You tend to hear horror stories about people going into debt. Others are buried under thousands of dollars of credit card bills. Some are picking up extra jobs and taking out loans left and right.
Having a good system to manage your finances is a smart idea if you want to stay out of debt and possibly save for the future. Here is a beginner’s guide to managing your money.
1. Set up a Rainy Day Fund
Contrary to popular belief, setting aside is the most #1 important thing you should do as compared to learning how to save or cutting down your debt etc.
This is because a rainy day emergency fund is for unplanned essential expenses, such as a sudden car repair or if you lose your job. The rule of thumb is to have:
Rainy Day Fund: At least 3 to 6 months of your expenses
The easy way to go about it is to just spend an excruciating month tabulating your expenses for the entire month. After that, smoothen out any irregular spike in expenses based on the number of months/years – example spending for staycation or travelling worth $5k should be divided by how many times you do it in a year.
After you build your emergency fund, you may consider building up your savings.
2. Automate your savings budget
When most people think of a budget, they think of a set of rules. Now, something is telling them what they can and cannot buy.
While this definition or practice is supposedly correct, i find that (from my friends) it rarely works. Its more of a theory thing.
Reason being that people will always spend whatever they have to the last dime and savings will only come by if there’s extra – but there wouldn’t be any!
So instead, we should all practise automation when it comes to our budget – Open a separate savings account and establish a automatic transfer of at least 10% of our take-home income.
Better still – Don’t apply any atm card for that account. Because…
You can’t use what you can’t see!
3. Protection before Earning
Last but not least, it is wise to have enough insurance coverage even before you start investing.
No matter how much you can earn, one illness can rob you of all these riches instantly. Health is always more important than Wealth.
Hence, you have to at least protect your downside (hedging) through insurance before you start to embark on the route to investing.
There are 5 categories of insurance and if you are confused of what to buy and how much premium to pay for, check out this informative article by Seedly.
The first principle of managing your money is to live within your means. Always spend less than what you make and keep to your budget.
Once you have a strong foundation, you will not panic when your investments suddenly turn sour – just like the vicious spread of coronavirus which sent the markets into a tailspin.
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