Personal Finance is one of the financial terms that consist of managing money, savings, and investing. It also includes budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. Summarily, personal finance is about how you can manage finance to prepare for your goals, and it all depends on your income, expenses, and living requirements.
Financial Literacy is a capability that you need before you set your personal finance goals. It shows you lots of financial skills and concepts. Someone literate in finance will rarely face financial fraud. Being financially literate also enables you to use credit cards, devise a budget, create an emergency fund, and create a savings plan. One thing for sure you must know is a strong basis of financial Literacy can assist and espouse many kinds of life goals, such as saving for education, retirement, household, and many more.
5 Ways to Strategize Your Finance
Nowadays, you must efficiently supervise your finances to achieve your goals and desires in the future. But, if you are a beginner at managing your finance or trying to save your money wisely, it is not what you have expected. In other words, you are still extravagant. Then, you must take some preparation to administer your finance simply.
There are many ways to adjust your finances well this time. However, one of them that you can do is strategize it. So, don’t worry about it. I will show you the ways how to strategize your finance. Here are they!
- Create a budget
The first thing you can do is create a budget. Many ways you can use to make it, some of them excel, google spreadsheets, or some applications on your phone if you are a busy one. Creating a budget can help you manage your finances in an orderly, and it also means that you have enough to prepare for your long-term goals. You can create a budget by doing the 50/30/20 method!
For example, Shandy is a college student who is studying abroad in Indonesia. He wants to save his money every month, but he also needs to use his money to pay for his boarding house, transportation, food, shopping, and other consumption required. Then, he tries to create his budget, starting with the 50/30/20 method. So, here it is!
● 50% of pay goes to boarding houses, food, utilities, transportation;
● 30% is for shopping and eating out; and,
● 20% goes to retirement and savings funds.
So, that is Shandy’s 50/30/20 method he has tried.
- Create Emergency Fund
Another way you can try to administer your finance is by creating an emergency fund. It can help you to ensure your finances in the unexpected time, such as when you get in an accident, when you need to have a medical check-up, or you get laid-off from your office, and many more. Based on financial experts generally, you can start to build your emergency fund by putting in 20% of your earnings which you have already estimated. When you have enough money to get through 3–6 months, don’t stop saving once you hit the target and use an automated system that helps you add money to the fund.
- Use credit cards correctly.
Managing and using your credit card correctly is an efficient way to budget and save money. It is essential to pay off the balance every month to stay out of debt and maintain a good credit score. Setting reminders on your phone and writing down the date are great ways to keep track of when to pay off balances. Another method is to link your account through direct debiting to pay your balance automatically every month. This eliminates the hassle and tediousness of paying off balances every month.
One of the most critical aspects of managing a credit card is staying out of debt, and there are two ways to do so.
- Avalanche Method:
- Pay the minimum amount on a credit card.
- Add money to a credit card with the highest interest rate.
- When the card with the highest interest rate is paid, push other payments to the credit card with the next highest interest rate.
- Snowball Method:
- Push extra payments to a credit card with the lower interest rate or with the smallest unpaid amount
- Pay off balances faster.
If you are already in debt, the #1 priority is to pay back debt, which can also be done using the methods listed above.
● Credit Score
Having a good credit score is an example of mastering or on your way to mastering good personal finance. A credit score is determined by a few factors, such as how long you have had a credit card, the payment history (if you pay your balances on time), and the debt to credit ratio. The longer a credit card line has been open and consistent, on-time payments, the better credit score a person will have. A credit score is required for buying real estate, getting a lease, mortgage, or loan. 720 is a good credit score, 650 is average, and 600 or less is a poor credit score. To maintain a good credit score, it is vital to stay on top of your debt. One method is to use agencies that keep you informed of your credit score so you know where you need to make improvements and budgets. Another technique that can be used when managing a credit card is setting up direct debiting to consistently pay on time. Another strategy is to borrow as little as possible when taking out loans or making expensive purchases. Below is an example of a scenario.
Sasha wants to buy a car, which is a big purchase. Her central reasoning is for transportation. She is told that she has enough money to purchase a vehicle with premium features. Even though Sasha can afford to spend the most, she should choose a cheaper car because the premium features are unnecessary.
● Retirement Planning
Early planning is the best decision when it comes to retirement planning. Starting to plan and save from an early age is beneficial because you can gain more money for retirement through compound interest. What is compound interest? When you set aside money in a retirement account, it will grow or increase by itself over time. Some methods are to use IRA, Roth 401k, 401k, or 403b. These will reduce the current income tax. Usually, your company or employer will offer these retirement accounts. Another tip is to add more money to the fund as your earnings increase. For example, a 30-year-old may add 10% of his pay to the fund. However, when he is 59 years old and earns more money, he should set aside 20% of his earnings for the fund.
5 Books Recommendation of Personal Finance
We realized that staying at home continually because of the pandemic makes us get bored quickly, and you do not have any ideas of what you would do to spend your leisure time? Don’t worry! There are five recommendation books you can read to increase your knowledge of personal finance. Those are:
1. The Richest Man in Babylon by George Classon
The author shared in the book about basic lessons of personal finance and taught other subjects related to personal finance through the setting of ancient Babylon. This book is recommended because the lesson is still relevant to conditions in this modern world. You can also get a lot of insight from the book because the author gives entertaining storytelling to enjoy reading it.
2. Spend Well, Live Rich by Michelle Singletary
The book written by Michelle Singletary is based on her experience when she gained many lessons from her grandmother. It gives you many references about personal finance, such as ways to set up your saving habit, how to spend your money well, and exploring the concepts of spending and saving money wisely. It is recommended to anyone who wants to use their money correctly.
3. The Money Manual by Tonya B. Rapley
This book will give you many insights about personal finance, especially in reaching financial goals, making a budget, and handling your indebtedness by presenting you with some digestible practices that you can easily understand. It is recommended because the main target is millennials who want to take control of their finances earlier.
4. I Will Teach You To Be Rich by Ramit Sethi
This book aims for people in their early 20’s until 30’s to learn personal finance for around six weeks with topics starting from 401(k) until finance the wedding. This book also presents you step-by-step to managing your money-saving shifts and how to start negotiating prices. It is recommended for you because the author serves you with interesting and practical discussions.
5. The Simple Path to Wealth by JL Collins
JL Collins wrote the last recommendation book to clarify the investment world scams to ordinary people to understand how to make an investment and build wealth correctly. This book was recommended because the writer served the step-by-step with exciting discussions.
Written by : Aulia Ramadhani Nur Hidayah & Mrina