Managing Finances

November 16, 2021

Each and every individual has their own set of personal Habits but before we tackle that let’s talk about “How to Improve and know the importance of your Financial Health.

I have here Five rules or general principles that can help you attain specific goals.

Your “personal finance” will navigate your plans for your future. All of these financial decisions and activities has a factor on your financial health. We do hear some specific rules of thumb, such as 70-20-10 division of your savings (70 for monthly bills and budget : 20 for savings and investments : 10 for tithes and repay of debts) and the other rule of thumb is to not buy a car that costs more than two-and-a-half years’ worth of income.

These may be good time-tested and helpful points of view but it’s important to consider what we should be doing—in general—to help improve our financial health and habits. Here we discuss five broad personal finance rules that can help get you on track to achieving specific financial goals.

1. Do the Math of your Net Worth and Personal Budgets

Have you ever wondered how much your net worth is? Net Worth is the difference between what you have owned and what you owe, so it’s best to make a list of your assets (what you own) and your liabilities (what you owe). Subtract your liabilities from your assets to arrive at your net-worth figure.

Your Net worth will define where you are financially at the moment. Remember seeing the yearly Forbes Top List of Billionaire with the equivalent Net Worth – that is a good example how clearly show wealthy they are.

Tracking your net worth allows you to evaluate your progress, able to highlight your success and identify areas requiring improvement.

Now that we an idea of your net worth, it’s time to talk about your personal budget since this is equally important in monitoring your expenditures and a great financial too because it can help you:

Plan for expenses
Reduce or eliminate expenses
Save for future goals
Spend wisely
Plan for emergencies
Prioritize spending and saving

Each individual has their own way of budgeting likewise it differs from income and expense. Your situation can change over time but here are common income terminologies you would hear:

Alimony
Bonuses
Child support
Disability benefits
Interest and dividends
Rents and royalties
Retirement income
Salaries/wages
Social security
Tips

While general expense categories include:

Childcare/eldercare
Debt payments (car loan, student loan, credit card)
Education (tuition, daycare, books, supplies)
Entertainment and recreation (sports, hobbies, books, movies, DVDs, concerts, streaming services)
Food (groceries, dining out)
Giving (birthdays, holidays, charitable contributions)
Housing (mortgage or rent, maintenance)
Insurance (health, home/renters, auto, life)
Medical/Health Care (doctors, dentists, prescription medications, other known expenses)
Personal (clothing, hair care, gym, professional dues)
Savings (retirement, education, emergency fund, specific goals such as a vacation)
Special occasions (weddings, anniversaries, graduation, bar/bat mitzvah)
Transportation (gas, taxis, subway, tolls, parking)
Utilities (phone, electric, water, gas, cell, cable, internet)

Once you’ve gathered your appropriate projections, do subtract your expense from your income. So, the left-over amount is what we call surplus, and with that, you can now decide how to spend, save or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income (adding more hours at work or picking up a second job) or by reducing your expenses.

To really understand where you are financially, and to figure out how to get where you want to be, do the math: Calculate both your net worth and a personal budget on a regular basis. This may seem abundantly obvious to some, but people’s failure to lay out and stick to a detailed budget is the root cause of excessive spending and overwhelming debt.

2. Recognize and Manage Lifestyle Inflation

Most of the time, Individuals with more income tend to spend more. As Lifestyle Inflation kicks in wherein this can be damaging in the long run if you don’t recognize it because it limits your ability to build wealth. Every money spent now means less money later and during retirement. Not unless you are born with a silver spoon.

There will always be pressure around our circle of friends and most often than not this can hardly sabotage our finances if lifestyle inflation is not in control. We would always want to be updated with the trends in fashion, gadgets, or equipment but recognizing your capacity of purchase will subtly harm your future savings.

As your professional and personal situation evolves over time, some increases in spending are natural. It’s just normal to upgrade your wardrobe to dress appropriately for a new position, or, as your family grows, you might need a house with more bedrooms. And with more responsibilities at work, you might find that it makes sense to hire someone to mow the lawn or clean the house, freeing up time to spend with family and friends and improving your quality of life.

3. Recognize Needs vs Wants – Spend Mindfully

As mentioned, if you were born with a silver spoon then lucky for you! But at the end of the day, it’s in your best interest to be mindful of the difference between “needs” and “wants,” so you can make better spending choices. “NEEDS” are things you have in order to survive like food, healthcare, transportation, reasonably clothing set and other items that can help you while on the other hand, “WANT” are things you would LIKE to have but don’t require survival.

It can be quite challenging to accurately label expenses as their needs and wants but let us share with you an analogy to it. A car is a good example. You NEED a car to get to work and take the kids to school but you WANT the luxury edition SUV that costs twice as much as a more practical car (and costs you more in gas). You could try and call the SUV a “need” because you do, in fact, need a car, but it’s still a want. Any difference in price between a more economical vehicle and the luxury SUV is money that you didn’t have to spend

4. Start Saving Early

It’s often said that it’s never too late to start saving for retirement. That may be true (technically), but the sooner you start, the better off you’ll likely be during your retirement years. This is because of the power of compounding as what Albert Einstein called the “eighth wonder of the world.”

Compounding involves the reinvestment of earnings, and it is most successful over time. The longer earnings are reinvested, the greater the value of the investment, and the larger the earnings will (hypothetically) be, just take a look at this sample having the advantage to work your money for you at an early age.

This image is from PRUlife UK and I’m a licensed financial advisor under their company with Spark Amber Life Insurance Agency Force.

The sooner you start, the easier it is to reach your long-term financial goals. You will need to save less each month and contribute less overall, to reach the same goal in the future.

While you’re still young and healthy, let me assist you in calculating for your protecting your income in as much as you can more especially if you have dependents. Let’s talk about your best plan so please feel free to click this link.

5. Build and Maintain an Emergency Fund

An emergency fund is just what the name implies: money that has been set aside for “emergency purposes” like a trip to the doctor or unexpected expenses incurred through your journey. One great experience we had was during the 2020 pandemic wherein some jobs had to lay off people and if you were the breadwinner of the family, definitely some of your emergency funds might have been unless you were able to save a huge chunk of savings.

Did you know that the traditional guideline is to save at least three to six months’ worth of living expenses in an emergency fund, the unfortunate reality is that this amount would fall short of what many people would need to cover a big expense or weather a loss in income. In today’s uncertain economic environment, most people should aim for saving at least six months’ worth of living expenses—more if possible.

The Bottom Line of this Post

Personally, managing your Finances can be an excellent tool for your growth of success. I had to make another post for financial habits as this took up knowing the key to building a good foundation to your Financial Knowledge — habits will eventually be learned along the way that may best fit your lifestyle. Without consciously having good habits it will be harder for you to manage it when more comes in.

About the Author

AR. SHERENDINE-BENZ SY-WONG

A licensed Filipina architect and financial advisor, Denden shares her journey of life and learning with her partner, Myke. This blog is a space for their insights, experiences, and skills, offering helpful and inspiring content for all who visit.

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