Skip to main content
Updated date:

How to Manage Your Finances & Live Within Your Means

Author:

Brian is an aspiring writer with a degree in BBA. His interest in economics and the business world influences his writing style.

Financial planning is tedious but when done right can save you from the pain of ignorance

Financial planning is tedious but when done right can save you from the pain of ignorance

Financial literacy is quite an important aspect in today’s world and in the life of any individual, who works hard for their money. Having financial literacy enables one to make informed and effective decisions with all of their financial resources, which is imperative for the sustainability of lifestyle. Frankly, it is a skill that many lacks and never realise until it is too late because they only live for the moment. It is not uncommon because the education system itself does not highlight the importance of being financially savvy. Thus, people fall into the trap of ‘spend now and pay later or indulge first and figure it out afterward when the time comes.

There is nothing wrong with having fun and enjoying a little with your hard-earned money. The downfall is when we do not set a plan to manage the earnings and a big portion of it is spent on enjoyment and fulfilling short-term pleasures. It is a scenario that should be avoided at all costs. Thus, it is crucial to have good financial habits to curb the probability of going down this road. Here are numerous proven habits that can encourage healthy financial management for better quality living. Having good financial management is one of the many keystone habits that we should definitely integrate into our lives.

Fail to plan, plan to fail - If you don't have a budget, you might end up spending unnecessarily

Fail to plan, plan to fail - If you don't have a budget, you might end up spending unnecessarily

1. Create and Manage a Budget

What is a budget? A budget is basically an estimate of your income and expenditures for a set period of time, which can be calculated either on a daily, weekly, or even monthly basis. The foundation of good monetary management is establishing your earnings and expenditures so that you can track the movement of your money. Firstly, identify your sources of income and determine the amount you make from each source. What will your disposable income be after taxes? It is important to get this sorted out because it will help you greatly in deciding where and how you allocate your money.

Have you got any idea what is the cost of living in your neighbourhood of choice? What will be the required amount of money to cover the basic expenses such as rent, food, transportation, taxes, and even healthcare? Your cost of living is correlated to the wages that you make and will have a great influence on your lifestyle. Never dismiss the little costs that you brush off as insignificant, which can eat into your budget later on. It is advisable to set up a budget regardless if you are a working-class adult or even a student surviving on scholarship or loans. The reason being, you want to avoid the uncomfortable scenario of your funds running dry before the end of the month because you have spent unnecessarily. Once you have a budget planned out and satisfied with the arrangement, you will need to commit to it wholeheartedly and stick to it.

You cannot manage what you don't measure

You cannot manage what you don't measure

2. Track & Record All Expenses

Are you the type to note what you spend your money on, or you just could not be bothered? Tracking expenses is something that most of us do not like to do because it can be a tedious activity. The act on its own is actually not that difficult to do; it only boils down on your willingness to commit and be consistent. These days, keeping track of your expenses does not have to be a hassle as there are apps that can help you to do so. The easiest way would be to install the app on your phone and you will be on your way to systematically track your expenses. You can record and save your logs and perform a daily, weekly, monthly, and even yearly analysis on your spending patterns. If you prefer going old school, get a little notebook and carry it with you to record when and how you spent your money.

Why is it crucial to track your expenses? You might think that you make more than enough that you can choose to spend it freely. However, this approach is dangerous because you never know what will happen in the long run. It is an even bigger disadvantage for those with credit cards and do not track your expenses, which could lead to overspending. It might be sunshine and rainbows for a short period but if you do not manage your spending well, it may come back to bite you in the future. Just like Benjamin Franklin’s wise words - “Beware of little expenses. A small leak will sink a great ship.” That is why you should have a tracking system to ensure that you allocate your resources only on things that matter and eliminate unnecessary spending. As a result, you will realise that you can actually set aside the unutilized portion of your income for saving and investing that can benefit you in the long run.

Your bills will not disappear on its own. If you have to pay then you got to pay

Your bills will not disappear on its own. If you have to pay then you got to pay

3. Pay All Bills on Time

This is a simple thing to do and yet there are still folks that cannot stick to making timely payments for their bills. You might think that it sounds ridiculous but it happens. Well, what contributes to this situation then? This takes us back to the basics of having a budget and sticking to it. The reasons some people do not meet their bill payments because along the way, temptations and lack of discipline caught up. The urge to get the latest phone model or indulge in a night out could be some probable reasons people default on their commitments. They decide to spend on things that they do not have allocation for by using the funds meant for their primary obligation. This shows us the importance of having a budget so that we can outline our key obligations and finance our lifestyle efficiently.

Paying bills on time or even earlier is a good habit which is beneficial in the long run by contributing to a healthy credit score. Settling your bills on time helps you to avoid penalty fees and unnecessary late charges, which can further add burden to your finances. Those with credit cards and have purchased a car or a house on loan will need to be extra vigilant on meeting your monthly payments. The interest rates charged by banks for late credit card payments, hire purchase loans, and mortgages will likely put a dent to your budget. This can throw you off track and you eventually end up paying more than what you owe in the first place.

4. Pay Down Your Debt

Even the richest person on earth will still have debts, but the differentiating factor is that the rich acquire good debt while the poor mostly have bad debts. This might be a controversial statement but Robert Kiyosaki’s clarifies in his book “Rich Dad, Poor Dad” the difference between these two groups. When the rich have debt, they are not really concerned because they know that they have the capability to pay it off by leveraging on their multiple income-generating resources. They will never waste money on servicing interests on loans or late payments because it will put them at a disadvantage. Thus, those that do not make multiple incomes must take this seriously in meeting timely payments of any debts that you may have. It will prevent you from having to allocate extra funds to pay for superfluous expenses in the future.

How can you accomplish that? Focus on your highest interest rate cards first. Clear the whole bill instead of paying only the monthly minimum payments, because then the bank will start levying interest on the balance payment you owe them. Should you continue to charge on the card again without settling the bill, you will incur further interest charges until you settle the outstanding payment in full. This situation may spiral out of control if you do not handle it well. That is why you see quite a number of young adults declaring bankruptcy because they cannot cope with the piling debts caused by a one-time decision to delay in settling their credit card bills.

5. Money Minute

Your ‘money minute’ could quite possibly be the most important minute of your day. When you schedule a ‘money minute’, you quickly run through your bank accounts just to get a glance at your financial standing. For example, you schedule a minute in the morning to review your expenses and perform a quick assessment of the charges incurred the day before.

This habit is a good ritual to practise every day, preferably in the morning. It allows you to determine your spending status, charges you were billed for, and how much money you have available to spend until the end of the month. This practise also allows you to identify if you are keeping your expenses in check so that any discrepancies may be corrected immediately. On top of that, this helps to avoid any major problems such as the illicit siphoning of your hard-earned money through identity theft. So, never be complacent and review your bank accounts regularly.

Saving is a good habit. Start small first better than having none

Saving is a good habit. Start small first better than having none

6. Automatic Savings

Imagine this scenario - You head out without an umbrella because you thought the sun is out and the weather is good until the sky suddenly turns dark and down pours the rain. We often think that we have control of a situation until the rug gets pulled out from under our feet. That is why it is pertinent to anticipate and prepare beforehand so that we do not get caught with our pants down. This principle should be applied in our daily life and especially so in our finances. It is advisable to always save for rainy days in case something happens and we have a need for an emergency fund to get by.

There is a widely popularized budgeting method by Senator Elizabeth Warren, who in her book “All Your Worth” introduced the 50-30-20 budget rule. It propagates that one should set aside at least 20% of your income for savings. This method is good for generally anyone looking to manage their finances better. This approach is so simple that anyone looking to start on with their personal finance journey can begin to do so. When it comes to savings, it really does not matter how much you make. Instead, it is reliant on your perception towards the idea of setting aside a portion of your income for emergencies or for retirement. Once you start this saving habit, you will be surprised to find that you can actually afford to not spend that money you thought you needed. Even more surprising, you will not have to go hungry or rely on junk food at the end of the month before your next paycheck.

Shop till you drop?

Shop till you drop?

7. Have a 15-Minute Buffer for Spending

Have you ever found yourself in a predicament whereby you visited a shop to get something but end up buying several other unnecessary items? It is quite easy to get caught up in the moment when you are shopping. For that reason, it would be helpful to have a reminder to keep you in check and reduce the tendency for impulse purchases. Before you begin your shopping spree whether online or at a shopping mall, set a 15-minute timer on your phone to prompt you. That should be sufficient time for you to locate the item you need and complete your purchase.

Why 15 minutes? Impulse buying is just that – it acts on impulse. It becomes an emotional response to a subconscious trigger and that is why many people often get carried away even by browsing around at the aisles. Hence, we will need a prompter to pull us away from the situation and really think about it for a moment before making the purchase. It may take getting used to this practise in the beginning, but practise makes perfect.

Credit card is a tool to help make your life easier. Don't misuse it and end up being a slave to it

Credit card is a tool to help make your life easier. Don't misuse it and end up being a slave to it

8. Utilise Credit Cards to Your Advantage

Living within your means implies sustaining your lifestyle with the income you make and not going overboard until you rake in a hill of debt. How can one avoid getting into debt? The simplest common sense would be to spend the money you have on hand and not borrow to supplement your lifestyle. The most common way some people get into debts without realising is by not managing their credit card use. A credit card facility is not a bad thing. In fact, when used prudently and appropriately, it can yield more benefits than harm. For instance, it can be a great tool to boost your credit score when you establish a track record of timely repayments on your credit card bills.

Before you decide to commit to a credit card, you must first ask yourself this question and be honest with the answer. Do you have trouble controlling your urge to spend? If the answer is yes, will you be able to practise self-control in your spending moving forward? If you struggle with this issue, then it would be best to not get yourself into trouble. Nevertheless, should it be necessary to own a credit card, you can minimise the probability of misusing it by monitoring your usage. You might want to set a spending limit that you feel comfortable repaying back promptly without getting you into debt.

Save some bucks when you eat in or pack your own meal

Save some bucks when you eat in or pack your own meal

9. Pack Your Lunch

How many of you frown at the thought of having to pack your own lunch? It may be troublesome in the beginning when you are so used to the convenience of eating out. However, you may not realise that the convenience you crave is actually burning a hole in your pocket. We often use the excuse that there is not enough time to prepare a proper meal and it would be easier to just grab lunch outside. At the end of the day, you end up spending $10, $15, or even $20 on a single meal. This amount would have ballooned over the weeks and months that you opt to eat out. If you think about it, the amount of money spent could have gone towards paying the rent, insurance, or even set aside for your savings.

At times, it may be hard for someone to comprehend how small habits like packing your own food can actually have an impact on your finances in the long run. The reason we feel this way is because we do not actually sit down and calculate the cost of it over the long term. We only think about the short-term pleasure of indulging in designer coffees and poke bowls that we lose sight of prudent living. Tell yourself that you want to live better and have more control over your spending. Wake up earlier to pack your lunch and in doing so, you have the benefit of being able to plan your meals around healthy foods. So, it’s basically a win-win situation for you.

10. Consult with a Financial Mentor

If you find it difficult to manage your finances and still struggle even after employing the tips and habits to be financially savvy, perhaps you might consider getting a mentor or coach to keep you accountable. We all need a mentor in life to help us in certain areas that we find hard to conquer. Often, a mentor is someone that is well-versed in the subject in which we need help. Their role is to help guide us in the right direction with their skills and experience. Look for a mentor that you can consult with for all things finance-related to help improve your financial planning.

You do not need a money manager, a tax consultant, or some other professional whom you pay to manage your finances for you. Instead, it could be someone within your family or social network, whom you admire for their skills and prowess in handling their wealth and assets. You can spend more time with them and exchange knowledge on how you can start to instill good financial habits in your own life. If it is someone that you know very well, do not be ashamed to get them to help you equip yourself with the skills to enforce the habits.

Conclusion

It is never too late to start where you are. You might have given up trying to plan a financially balanced life, but remember that little changes when put to action can make a big difference over time. Most people have the mentality that life is to be enjoyed; enjoy life but do not forgo the future and live only for the moment. Start to plan your finances now, so you will be able to look back without the regret of not preparing well.

© 2021 Brian

Related Articles