6 Tips for Improving Your Personal Finance Skills
Nowadays, having money is synonymous with having everything. The phrase “money cannot buy happiness” is an arguable statement.
You need money to live a comfortable life and survive as well. The best way to diversify your income is by investing. Aim at having several investment channels to secure your future.
However, before investing, you must look at your “personal finances”. Personal finances relate to managing your money and planning your future.
Here are some methods that can help you improve your personal financial skills.
1. Develop and Maintain a Budget
Ensure that your finances are well planned. You can use both offline and online tools to manage your finances. Carry out an analysis and evaluation of your net worth regularly. Knowing your net worth will help you determine where you currently stand financially.
Disturbances in the market will make your net worth fluctuate from time to time. Keep track of your financial standing so that you can gauge your progress and highlight the areas you need to work on.
To take charge of your finances, you can start by getting to know your credit score on ClearScore. Better financial health will save you from lots of stress. You can secure your future by making worthwhile investments.
Sort out your finances to determine your expenses and prioritise them. Subdivide your expenses into categories such as utilities, savings, transportation, food, housing, and education.
This practice will help you learn how to use your money. If there is some leftover money after catering for all your expenses, decide how to use it wisely.
2. Start Saving
You should always set aside some money for emergencies. Begin setting aside funds for your retirement as early as possible. You never know which turn your life will take.
Always be prepared for the worst-case scenario. You can reinvest your earnings to help with saving. The returns are more significant when you invest for a long time.
If you’re formally employed and have a monthly salary, keep track of your provident funds. Check your balance regularly. The sooner you start saving, the earlier you will reach your long-term financial objectives.
3. Understand Lifestyle Inflation
The more you make money, the more you probably spend it. Most people usually follow this trend, which is referred to as lifestyle inflation. Excessive spending jeopardises your long-term wealth. People always have the desire to live like the rich.
If other people are dining in expensive restaurants, you might be tempted to do so too. However, doing this will cost you in the long run.
When you start having more money, it's only natural to improve your professional and social life. However, being extravagant will put your future at risk.
4. Understand Your Needs and Wants
Unless you have a lot of money at your disposal, being mindful of the difference between your wants and needs is good for you. This assists in making better monetary decisions.
Needs are elements such as healthcare, shelter, transportation, clothing, and the food that you require to survive. Some people also include savings as a need, whether it's ten per cent of their income or what they can afford to save monthly.
On the other hand, wants refers to what you would fancy having but do not necessarily require to survive.
Accurately categorising expenses into needs or wants can pose a challenge. The lines usually get blurred for many people when making this distinction.
More often than not, you’ll rationalise a needless and extravagant purchase by terming it as a need. An excellent example of this is when purchasing a car. You might need a car to run errands, take kids to school, and get to work.
In such instances, you will find yourself wanting to purchase luxury brands that cost twice the amount of practical cars. Luxury cars will also cost you more in gas.
You can try rationalising your purchase of an SUV as a need, but it is still a want. The difference in price between a more economical car and a SUV is money you did not have to spend.
5. Create and Maintain an Emergency Fund
As the name implies, an emergency fund is money set aside for an emergency.
Emergency funds are meant to cater to unexpected expenses not included in your budget, such as car repairs or an emergency visit to the dentist.
An emergency fund can also come in handy when your income is interrupted, such as when you are ill or injured, and it prevents you from working or when you lose your job.
The conventional guideline is to save 3-6 months’ worth of living expenses in an emergency fund. However, in reality, this amount is less than what most people require to cover significant expenses or lose their source of income.
6. Understand Taxes and their Requirements
Before getting your first paycheck, ensure that you have understood the fundamentals of income taxes and how much you will actually get in your pocket. Likewise, when you secure a new job, calculate to see if the salary the company is offering will allow you to pay your taxes accordingly.
There are many online calculators that can help you determine your payroll taxes according to where you live. For example, if you earn a salary of $35,000 annually in Melbourne, you should take home around $27,000 after the federal taxes are deducted (figures from online calculator PaycheckCity).
If you’re planning on looking for a new job with a better salary, you need to understand the impact of the marginal tax rate on your next salary increase. For example, if your salary increases from $35,000 to $40,000, the chances are that you will actually only take home $4,000 more every year. Please note that this amount will always vary depending on where you live.
The Bottom Line
You need personal finance skills to achieve financial success. And the good news is that you don’t need a fancy degree to manage your finances effectively.
By just reading personal finance materials on the internet, in books and by listening to a few podcasts, you’ll learn how to manage your finances.
You must always consider the big picture and develop habits that can help you make better financial decisions, resulting in better financial health.