Everyone wants to stretch their money a little bit further and improve their personal finances. Managing money can be a daunting task, and it can be hard to know where to start.
Fortunately, there are many simple and effective strategies you can follow to help get your finances in order. From creating a budget and tracking your spending to investing your savings, here are 9 steps you can take to help you take control of your money and build a strong financial future.
1. Create a budget and stick to it
The first and most important step to improve your personal finances is to create a budget. Budgeting may seem like a daunting task, but it’s actually quite simple.
You start by tracking your spending for a month so you can see where your money is going. Do this by writing down everything you spend and categorize it to get an idea of what your biggest expenses are. The most common categories used are transport, food, groceries, bills and entertainment expenses. However, you can add or remove any categories as you wish, so it can be as personal and accurate as possible.
Once you have a good idea of your spending patterns, you can start creating a budget that aligns with your financial goals. For this, you need to start analyzing how much you are willing and able to spend per category each month. Here you can start prioritizing categories.
For example, say you feel like you have been spending too much in transport and eating out. You can reduce the amount you allow yourself to spend in those categories and keep the difference to grow your savings. Making sure you stay within the allowed amounts is the best way to stay in line with your budget and on track to reach your financial goals.
Furthermore, a budget allows you to plan for future big purchases like cars or houses. By establishing a fixed amount that you will set aside each month towards those purchases, you can accumulate a considerable amount for a down payment or even the whole purchase.
For example, if you want to save for a down payment on a house that you intend to buy in 5 years, you can include saving 100 dollars each month into your budget. At the end of those 5 years you will have saved up 6000 dollars towards your down payment. Now, if you put those monthly contributions in a savings account with a 3% interest rate, you can generate an extra $370 towards your down payment.
Creating and sticking to a budget takes discipline, but the effort is worth it because it will help you reach your financial goals and improve your financial health. You won’t be able to fix your financial situation if you don’t know what your situation is to begin with, and a budget is the most helpful tool to get a sense of what that situation is.
2. Live below your means
You created your budget, so the next step to improving your finances is to live below your means. What this means is to spend less than what you earn every month. This is why the budget you created is so important, so you can know up to what amount you can spend and in what. You want to be spending under that amount, so that means reducing your expenses.
Instead of aiming to buy whatever you can afford, try focusing on buying only what you need. A good technique to help with this is to wait 1 week before purchasing whenever there is something you want. If after that week you still want it and think you will have use for it, then you buy it.
You should also take advantage of any discounts or deals offered by stores or companies. Many stores offer loyalty programs and discounts for repeat customers, and many restaurants have weekly specials as well. Taking advantage of these offers will save you money and help keep more money in your pocket.
Applying for supermarket memberships like Costco or Sam’s club can also help you save more money on groceries. But, you do have to make sure you are saving more than what you are paying in your membership for it to actually be worth it.
You can use apps to look for cheaper alternatives in gas (Waze also has this feature, depending on your location). There are also apps and browser extensions that let you look at the price history of items you want to buy and also compare with other sellers so you can always get the best deals. In short, there are plenty of things that you can do to lower your living costs. Combining these will let you have more money left over at the end of the month.
3. Invest in yourself
You are your own best asset. There will hardly be any scenario where you invest in yourself and it goes to waste. However, we have to be clear on what it means to invest in yourself to get the most out of it.
When one invests in oneself, one is making a change towards a positive goal or desired outcome and exchanging valuable resources. Typically you exchange money, but you can also exchange your time.
There are many ways to go about this. You can enroll in courses online or university classes, or buy books on topics that interest you. You can get a gym membership and plan to go to the gym consistently no matter how lazy you feel. In general, anything that teaches you new skills you can then work with for cash, or improve your physical or mental health, are good examples of investing in yourself.
By doing this, you are setting yourself up for more success by obtaining the necessary resources, skills and mindset to climb your way up to your goals. Not only does this help your personal finances, but it can also help strengthen your relationships, elevate your work-life balance, and in general allow you to feel happier and more satisfied.
4. Get out of debt
Getting out of debt is an essential step when it comes to improving your finances. It allows you to close that imaginary tap that is flushing out money from your bank account each month. Paying off all your debt opens the door to actually increasing your wealth with the money you have left at the end of the month.
I know, paying down debt is much simpler said than done. But you can accomplish it when you have a financial plan set in place. For starters, you already made your budget, and you have some money left over every month.
Now, create a plan to pay off your debts as quickly as possible. Make sure to focus on paying off higher-interest debts first, such as credit cards or personal loans, since these are the ones with the highest costs. Then move on to lower-interest debt like student loans or mortgages. Once you have paid off all your debt, you’ll be free from that financial burden and be able to use that money for other investments or to save for the future.
If paying off all your debt is not a possibility yet, look into refinancing options or if there is any way to negotiate with your bank to get a better deal. Many times you can get a lower interest rate if you combine debts or make a payment plan for high balances. However, your priority should be to pay the debt off completely as quickly as you can.
5. Stay disciplined with your spending
There is no point in making a budget and planning to get your finances on overdrive if you don’t stick to the plan no matter what. I know this point sounds unnecessary, but we sometimes don’t realize how much we are bending the rules to spend on something that we cannot really afford. Making sure you avoid this urge is the best way to stay on track and reach your financial goals.
Another way to make sure you don’t overspend, in case you are using credit cards, is to treat your credit card like a debit card. What this means is to only make sure you are spending an amount you can instantly pay off.
Doing this will ensure that you avoid having a balance that accumulates interest while still enjoying those precious credit card perks (more on this below). Knowing how much you can spend per day or category is the best way to achieve this. So, all you need to do then is to keep track of what you buy with a credit card and consciously avoid going over that limit.
Furthermore, another way to stay disciplined with your spending is to set up automatic transfers and payments. This will help you avoid missing payments and paying extra fees due to late payments. By setting up all these transfers as close to your payday as possible, you make sure that all recurring expenses (bills, rent, etc.) are covered and you won’t have any problem with them later.
6. Cut unnecessary subscriptions
Subscriptions can be a great way to save money when used correctly. Especially nowadays, it seems like everything one could previously buy is turning into a subscription.
This is why it’s easy to forget about them and end up with more than you need. To make sure you don’t overspend on subscriptions, take a look at what you are currently subscribed to, and see if you actually use it or if it’s necessary. If not, cancel the subscription and save that money for something else.
You may also be able to negotiate a better deal with your current provider or switch to a cheaper alternative that offers the same services. Keep in mind that services like Spotify or Headspace offer family plans that allow more people to access their content at a lower cost.
There are also bundles of services that you can get, like the Hulu – Disney+ – ESPN+ trio bundle, which allows you to save even more on the services that you want. Keeping an eye on the subscriptions you have is a necessary step in controlling your money, or else you could potentially have up to hundreds of dollars going away unused every month.
7. Create an emergency fund
An emergency fund is arguably the best way to prepare for any unexpected expenses. We always hope for the best, but we never know when we could end up with critical home repairs, the car breaking down or a nasty accident.
Having an emergency fund in place can help you avoid going into debt or having to dip into your savings to cover these costs. A good rule of thumb is to save up at least three to six months of total living expenses. Remember to factor in any child or family-related costs, as well as the payments of any debt you still have.
You don’t have to make your emergency fund in one go. Instead, start by setting aside a small amount of money each month, and then gradually increase it as you see fit. This is money that you shouldn’t be touching under any normal circumstances, so keeping it in a separate account is recommended.
You look into investing the money in an interest-bearing account, such as a high-yield savings account, to help it grow faster. Although this is a good idea to keep your emergency fund growing and potentially in line with inflation, you need to make sure that you can access the funds at any moment.
Accounts with lockup periods can end up becoming a problem if you were to need your money at a moment’s notice. With an emergency fund in place, you’ll have peace of mind knowing that you have something to fall back on if needed.
8. Take advantage of credit card perks
Credit cards are a powerful tool. They allow you to spend money on things that you need without having to pay the money upfront. Yet, many of them have another added benefit: credit card perks.
Many credit cards offer a variety of perks and rewards; cashback, discounts on purchases, or points redeemable for travel or gift cards are some examples. Some credit cards even offer bonuses for signing up, such as sign-up bonuses or introductory rates.
Accumulating these perks will allow you to use them towards a big purchase you want to make, buying Christmas gifts for your family, or even paying for a vacation. For example, last year I was able to buy plane tickets for 2 vacations and a new pair of running shoes by only using the credit card points I had accumulated in that year.
Depending on the card, you even get extra benefits like travel insurance, rental car insurance or even a personal concierge that can help you buy tickets to popular events or book a table at a busy restaurant. These are all services that are worth a lot of money. Still, they are given to you just for having the right credit card (although many of these cards do have an annual fee).
However, make sure to read the fine print and understand the terms and conditions of any credit card you are considering. The last thing you want is to end up getting stuck with high-interest rates or fees.
Additionally, make sure to pay off your balance in full each month to avoid paying interest charges. As mentioned before, use your credit card as a debit card, and avoid spending more than you can pay off right away. By taking advantage of your credit card responsibly, you can enjoy perks, save money, and earn rewards for your spending.
9. Invest your money
The previous steps are all focused on reducing spending and making sure you know where all your money is going. Now that we have been able to save some of that money and create an emergency fund, the next step is to invest our savings.
What investing means is to essentially make your money work to create more money. This can be achieved thanks to the power of compounding. Even Albert Einstein famously said that compounding is the 8th wonder of the world, and you can surely be amazed at the amounts of wealth you can create if you put in the time and effort.
There are many ways to invest your money. You can buy and invest in stocks, index funds or mutual funds. These tend to have variable returns, so you could potentially lose money for some time.
You can buy bonds, CDs or open a savings account. Although these tend to have lower returns, those returns are fixed, and are therefore seen as safer assets.
If you tolerate more risk, you can look into speculative investments like cryptocurrency, although these tend to be more volatile.
Finally, when you have amassed a larger amount of money in savings, you can look into investing in real estate. From flipping properties to buying rental properties and land, there are many things you can do in real estate to grow your wealth.
No matter what investment you choose, it’s important to research and understand the risks associated before starting. Additionally, it is always a good idea to consult a financial advisor or professional before investing any large sums of money. However, with enough dedication and patience, you can set yourself on track to get the financial freedom you have always dreamed of.
Conclusion
When it comes to improving your personal finances, there are a lot of things to do. But, by making these changes, you can slowly turn around even some of the most dire financial situations. You just have to be patient and consistent with your plan, save up your money, and later put it to work by investing in cash-producing assets.
If you would like more tips on finance or business, check out my blog for many more articles. The best moment to start all this was ten years ago, but the second-best moment is right now. So start making your plan, and let me know how it goes in the comments or through social media. It’s time to get moving!
