It’s a new year and a good time to get your finances in order. Here are some of the best personal finance tips to help you save money, get out of debt, build your personal wealth and become rich.
1. Track your spending
Everyone should track of their spending if they want to be on top of their personal finances. This helps you understand where your money goes every month. Set aside an hour each month to review how much you spent over the last 30 days. Categorize each topic to help you understand your spending patterns. Categories may include grocery, gas, restaurants, living expenses, etc. Break down how you spend your money and look for ways to reduce spending in each category.
2. Create a budget you can stick to
Budgeting is essential to personal finance, but everyone’s mind works a little differently. Fortunately, there are plenty of different ways to budget your income. Here are a few examples of personal budgets:
Traditional line item budget
All your expenses are listed, a budget is set, and spending is tracked. This method is a little bit tedious, but it really helps some people tackle spending problems by identifying specific spending issues.
Proportional Budget
A proportional budget is a way to break down your needs, wants, and savings into proportions of your income. For example, the book All Your Worth advocates for a 50/30/20 budget, where 50% is for needs, 30% is for wants, and 20% is for savings. Depending on your situation and financial goals, you can adjust the proportions to best suit you.
Automated Budget
In an automated budget, your money is set to automatically go into specific accounts, such as your checking, emergency savings, and retirement accounts. Your bills are automated as well. This strategy works best if you have about 25-50% of your monthly expenses already in your checking account in case bills come up unexpectedly.
Envelope Budget
This method was popularized by Dave Ramsey and is essentially a way to force yourself to stick to a budget. To follow this method, you create envelopes for each spending category (food, restaurants, gas, etc.) and you put a set amount of cash into the envelopes at the beginning of each month. As the month goes on, you only spend cash from those envelopes. There is something psychological about spending real cash that helps some people stick to their budget.
Zero Sum Budget
The idea behind the zero-sum budget is to give every dollar a purpose. This is done by using last month’s income to fund this month’s expenses. However, there is a little bit of prep that’s required before you can initiate this method. First, you need to have 1 month of expenses saved. Second, you need to track your spending for 1-3 months to get a good sense of how much you spend each month. Tracking also shows you where you can decrease spending. Finally, you need to track your spending often throughout the month to carefully track where each dollar goes. This is a really effective way to budget, but it does take time to successfully set up.
Check out a more detailed post on budgeting. Find a method that works best for you. Budgeting literally pays off!!
3. Know your net worth
Your net worth is the sum of all your assets minus the sum of all your debts. If the sum of your assets and debts are positive, you have a positive net worth. If the sum is negative, then you have a negative net worth. This is the best way to measure wealth. Understanding your net worth will also give you a basis to create financial goals. For example, let’s say you have a negative net worth because you owe credit card and student loan debt and have no savings or investments. Now you can set goals to gain a positive net worth by paying down your debt and investing your money.
4. Check your credit reports and credit score
Credit reports are also an important gauge of your financial health. The score measures your payment history (including late payments), the amount you owe, the length of your credit history, the types of accounts you have, such as, installment accounts, home loans, and credit card accounts. If you have a long history of making timely payments in full, you will have a good credit score.
Credit scores also influence interest rates on large purchases like your home! If you have a better credit score, your interest rate and monthly payments will be lower.
5. Start a side hustle
There is only so much saving you can do each month. At some point, the only way to save or invest more money is to make more money. In the world of personal finance, side hustles are a great way to make more money to help you reach your financial goals faster. Some examples include, starting a blog, renting parts of your home, providing ride shares, dog walking, etc. There are so many ways to make extra money. It’s worth the effort to search for them, but remember no one said being rich would be easy. Here are some examples of some side hustles (https://thecollegeinvestor.com/23078/best-side-hustles/). Some you can start today!
6. Negotiate your Income
Similar to my previous point, one powerful way to increase your wealth and strengthen your personal finance is by negotiating a higher income. If you haven’t negotiated your income recently, you’re probably being underpaid. You can find out whether you’re being underpaid by doing an internet search of your career salary in your area. It’s also a good idea to talk to your peers in similar career positions to learn their pay and benefits. This knowledge gives you leverage as you negotiate. There are also effective strategies to negotiate your income. I recommend a book called, I Will Teach You to be Rich.
7. Set financial goals
You need financial goals to keep you on track to become wealthy. They hold you accountable, allow you to create realistic plans, and help you track your progress. You should create large end goals and small intermediate goals to keep you motivated. Small goals might include paying off each credit card one by one and large goals may include saving $1,000,000. If you don’t have small goals, your end goal may seem very intimidating. Don’t be discouraged! Make both small and large financial goals!
8. Savings
Depending on where you are in your financial journey, you need to have at least $1000-$2000 saved for emergencies. Ideally, you want 3-6 months worth of expenses saved in a liquid account, but when you’re starting out you need at least $1000. This money is a cushion that will help you avoid using credits and racking up more debt. For example, let’s say, you do everything else right, you track your spending, you reduce your monthly expenses, and you invest in retirement accounts, but you never save an emergency fund. Then you lose your job, your car breaks down, or someone breaks into your house. How are you going to pay for a large expense without liquid savings? The options aren’t great and many of them include borrowing more money at high interest rates. If you want to be rich, you must have liquid savings to cover large surprise expenses and avoid borrowing money.
9. Get out of debt
Debt eats your potential to build wealth. Focus your energy on getting out of debt to free up your money for investments and savings. Paying off debts help you build wealth incredibly fast! Pay off your high interest debts (usually debts with interest rates greater than 8%) before loans like your mortgage or your student loans. My favorite method of paying off debt is the debt snowball (https://www.daveramsey.com/blog/how-the-debt-snowball-method-works). Basically, you write a list of all of your high interest debt, from smallest to largest, start at the top of the list and focus all of your extra money on paying off that one debt. Once the smallest debt is paid, roll over your extra onto the next smallest debt on your list. Continue this method until all your debts are paid. Each time you pay off a debt, you will feel so much relief and motivation to pay off the next.
10. Stop going into debt
Once you have a 3-6 months of emergency savings, it’s time to continue living below your means. You can do this by continuing to track your spending, following your budget, and increasing your cash flow (by paying off debt and increasing your income). In some cases, you may need to close credit card accounts to get rid of the temptation of charging that delicious steak dinner and bottle of wine on your card. Don’t charge it! You won’t regret missing a nice meal at an expensive restaurant in exchange for wealth.
11. Invest in yourself
Investing in your health, education and happiness are key to becoming rich. Healthcare is expensive in the United States and sometimes medical issues take people by surprise. I realize you can’t prevent everything, but you can put yourself in the best position from a health perspective to avoid becoming sick in the future. Go on walks, eat healthy and follow good nutrition and diet recommendations.
Additionally, the more you invest in skills, the more earning potential you have. Say, you plan to start an internet business, don’t be afraid to spend money on learning how to build websites, or marketing to your potential customers. Invest in educating yourself on high paying skills so you can gain wealth faster.
12. Invest in your retirement accounts
Wealthy people invest in their retirement accounts. They create plans so they can retire and live out their days doing whatever they desire. If you are on the path of financial independence and financial freedom, you must invest in retirement. People are living longer than ever and retirement accounts offer tax advantages that allow you to build wealth even faster. If you work for a company that offers a 401(k) match, you should invest at least enough to meet their match. That is free money just for you!
13. Practice minimalism
Minimalism helps reduce clutter both physically and mentally. However, practicing a minimalist lifestyle can be challenging in our consumerist society where we feel pressure to buy bigger and more expensive items. Following minimalism will allow you to prioritize your spending, live in a smaller home or apartment (which saves you more money) and focus on your financial goals. It will also help you fall out of the consumerist lifestyle that many of us grew up living. It’s stressful to keep up with the Jones’! If you can let it go and realize there are more important goals in your life than buying a brand-new Lexus, you will feel so much less pressure. Think about it this way, would you rather be trapped in your job with little to no savings, but a massive, beautiful house, or would you rather live in a smaller house that allows you financial freedom and early retirement?
14. Learn about personal finance
Unfortunately, many of us don’t learn about finances in school. However, we are blessed to live in a time where information is easily found on the internet. Take the time to learn how to pay off debt, become rich, and build wealth. You have so much knowledge at your fingertips!! If you ever get stuck, feel free to reach out. I am here to help you on your journey!
Hopefully, these personal finance tips give you excellent ideas for building wealth and becoming rich moving forward. These tips are not necessarily easy, but I am confident that you can follow them. If you ever feel stuck, please feel free to reach out to me by leaving a comment or shooting me an email.
Cheers!
FI Addict