Do you usually find yourself living from paycheck to paycheck? Do your finances go downhill at the middle of the month, picking up again only at the start of the next month? Do you always find yourself struggling to make ends meet until your next salary?
If you answered yes to one or all of these questions, you need to know about financial literacy and how to break free from the vicious cycle of living from hand to mouth. In case you have always wondered how your colleague manages to go for a vacation once a year and still afford that brand new car on the same salary that you earn, the answer is simple. Financial literacy. Financial literacy is a term for being informed about your money; where it comes from and where it goes to and how much you have set aside at every point in time, physically or otherwise.
Here are some strategies on how to manage your money so you can afford all those things you want:
- Know how much you are worth:
This is the first step to financial freedom. You need to make a detailed list of all your incomes (all the money you make) and expenses (all the money you spend). These figures not only lets you know how much you have left after covering expenses, but also lets you see how you spend your money. This helps you see the things you can cut back on and how much money to put aside.
- Always stick to a budget:
In her book “All Your Worth: The Ultimate Lifetime Money Plan”, Elizabeth Warren talked about the 50/30/20 budget rule. This rule is quite easy to follow. It says after paying taxes, whatever you have left should be spent in three ways.
50% should be dedicated to your needs; that is those things you cannot do without. Food, transport, healthcare and rent fall in this category. Going to the movies or splurging on a new pair of shoes do not count, unless the old pair is falling apart at the seams.
Another 30% of your net income covers your wants. These include saving for your vacation at the end of the year, buying equity in a small business or that handbag that you must certainly have. Your wants are things that you think you need but are not crucial to your survival. Yes, going to that fancy restaurant to dine is a want.
The remaining 20% should be saved. This could be your retirement fund or rainy day fund in case of emergencies.
Remember that sticking to a budget is rewarding in the long run when you find yourself veering off course.
- Set financial goals:
Setting and achieving goals proves to be a rewarding exercise. It makes you feel capable as a person. To better manage your money, it is good to set goals; long term ones and short-term ones. In fact, studies have shown that actively set goals have more chances of being realized. You should make a list of all the goals you mean to slay this year because it reminds you to work towards it. Thinking of putting aside some money to invest? Or perhaps starting you own side hustle? Then start setting those goals!
- Be accountable to someone:
Although this might not be necessary if you are a disciplined person, it helps you achieve your goals. Telling a sibling, spouse or friend about your goals helps you feel like you have an audience that you don’t want to let down. When you feel yourself slackening with your goals, they can also give you the support and encouragement you need to carry on.
Though this has been mentioned earlier, it still needs to be emphasized. Want to get a new car? Save. Buy a house? Save. Quit your job and do your own thing? Save. Putting money aside is very important. In fact, you should even start putting something aside for your retirement from now. With how unstable paid employment is, having a nest egg serves as a cushion if you suddenly find yourself out of work. It helps you keep your bills paid while you figure out new sources of income.
Asides this, saving also makes it easier for you to splurge and give yourself a treat. The best way to pay for something is to save towards it. So you should start putting money aside for that wardrobe change so it does not affect your finances.
- Spend less than you earn:
A lot of people are in debt because they ignored this simple rule. A 2018 report from the Federal Reserve shows that Americans hold over $1 trillion in credit card debts. These debts include mortgage, student and car loans.
If you want to be financially free, you must spend within your income. It makes absolutely no sense to go broke trying to look rich. Do not buy anything you don’t really need just to keep up appearances. You will only end up miserable and in debt.
- Stay away from gambling and high interest rates:
If you must get a loan, let it be towards an investment. Before you take the loan, ensure that you check out the interest rates and work it out. Make sure it will not stretch your finances too thin in the long run.
Gambling is not only addictive but also a very quick way to drain finances. A lot of people are drawn in by how much money they stand to win with the paltry sum they spend on tickets. They allow themselves to be lured by the huge figures that they start to buy tickets everyday and gradually increase their stakes. Most of them end up in debt.
As fantastic as winning a million Naira with just a hundred Naira ticket sounds, do not do it. If you need to increase your income, investments are a safe way to grow your wealth.
Managing personal finances is a skill that everyone needs in today’s world.