Let’s talk about money
Money and money management! One of the topics we don’t generally talk about. It’s very personal and hence we hardly talk about it and we feel anxious or uncomfortable when someone asks us about it. I’m not a professional financial adviser but I can help you with the basics on how to manage your money in such a way that you could enjoy your life as well as make you stop worrying about your future, even if you are a freelancer or at a full-time job. There are many people out there who talk about investments but no one actually talks about the basics.
To manage your money, you need to consider the following points and tips:
1) Create your personal money journal
What is a money journal?
A single report in which all your income, expenses, assets, and debts are mentioned together. It shows how much you earn, how much you spend, and how much actually left with you at the end of every month.
Make a list of:
– Your income sources like salary, side business, etc.
– Your expenses like utilities, entertainment, etc.
– Your assets like Investments, cash, etc.
– Your depts like loans, credit cards, etc.
To make this work, ensure that your report is detailed and complete. When you do it, you will know what expenses are necessary and what you can postpone or eliminate completely. This will show you if you actually need budgeting or you are doing just fine.
Also, calculate your gross income (Income before tax deduction) and net income (Income after-tax deduction). This will actually give you an amount you can use.
2) Dealing with debt
Dept: A loan amount that is unpaid or due. I’m not a big fan of loans or credit cards. Especially, when we take loans for the things which are not important and definitely out of budget. It’s good to have a credit card, it gives you credibility from the bank but only if you pay off your bill regularly. But if you miss or delay paying off your credit card bill, it will decrease your credibility and it will cause issues if you ever apply for a loan, in the future. Plus, it will cause you unnecessary stress at the end of every month or till your next salary is due and it is definitely not a fun way to live.
For example, you earn $5000/month and you pay $3000/month to the bank. You will be left with $2000 only, in which you need to pay for rent, electricity, car fuel, etc. You will hardly have any money left to spend on the things which make you happy. I will suggest a person should pay off his debts as soon as possible. When you pay off all your debts, you will have one less thing to worry about and you will have the cash to spend on something you dream of.
As your debt increases, your cash flow decreases, unless you generate an extra source income. Adding depts gets in between your net worth.
3) Saving for retirement
Many people don’t even worry about their future, especially retirement. Let’s talk about why it is important to save for retirement. After working for years, you grow economically and you create a lifestyle. At old age, you have no energy to earn, and maintaining that lifestyle becomes difficult. So, when we start saving at an early age, till the time we retire, we can save a huge amount for our future self.
Now, let’s talk about, how can we save money for our retirement?
Make a plan for your future life which includes an answer for- How do you want to live? Where do you want to live? How much will be your monthly expense?
The next question which arises is how much amount to save for retirement? For that, we will take an average age when you are planning to retire and the expected age you want to live.
For example, You want to retire at age 60 and you are expecting to live till 90. That means you need to save for 30 years. Calculate your expected monthly expense and multiply it by 12 (months). The amount you receive, multiple that amount again with 30 (years).
– Monthly expense x 12 (months) = Annual expenditure amount
– Annual expenditure amount x 30 (years) = Total amount you need for your retirement
I know it is impossible to know your future and plan for it. But by doing this we could at least be prepared. And to know how much time it will take for you to save that amount?
You need to calculate your monthly net income and deduct your monthly expenses. The amount you receive is the amount you can use per month. Now select a particular amount which you are going to save every month and that will give you that approx. the amount you need for your retirement. When you save regularly, you don’t feel the burden of that huge amount.
4) Create emergency fund
Life is unpredictable, you never know when you fall sick or lose your job or face natural calamity. The cash you save for such an unexpected life event and peace of your mind is called an Emergency fund. So, to avoid sudden stress or debt, I will suggest you have an emergency fund. Your emergency fund is different from your savings or investment. For people who have a full-time job, I will suggest saving an amount worth approx. 6 months of income or expense amount. And for those who are a freelancer, I will suggest saving an amount worth approx.12 months of income or expenses.
How to calculate?
– Option A: for saving monthly income: Monthly income ($10,000) x Months saved (6) = Emergency fund ($60,000)
– Option B: for saving monthly expenditure: Monthly expenditure ($5000) x Months saved (6) = Emergency fund ($30,000)
It’s on you, how much money do you want to save as your emergency fund. Both the options are reliable.
If you reach this part, be proud of yourself. Not many people are working or even thinking about it. How much money you spend is always your choice at the end of the day. Creating a habit of managing your money saves you from anxiety and vulnerability but don’t put too much pressure on yourself. Work with your money journal to target short- and long-term goals. Remember, you are not going to be perfect but by doing this, you will be confident enough and you will know what to do.
Click on the money journal and expense tracker to download the free layout.