Getting your personal finance (money) in order

Getting your personal finance (money) in order

Getting personal finances in order is like taming a wild beast, it can be quite a task, but if you succeed at it the satisfaction it delivers is unmatched. Even though money is not a pleasant topic to discuss, it is something most of us cannot live without. Managing your personal finance or your money is extremely critical. But where do you start?

Well let’s say wherever you start don’t start with a savings target in mind.  I know it sounds quite the opposite of the general consensus, but if you are a person who doesn’t believe in living a life constrained by self implemented financial restraints, then it’s better not start straight away with a savings target, as you can lose interest quite fast. Savings will come into the picture but after fixing few basics first. The savings mind-set will have to be developed slowly over time.

Begin with understanding your financial behaviour

The first step towards managing your personal finance or money is by understanding where does the money go. Most of us think we know where we spend our money like the back of our hand, if you really do, then you are financially savvy unlike me when I started off. But the reality is most of us have no idea of how much money we have spent on things we haven’t really used over the past year or how much money we have flushed down the toilet to get entertained.  Gaining this knowledge of our financial behaviour can be an eye opener and that’s exactly where we should start.

If you are currently among those who falls within the category described above then you are definitely carrying a latest model smart phone from the market. So let’s put that latest phone to good use, and start with downloading an expense tracker app.  There are plenty of free and paid applications out there, it really doesn’t matter which one you use as long as it is easy to use and satisfies the objective. Tracking your money is critical in managing your personal finance, and having an app helps to make it easier.

Create a couple of expense heads that you can group your regular expenses under like Shopping, Grocery, Utilities etc… and start cracking with it.  I am sure you pull out your mobile at every 5 minutes’ interval to check on your social media update, so do the same every time you take out your credit card or cash to spend and take note of it in the app. Make it a habit and keep doing it until you have enough data to understand where you spend your money during a particular period which can be a month or a quarter or even a few weeks.

Tallying money

So now you have the knowledge of how much you spend and where you spend it. It’s time to tally them with your income. Now you don’t need to be a financial whiz to do that do you?  The objective is that the result of this tally exercise should always be positive. Meaning if you have an income equal X and an expense equal to Y, Then X-Y should be a number greater than zero.

This reveals your personal financial status, if you are getting a number which is zero, then you are already better off than many. Yes, I am talking about those who spends more than what they earn. They do so with the help of little borrowing, it can be credit cards, loans and some lucky once even get away with interest free borrowings from friends and families. And then you start your never-ending roller coaster ride of juggling your personal finances.

Financial rehydration

So let’s say you have a constant diarrhoea of financial trouble, and your system is fast getting dehydrated of money within a few days of the pay check hitting the bank. Then you need to keep yourself hydrated before this financial dehydration kills you.

Start with a plan to reduce your debt down to zero.  List down the expense heads which you can trade for fixing your debt. It won’t come easy but understand that financial freedom comes at zero debt.  It may take you a few months to get there or few years depending on how deep in debt you are, having a plan helps you to measure the time it takes and constantly revisiting the plan will give the motivation to get there faster.

The discipline in managing money

Discipline is the foundation of personal finance management, or money management. In the process of going debt free you will learn to give up on some of the unnecessary spending that you would otherwise be accustomed to.  The longer the time you spend on going debt free the more disciplined you become.  Going debt free is like going from obese to being physically fit.  Those who have once gone through the transformation hardly goes back to where they were.

Now it’s time to bring in the subject of savings

So let’s look forward and say you reached the point where you have become debt free. In the process you have picked up the discipline of managing your spending, now it’s time to start budgeting your expenditure to get some savings out of your income. It doesn’t need to be big,  it can be any amount,  there is no pressure to attach an uneasy % to your income and then go on a deprivation,  start small and start building the habit,  once you have built the habit start increasing your savings and you won’t feel the pain.

Put your money to work

Keeping aside your savings in your bank account is not always a good idea.  Firstly, having a good bank balance can bring in the feeling that you can now start spending small amounts on things here and there which are unnecessary, and before you know it you are back to your old self ending up spending it all. Apart from this the money in your savings account cannot always beat inflation and inflation can be a killer leaving your money depreciating your money value in the long run.  So it’s important that you put your money to work rather than let it get rotten sitting and doing nothing in your savings account.

This is where the power of compounding comes handy, start investing your money in a systematic investment plan from the very start. This way you can invest small amounts over a long period of time and the money keeps growing at a good pace depending on the instrument you invest in beating market volatility.  Now there are several streams of investments you can pick to invest in depending on your risk appetite and the risk reward ratio you stomach can take.  Talk to couple of your friends who are better off with their investments to evaluate your options before zeroing in on the path you want to take.

Net worth tracking

Having visibility of all what you own and what you owe is important to keep you on track with the objective of growing your money. Your net worth is basically the value of the things you own that can be monetized value including but not limited to properties, investments, gold cash etc.… minus what you owe in terms of cash/ credit. Your net worth should keep growing with time, if your net worth is shrinking with time then the alarms should go off to put it back on track.

The air of freedom

A debt free life, with money feeding your investments which grows with your age, while having a steady income, is the feeling of financial freedom that everyone can enjoy with a bit of effort.  Some makes a move towards it early in life and some later.  As the saying goes it’s never too late, so get going with it.

Photo credit Karolina Grabowska