Personal finance is the process of managing your money and planning your finances in a way that will help you secure your future. Each financial decision taken will have an impact on your financial health. You can follow a few guidelines that will accelerate your decision-making process. For example, experts advise that the cost of your house should not exceed three years of your total income. It’s also advisable to save at least 20% of your after-tax income and invest the same into various asset classes. Here, we discuss five budgeting strategies that will help the reader improve finances over time. Track your expenses To save your income, you first need to understand your monthly spending pattern. While it’s impossible to avoid spending on essentials such as house rent, utilities, and food, your spending habits always have room for improvement. You can start with downloading a free-to-use money management application that will help users track spending across categories. So, you will know how much you spend on entertainment, dining out, traveling, etc. The spending data will help users better allocate monthly expenses and lower non-essential costs. A monthly budget is key The most important tip is to have a monthly budget that should not be exceeded. In addition, it’s vital to allocate a portion of your income towards investments that should ideally beat inflation rates in the long term. As stated above, you can start with saving 20% of your post-tax income and invest the savings into a diversified portfolio of stocks, bonds, and commodities. The savings percentage should ideally move higher as your income increases. The best way to adhere to a monthly budget is to create an automated investing cycle or systemic investment plan. Here, you ensure to save or invest a particular amount each month, after which you will have the flexibility to spend the rest of your earnings. Create an emergency fund The COVID-19 pandemic has shown us the fickle nature of the global economy. In a matter of a few weeks, unemployment rates touched multi-year highs as governments imposed lockdowns and shut their borders. Further, an economic recession is witnessed once every decade, and you need to be prepared for the worst. So, you need to create an emergency fund that will help you cover at least six months of expenses. Have financial goals It’s essential to have both long-term and near-term financial goals to help you improve your spending habits. So, if you aim to purchase a car, you don’t have to max out your credit card for a down payment. Instead, the buyer should create a fund and make regular payments towards it, even if it means you have to delay the purchase by a few months. Limit your credit card bills A credit card provides users with financial flexibility, provided you maintain a disciplined spending approach. Also known as the credit utilization rate, this metric is calculated by dividing the total amount on your credit card by the total available credit. Generally, if this score exceeds 30%, your credit score may be negatively impacted, thereby increasing your cost to capital. Using your credit card judiciously can help you tide over short-term cash flow issues as well as improve your credit score. Want to Learn More?
Download CleverCookie, the first Canadian finance app that teaches you personal finance in an interactive and fun way.