Personal finance is essentially how an individual manages their money and plans for the future. All the financial decisions that you take during your lifetime will eventually have an effect on your finances, both current and in the future.
No matter what rules we abide by, it is always important to self-improvise on financial habits and health. To make it simple and understandable for you, we have framed 3 rules that can help you improve your financial health. Check them out below:
Rule #1: Do the Math – Net Worth and Personal Budget
We know that you are certainly not an expert in managing personal finances. But you just cannot keep ignoring it. Learning just the basic of managing personal finances can help you evaluate your current financial health. It will also help you determine how you can accomplish your short term and long term financial goals.
Initially, you need to calculate your net worth. The net worth is the difference between what you own and what you owe. For calculating your net worth, make a list of all your assets (things that you own) and your liabilities (things that you owe). Next, subtract your liabilities from your assets which will give you the net worth.
The net worth is the representation of your current financial position and it is very normal for the figure to fluctuate over time. However, it is essential that you calculate your net worth on a regular basis (we recommend at least once a year). By tracking your net worth annually will help you evaluate your progress, highlight your successes and identify areas that require improvement.
As we emphasise the importance of net worth, it is equally important to develop a personal budget alongside. Having a budget plan or expense plan drafted on a monthly or annual basis helps you:
- Plan on your expenses
- Reduce or eliminate the unnecessary expenses
- Save for future goals
- Spend wisely
- Plan for emergencies
- Prioritise spending and savings
Once you predict your expenses, subtract them from your income. If you have some money left, you have a surplus amount and you can decide how to spend, save or invest it. If your expenses exceed your income, you will have to adjust your budget by either increasing your income or cutting down your expenses.
Hence, it is highly recommended that you regularly calculate your net worth and personal budget. Doing the math correctly is all that matters.
Rule #2: Recognise and Manage Lifestyle Inflation
Many people will spend money if they have it in surplus to spend. As individuals advance in their careers and start earning higher salaries, they tend to increase their spending simultaneously. This phenomenon is likely to be known as lifestyle inflation.
Although you are able to pay your bills on time, lifestyle inflation can be damaging in a long run since it limits your ability to build your wealth. In other words, every extra pound you spend today will mean less money later in life.
As your professional and personal life evolves over time, there are naturally going to be some increase in your spending. But here we want you to emphasis on the importance of saving money as well. One way people can have some extra injection of money into their savings and investments is by claiming for mis-sold PPI.
It may sound absurd to you right now, but PPI mis-selling scandal has been making headlines in news every other day. Every other individual in the UK have been mis-sold the policy by their banks or lenders. So, you might as well just check your financial products to see whether you had PPI on them or not.
Once you discover that you have had PPI and it was wrongly sold to you, you can move on to make a claim by yourself or with the help of claim management companies.
What we want to tell you here is, no matter what lifestyle you are leading today, you would want to live the same lifestyle when you retire. And to continue doing so, it is essential that you start saving for your retirement from today.
Rule #3: Recognise Needs vs. Wants
It is necessary that you are aware about the difference between needs and wants, which will help you in making better spending choices.
Things that you have to have for your survival are termed as ‘Needs’, these include
- Reasonable amount of clothing
On the other hand, ‘wants’ are the things that you would like to have but are not necessary for survival. Once your needs are settled, then and only then should you allocate your income towards your wants.
However, keep a note that if you do have money left over every end of the month after paying for the things you need, you do not really have to spend it all on the things you want. There is the option to save instead…
Abiding by these three rules, we believe, will surely contribute to an improvement in your financial health.