[Please read my disclaimer -Ed.]
Almost everybody worries about money; money worries don’t respect the size of your paycheck or your bank account balance. The salient reasons for worrying about money vary from one individual to another. Someone might be worried about where to find money for the next meal, while another person is worrying about where to invest for the best returns. However, the following tips could be universally helpful at keeping money worries at bay, no matter your situation.
1. Know your net worth
The first step toward keeping money worries at bay is to know where you stand by calculating your net worth. Your personal net worth is simply the value of your assets (everything you own of economic value) minus the value of your liabilities (everything you owe in debts). Your net worth is just one gauge of your financial health that provides some insight into how much money you’ll have left if you had to sell your assets to pay off your liabilities. A positive net worth is a good starting point, but with hard work, you can fix a negative net worth.
2. Create a financial plan
The next step to easing money worries is to have a solid financial plan. You can’t achieve your financial goals without a financial plan to get there. You can create a financial plan whatever your goal is, whether to get out of debt, buy a home, pay off your mortgage, start investing, or to retire early. Besides checkpoints along the path of your long term goal, your financial plan should also include recurring reminders to pay your taxes, check your credit report, review your insurance, and updating your budget.
3. Create a budget and use it
The first step in your financial plan should be ensuring that your expenses are always lower than your income. The key to making your income higher than your expenses is to create a budget to control how you spend money – and to figure out how to make more money if that just isn’t enough (I recognize that this may be easier said than done). A budget helps you allocate limited resources according to your prioritized preference among unlimited financial needs. Creating a budget, however, is only one leg of the journey and you’ll need to be disciplined enough to stick to your budget by avoiding impulse purchases. Of course, you can set apart an amount for impulse purchases in your budget if you know you’re the sort who can’t avoid them.
4. Learn how to leverage credit to your advantage
Many personal finance experts often advise people to steer clear of debt; but it’s important to recognize that taking on debt is one additional tool in your quiver of financial arrows – albeit one that comes with a special set of risks. Credit is good, and it is practically impossible to live without credit under current economic conditions. However, credit, when not properly managed can become long term debt, which can then become unsurmountable debt. Using credit such as auto loans and mortgages can help you spread out the cost of large financial milestones. You can also get personal loans online to access credit for other financial needs not covered by traditional loan packages.
5. Find the perfect balance that separates frugality from miserliness
Many people shy away from advice on savings because it seems like the resultant life would be uninspiring and impractical. For instance, asking people to stop buying coffee or to walk instead of taking a cab might not be fun at all. Hence, you’ll need to take an objective look at your finances to find the right balance that helps you build wealth without sacrificing on the things that provide value to your life.
One rule of thumb is allocating a minimum 20 percent of your after-tax income toward meeting financial priorities such as increasing your savings, building an emergency savings fund, funding retirement, or getting out of debt. At the same time, your budget could allocate 30 percent of your after-tax income toward meeting your lifestyle expenses which could include eating out at restaurants, going to the movies, drinking at happy hours, and the occasional vacation.
The good thing about rules of thumb is that they’re not rules at all and you should do whatever makes the most sense for your personal situation.