Your morning alarm goes off. The urge to snooze it and go back to sleep is real. But, duty calls. Fast forward to the end of the month when your pay cheque arrives and your bank account sees some light, only to realise a few days later: where did all my money go?
Does this mean that your income is too low? Do you need to start thinking about getting a higher paying job? Do you need to go back to school to upgrade your skills and open up more opportunities for yourself?
Taking the time to manage your money can really pay off. Life is also much easier when you are financially savvy. It is time to take control of your finances instead of letting them take control over you.
1. Set Financial Goals
You have to know where you want to go in order to know which road to take. It is important to have specific financial goals that you can work towards. These goals will motivate you to better manage your finances.
These goals should be SMART (Specific, Measurable, Achievable, Realistic and Time bound). This will help to ensure that the goals are not just wishful thinking. The more specific and quantifiable the goals are, the less overwhelming they will be. You are more likely to take actionable steps, and therefore more likely to achieve them.
So instead of setting a goal like, ‘I want to be rich,’ you should set a goal like I want to have a net worth of $xxxxx by the end of 2025. Instead of saying, ‘I want to own a home’, set a goal to buy a 5-room HDB flat by age 30.
If you are unsure of where to start with setting financial goals, you should break them down into long-term goals and short-term goals. Long-term goals may include purchasing a home, retiring early, or paying off debt. Short-term goals may include setting a budget, saving for something specific that you can buy within the next few months, or paying off your credit cards.
2. Split Your Income
This is a vital step. You should allocate a certain percentage of your income towards different expenses. A general rule of thumb is to spend no more than 50% of your income on necessities. These include rent, utility bills, groceries, insurance premiums, school fees, transport, health care and vehicle maintenance.
If you are using more than 50% of your income on necessities, you may want to reconsider your lifestyle choices. You may have to make some changes in order to bring your costs down. These may include shopping in bulk to reduce the cost of groceries, moving to a cheaper apartment or letting go of the second car and carpooling.
Use 20% of your income on shopping, entertainment and other desires. The remaining 30% of your income should be set aside for investments and long-term savings.
3. Open Multiple Accounts
Once you have worked out how much of your income will go into each category, you should ensure that you have different bank accounts, each for a different purpose.
Having different accounts will help to keep you disciplined. It will ensure that you do not spend unnecessary money that has been put aside for long-term savings. It makes it easier to keep track of your spending too.
Consider the following when choosing the types of accounts for each spending category:
(i) Account for savings – This account will be used for saving money for long-term goals such as buying a car, your first home or your children’s education. Choose an account that is not easily accessible with an ATM, but one which you can keep track of.
(ii) Monthly expenses – This account will be used to cover necessities including rent, utilities and insurance. This should be the account in which your salary is deposited into. You can choose to have a portion of your income transferred into your savings account automatically to ensure that you do not spend everything.
(iii) Daily expenses account – This account will be used for daily expenses such as shopping, groceries and transportation. It should be easily accessible. You should therefore pick an account with a good ATM network.
4. Have A Budget And Stick To It
Many people do not budget as they think it is too much of a hassle and too restricting. However, budgets are one of the most important tools that will ensure that you attain your financial goals.
Budgets help you decide where your money goes. They will help you better plan how to spend your money, and determine what is important and what you can do without. Below are some tips to ensure that you actually stick to your budget:
(i) Use the envelope system – This involves placing money in different envelopes e.g. groceries, clothes, etc. You should only use the money in that envelope. Once the money is depleted, you will have to wait for the next month’s income to spend more money in that category.
(ii) Plan ahead – This will help you to avoid overspending. This may include things such as having a meal before you go grocery shopping to avoid overspending on groceries or having to eat out.
(iii) Use budgeting software such as a mobile app– This will ensure that you can keep track of your spending in real time. An example of this is the Mint budgeting app.
5. Get Out Of Debt
Avoiding debt won’t make it go away. True financial freedom can only be realised when you are debt-free.
Begin by setting a debt elimination plan. This will help you understand your level of debt, and the minimum payments you should make to get out of debt within a set period. You may have to seek ways to increase your income or cut back on costs in order to repay your debts quicker.
6. Keep track of your spending
Budgeting is not enough to ensure discipline with money. You need to know where your money is going. Keep track of each and every penny you spend. You may identify unnecessary expenses or areas that you can cut back on. You may only have to do this for a few months to notice trends and opportunities for saving.
7. Learn to live within your means
This is a big one. It may mean re-evaluating your lifestyle choices and cutting back your spending on unnecessary items. Decide what you really need and what you can afford to forgo.
If you want to achieve your financial goals, you may have to make some drastic lifestyle changes. However, taking a long-term view of your life and keeping your eye on the prize will help to keep you motivated. By incorporating these habits into your daily life, you will realise that it is easier to manage your finances, and make your money work for you.
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