Managing your finances isn't as hard as some people make out. All you need do is keep an eye on these seven areas...
Here's a quick question for you: how much time do you spend managing your finances each month?
Depending on your personal situation, I imagine it could be anything from thirty hours to thirty minutes a month. Of course, if your money is in a right old mess, then it takes a lot of effort to manage and monitor it. On the other hand, if you have all your financial ducks in a row, then money management can be plain sailing!
Personally, I fall somewhere in-between these two categories. On one hand, I have a simple plan to help me to achieve my long-term financial goals. On the other, I'm incredibly disorganised and tend to procrastinate, so I'm my own worst enemy at times. Nevertheless, I'm confident that my household finances are in pretty good shape, largely because I look after these seven important areas:
1. Budgeting
Although many people regard budgeting as a tiresome topic, I view it as the very cornerstone of good financial management. By learning how to budget, you can start building financial security by spending less than you earn. Indeed, to jazz it up, I think of myself as CEO of `Me PLC', whose job it is to maximise income, minimise expenses and create a healthy surplus for shareholders: i.e. me!
2. Spending
Budgeting (holding onto as much money as you can) goes hand and hand with spending (letting your money go). As a `wiser miser', I don't have a problem with spending as such. What I worry about is over-spending and paying over the odds for goods. Hence, I take great care to shop around and haggle, so as to ensure that every purchase is a bargain. Paying with a Best Buy cashback credit card helps, too!
3. Borrowing
After budgeting, I feel that the second-best financial skill is learning to control your borrowing. Indeed, having endured years of debt-induced misery, I've taken a vow never to `do debt' again. Alas, few people are as fortunate as me -- especially as the UK has a record £1,163 billion of mortgage debt and a further £216 billion of other personal borrowing. Nevertheless, if you'd like to shake off your debt shackles and become financially independent, then visit our Get Out of Debt centre. And stop spending on interest-charging credit cards! Take out a card offering 0% interest on new purchases instead, and try to start paying your debt off every month.
4. Saving
Generally speaking, yearly interest rates on credit cards and overdrafts are between 15% and 25% APR. On the other hand, a half-decent savings account will pay perhaps 5% a year -- and that's before any tax due. Thus, in almost every circumstance, it makes sense to pay off your debts before starting to save.
However, once you're back in the black, then you should start saving in earnest. Ideally, you should pay into a savings account which pays a high rate of tax-free interest, such as a cash ISA. Over time, and depending on your personal attitude to risk, you should aim to build up a `cash cushion' of three to twelve months' living expenses. This will tide you over when times get tough, and cut down on your need for insurance, which is up next...
5. Protection
We all have very different attitudes to life's mishaps. Some of us are very risk-averse and take great care to avoid falling foul of bad luck. Conversely, some people are quite happy to gamble and hope for the best. Where you fall in this `risk spectrum' will govern your outlook towards insurance.
If you're anxious about the financial impact of unforeseen events, then you're far more likely to buy insurance as a safeguard. Thus, for your own peace of mind (and that of your dependants), you should establish which insurance policies -- and the extent of cover -- you need. For example, popular policies include:
- car insurance (mandatory);
- home insurance;
- income protection;
- life insurance;
- medical insurance; and
- travel insurance
...all of which you'll find in our Insurance centre.
6. Investing
For me, investing -- turning cash into yet more cash -- is the best bit of financial management. Although you can invest in a wide range of different assets, my personal preference is stock-market investing. It's up to you whether you invest in individual companies listed on the London Stock Exchange, or if you buy the whole market via a low-cost index tracker.
Then again, what you must do is ensure that you invest enough of your income to build wealth over the long term, which includes saving for retirement. As I explained in The Automatic Millionaire, putting a mere tenth (10%) of your income away over a long period can leave you seriously well-off.
7. Reading
Finally, as a bonus tip, I'd recommend that you do what I do and read Fool.co.uk several times a week (and not just my own articles either!). Regular readers will know I've discovered a great deal from seven years of reading this website, and I'm constantly surprised by how much more there is to learn...
More: Get quality insurance, investments and savings accounts via the Fool | How To Shop Safely Online This Xmas | Passwords, PINs, Bank Accounts And Fraud