Easy Guide to the Basics of Personal Finance

Why should you NOT save?

When you have more than enough savings, it offers you peace of mind, security, convenience, and freedom to pursue the things you want for yourself and your loved ones. Living paycheck to paycheck is very stressful and worrisome. As much as possible, you will want to prevent this financial fear from re-occurring. If you do not work and are not earning, you can help the earner in your family by being the family’s Financial Manager and assisting on how you can grow the family’s income and savings and reduce your expenses.

What can you do now?

You can start by analyzing and taking control of your finances. How much is your income? How much of your income should go to your expenses and how much will go to your savings? Inspired by the Suze Orman show, your personal financial report should have the following categories:

PART 1 – INCOME

a. Income – Your income sources could be your job, sideline work, business, stocks and dividends, rent income, and any other monies you receive. How much is your income? Can it truly support you and if you are not single, can it support your entire family’s needs? If you work very hard but your income is too low that you have to depend on others to take care of your expenditures, it will be difficult to save for the future. You have to work hard but ‘smarter’ and find a way to improve your earnings, otherwise, you and your loved ones could suffer deprivation. So don’t give up on looking for opportunities on how you can grow your hard-earned money into wealth. Educate yourself but know that you cannot also do everything on your own; know when to get help.

PART 2 – EXPENSES

a. Living Expenses – Divide your income into portions. Determine how much total monthly spending you need to take care of your fixed monthly living expenses such as your food, water, and utilities. If your income is not enough to take care of your needs, cutting down on your expenses and evaluating if your spending is a need or a want is always the best practice in being in control with your money. It’s not bad to have wants in life but before indulging, ask yourself first if you can afford it. Can you afford to spend a big chunk of your savings for a luxury shoe that you will only wear for a year? Before buying that flashy BMW car, ask yourself if you can afford the insurance, maintenance and repairs for this car.

b. Debt – Sometimes, debts are inevitable such as debts incurred due to an accident or a medical emergency. However, the stress of falling into debts may be avoided by making sure you have more than enough savings and also, by borrowing wisely. For one, there are banks that offer credit for a zero percent interest. You should start investing on long-term relationships with these banks to earn financial benefits, secure a good credit, and to avoid the large penalties and interests that other lenders have. Most people end up in so much debt through poor use of credit cards. In fact, if you use it wisely, credit cards are great financial tools where you can grow your credit based on your spending performance. If you spend wisely and pay your dues in advance, banks could increase your credit. Use your credit card as a tool where you can buy something and have the ability to pay for it within 30 days. In this way, you can earn some free money and rewards with your spending. Don’t use your credit card if you are sure that you wont be able to pay back the entire amount after a month. Only buy what you need and can afford. Also, don’t make the mistake of spending impulsively and shopping for unnecessary things just for the goal of earning rewards; you will lose more money when you do so this way.

PART 3 – SAVINGS AND INVESTMENTS (Where else can the rest of your money go? In your savings and investments!)

a. Cash – This is your revolving fund; the money that you use to take care of your ‘needs and wants’ such as food and water, mortgage or rent, electricity, clothes, medicines, insurance, and car. When you are left with money that you are not ready to invest, save it and add it into your savings account. It’s always a good practice to save at least 10 percent of your salary into your personal savings. As a matter of fact, save first before making purchases; otherwise you will most likely end up not having any saving once you have spent all your salary. Must you still carry cash? Yes, but do not carry your entire life savings in your purse or home safe. Put your money in a bank where it is much secured and only allot cash that you may need for the entire week. Cash could get lost so utilize your debit card or ATM card. Just imagine if you had lost your entire month’s paycheck just because you didn’t put it in the bank!

b. Emergency Fund – Suze Orman is strict on making sure you have secured at least eight months worth of income into your emergency fund. If you think eight months could be extreme, think pregnancy, unemployment, or recession! Your emergency fund should not be treated as a revolving fund; this is cash reserve intended strictly for emergencies like a major house repair, or a surgery, or when you lose your job. It may take a father of four several months to land a new source of income after his company went bankrupt, or a young graduate who just switched careers, or a new mom to get back to health, so a well-funded emergency fund could save you the detrimental effects of these situations.

c. Investments – Your house and lot, farm lands, rental buildings, or other valuable assets such as jewelries, gold, stocks, and bonds are all good investments where you can put your money into. These types of investments allow your money and capital to work for you. Other personal items such as cars, cellphones, and appliances are not good investments as they lose their value very quickly. Despite not having sufficient savings, many people spend their money on clothes, shoes, cars, and electronics that wear out, depreciate, and cost repairs and maintenance; while there are also other people who save their money first, avoid materialistic spending, and who choose to invest their money on gold and real estate. Are you going to be a spender or would you rather be an investor?

d. Retirement Fund – Sources of your retirement fund could be your pension, social security, company stocks, retirement accounts, equity from your home and other real estate investments, and personal savings. When we get older, the costs of healthcare can be drastic to our finances. Not having enough retirement fund leaves you in a vulnerable state. You could end up penniless during your retirement years, you may not afford your medication, or you might have to move in with your family members. If your family members are not wealthy, they and their children could end up sacrificing too and this could hurt their budget and living situation. Retiring is a time where you should be rewarding yourself for all the years you have worked so hard and you can still afford to retire on your own by saving now.

e. College Fund – Plan for your children’s education as early as possible. Invest in your children. Education for your children provides them a good foundation to compete in this fast changing global market. Your children are not slaves, tools, or robots who should work for you. Instead, your children are your obligation and you have a duty to provide for them until they are legally capable of earning on their own, so invest in them.

Think through your finances and this could help you see the reality of your financial ability. Do not feel discouraged if you don’t think you have organized your finances accordingly. What’s important is to work on these key points NOW.

© 2014