The ability to properly manage money is a skill that everyone should have, but not everyone does. Your financial decisions can have a huge impact on your life, for better or for worse. Thus, understanding personal finance is a crucial part of building and maintaining wealth. Here are four steps you can take to improve your own financial well-being.
1. Make a budget for yourself
A budget is a valuable tool that can help you effectively manage your personal finances. When you adhere to a budget, you know exactly how much money is coming in each month and how much is going out. It enables you to save money and work towards achieving your long-term financial goals.
The first step in creating any budget is to take a full accounting of your income and expenses. Determine where your money is going: What are you spending on essentials like food and rent? On non-essentials like movie tickets and take-out? And, finally, how much money are you saving and/or investing?
Once you can provide detailed answers to these questions, you can start making a budget that’s both realistic and caters to your future goals.
It’s a good idea to review your budget on a monthly basis to see if it’s meeting your needs. Take a hard look at your spending and see if there are any areas where you can cut down. Or, if you get a new job that provides you with more monthly income, sit down and restructure your budget to match your new circumstances.
If you’re having trouble devising a budget that addresses your needs and goals, then consider using wealth management services. Wealth management advisors can expertly tailor a budget and financial strategy to help you achieve your long-term goals.
2. Create an emergency fund
Living paycheck-to-paycheck is risky and can lead to all kinds of stressful situations. What do you do if you lose your job and have no savings to fall back on? That’s why it’s important to start building an emergency fund as soon as you possibly can.
All kinds of unexpected things can happen in life, so put aside some money each month and create a safety net for yourself. Either put this money in a savings account at your bank or use it to make safe short-term investments. You don’t want your emergency fund to be tied up in anything that makes it harder to access when you really need it.
As far as how much you should ideally have in this fund, many experts recommend putting away enough money to support yourself for six to twelve months. This may be a lot of money, but you won’t build an emergency fund overnight. It can take years of consistent saving to build one, but it very well may save you from tough times later on down the road.
3. Save for retirement
There’s no such thing as too early when it comes to saving for your retirement. Time is a precious asset when it comes to investments.
Small contributions to a 401(k) or Roth IRA as a young adult can accumulate interest over decades and snowball into massive sums. And if your employer offers a 401(k) match, you should absolutely be maxing out your contributions in order to capitalize on the opportunity.
As you get older and begin making more money, you should also consider increasing the percentage of your paycheck that you devote to retirement accounts. How much you save ultimately depends on what you can afford, but ideally you should be putting away around 20% of your post-tax income for retirement.
Remember that the more you save now, the more likely it is that you’ll be able to retire early and live in comfort during those years.
4. Purchase insurance
Having good insurance can save you a lot of money in the future. For instance, if you’ve ever seen a hospital bill, then you know just how astronomically expensive healthcare can be without insurance. Therefore, you should invest in health insurance either through your employer, if they offer it, or independently.
Look into other types of insurance as well. Things like homeowners insurance and life insurance can protect you and your family from disastrous situations.
If you want to put yourself in a better place financially, try applying these four tips to your own life. It may take some time to find a personal finance strategy that works for you in particular, but by putting in the effort you’ll be that much closer to achieving your financial goals.