Managing money is extremely tricky. Budgeting can help you get control of your spending, but that is not enough to master finances. You need to understand how you can beget money from money. You will call yourself to be in a sound financial condition when your account is in the black and you have retirement savings.  

You should get to grips with your personal finances to make the right decision. Only if you are financially savvy will you be able to make the most of your money. You will know:

·         How to handle your debts

·         Where and when to invest money

·         How to build a retirement fund

·         How to insure assets

·         What size an emergency cushion should be

Here is what you need to do to understand the basics of personal finance:

·         Learn how to create a budget

Budgeting is the most basic thing you cannot ignore. It can help you achieve your financial goals within the set relevant timeframe. However, coming up with a solid budgeting strategy is a big concern for many people. There are various budgeting methods you can choose from. Make sure you pick the one that matches your requirements.

·         Gather all your financial documents and see how much you pay every month on groceries, housing, entertainment and travel.

·         Record your monthly income. It includes your pay and wages from other sources. If your income varies by month, you should determine the average income for the last six months.

·         Create a list of fixed expenses like rent, mortgage payments and insurance. These expenses also include those that do not change much, like credit card bills and utility expenses.

·         List your variable expenses. They include both essential and discretionary expenses such as groceries, gym memberships, eating out and nights out.

·         You are good to go if your income is more significant than your expenses. Well, whatever the situation, you should always try to chip away in certain areas so you can make the most of your money.

·         Set goals. Start with smaller goals like building an emergency cushion of three months’ worth of living costs or the settlement of loans with no guarantor from a direct lender.

·         Adjust your variable expenses to achieve your goals smoothly. You will have to track down them.

·         Review your budget every month to ensure you are not overspending.

Make a strategy to settle your debt

It is vital to understand that you should be free from debt to improve your financial situation in the future. Come up with a payment strategy. If you owe too much debt, it might be difficult to keep up with payments. Talk to your lenders to know if they can revise a repayment plan. Do not expect that every lender will have an ear of sympathy. Try to come around such lenders to a minimum payment plan.

The unpaid balance will keep accruing the interest, so try to pay more than a minimum monthly payment. You must know how to tackle your debt quickly if you want to gain full control of your finances. Credit card debt is also difficult to handle. Try to transfer the balance or use a 0% interest credit card so you can pay off the whole balance without being obliged to make interest payments.

Improve your financial knowledge. You should know the difference between interest rates and annual percentage rates. Understand the implications of taking out a loan. Moreover, you should carefully compare interest rates.

Make sure you understand the terms used in your loan agreement. Pay heed to the fine print. Ask your lender if you are unfamiliar with a term. No lender is obligated to inform you what is what. The lending industry strictly follows the rule of “caveat emptor”.

Use online calculators to determine the estimated cost of the debt to know how much a loan will likely cost you. A lender should be running an affordability check, but you should also check if you can actually repay the debt.

Here are a few ways to settle your outstanding accounts:

·         Calculate the amount of total debt you owe and then divide it into priority and non-priority debt. Make sure you first settle your priority debts like mortgage payments, auto loans and the like.

·         Look over your financial condition and see which payment strategy will work for you – debt avalanche or debt snowball.

·         Use a new loan to pay off all your outstanding dues so you will have only one loan to pay down over a length of time. You must have good credit to use this option.

·         Consider refinancing some of your loans if your financial situation has improved ever since you took out a loan.

Setting aside money for a rainy day and retirement

Savings are crucial as they help get by when you are in a tight spot. Emergencies can pop up at any time. You must have some money to dip into to tide over. Along with your emergency cushion, you should also have a retirement fund. Contribute to a 401(K) account. If your employer does not have a workplace pension scheme, build a private pension fund.

·         It can be hard to be committed to savings, and therefore, you should set up automatic deposits. Link your savings account to your pay account and make sure every month, a certain amount of money is pulled on a fixed date.

·         Do not dip into your savings account unless it is an emergency.

·         If you can pay more money to your 401(K), go ahead. It will help build your retirement savings quickly.

Invest money

Your money loses its present value because of rising inflation rates, and that is why you should invest money. Savings accounts do not yield high interest. If you let your money be idle, your buying power will reduce. It can be dreading to start investing money as a beginner. Choose an investment expert who will help you create a diversified investment portfolio.

·         A fixed deposit is a good way to start.

·         Improve your knowledge about how stocks and mutual funds work and start investing in them.

·         Understand the market trends to cushion the blow of unexpected downfalls.

·         Understand the importance of your home insurance. It can prevent you from the risk of theft, burglary and fire.

·         Buy life insurance to secure your children.

·         Get health insurance to protect you if you come across a medical emergency.

The final word

Understanding the basics of your personal finance is extremely crucial to stay on top of your money. When you know the basics, you will be able to make better decisions about savings, building emergency cushions, debt settlement and investments.

Talk to your financial advisor to learn about market trends. They will help you choose the right type of investment to grow your money. Improve your knowledge about money by reading books and newspapers. The more you learn, the better it is.