Think you’re bad with personal money management? We believe otherwise. You need one concept and one rule to get started!
Professor Choi and professor Robertson from Yale School of Management and University of Toronto recently conducted a study to see what differentiates millionaires from everyone else.
They collected responses from 2500 investors with high net worth and compared the results with a previous study that contained 1000 responses from people will all income levels. While there were several commonalities and differences, two-thirds of the wealthy group relied on some professional advisors to manage their finances.
What does that tell you?
Not Everyone Has The Perfect Idea Of Personal Finance Management
Anyone can indeed earn money, but using it effectively isn’t what everyone’s best at. The idea of budgeting and planning looks easy but requires a great deal of attention and consideration before you’re applying an approach.
In the case above, average people manage their finances themselves in contrast to the wealthy ones. This makes the common man miss out on the critical financial knowledge that can improve their financial well-being. However, you can learn the tricks of personal money management if you focus on the basics, coupled with effective strategies and a nifty app.
It’s ok if you can’t get the hang of personal finances or have the basic idea and lack the strategy. We’re here to help you out. Read on to figure out the golden rule of budgeting to master your necessary personal money management skills.
The Golden Or 50:30:20 Rule
Since budgeting comes as a crucial step in money management, it requires some guiding principles. Also known as the Rule of Thumb for Budgeting, the concept was coined by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan.
The plan is widely adopted due to its flexibility and versatility, where it splits your after-tax income into three main categories: needs (50%), wants (30%), and savings (10%). Assigning your money into these slots will help you stop detailing your finances while focusing on your overall financial situation. It’s a simple plan for people who want to achieve their financial goals in an organized fashion.
The rule states that you should spend 50% on your critical needs and obligations to fulfill or must do, such as groceries, rent, bills, and anything that counts as a monthly essential. If your needs are fulfilled, and some amount of the 50% remains, you can split it between savings and everything else you want. The rule is presented as a template designed to help you manage your money better and save enough for retirement.
Anyhow, suppose you’re going to implement this rule in your budget planning. In that case, you must first evaluate your overall financial situation, your socioeconomic status, lifestyle, and other factors and see if this rule applies to you. But if it doesn’t, you can always tweak things that work your way.
70:20:10 Is An Alternative
Now, you see that the above framework doesn’t work for you. That’s ok; not everyone has it easy. The 50:30:20 rule might seem too ambitious for many who struggle to make ends meet. However, there is a lot more flexibility if you aim for substantial personal money management with simplicity intact.
While the basic framework remains the same, i.e., the three-tier premise, the categories and percentage of the amount allocated to each category are different. Here you designate:
- 70% to living expenses
- 20% to savings
- 10% to debt payment
Whether you follow the 50:30:20 rule or the 70:20:10, the key is to find a system that works for you. Using the three-tier proportions, you have to set and adjust the 100% of your income, so you build a secure financial foundation. But how are you going to do it?
Applying The Rules For Perfect Money Management
Congratulation! You’ve finally learned the way to handle your financial planning. What’s next? It’s usually the tips and tricks that support your planning and boost the working of it. Here are a few things to get you started:
Pay Attention To Housing And Mortgage Needs
Of all the financial needs, looking after rents and mortgages must be taken care of immediately. Most people save for houses, while others live on rent. The best thing to tweak your finances is to evaluate your housing, rents, and mortgage. Within the three-tier system, your housing needs could vary from rents being critical needs to the mortgage being the savings. Are you living alone or with a roommate or family? Do you often travel or spend time indoors? Do you live in a metropolitan or a suburb? Factors like these determine your housing needs and help decide on your actual needs for a house that best fits your financial plan.
Cut The Costs Of Transportation
Did you ever think about how much fuel it cost you to commute from home to work and back again? According to Business Insider, commuting costs can range from $2000 – $5000 annually in the US. Imagine how much you can save without having to worry about commuting to work.
You can always use public transport if you’re living on the city premises. If you live in the city outskirts, consider carpooling with friends and colleagues. Even if you’re working from home due to the pandemic, you can save transportation costs altogether.
Look Out For Discounts And Deals For Groceries
Savings come in all shapes, sizes, and even grocery discounts. Since these come in the basic needs group, you can still trim the costs by using coupons, discounts, promos, and much more. Always keep on the lookout for better plans and budget deals that don’t cost you much. If you’re a brand’s loyal follower, give other brands a chance for a change.
If you’re a family, buy canned, jarred, packed, or bottled items in bulk, and create weekly slots for fresh produce. If you live alone, then create a monthly budget plan that applies to your needs alone.
Introduce Frugal Family Entertainment
Family fun doesn’t count on costs; it depends on the memories you create with your loved ones. Sure, the kids want to visit Disneyland, and you’re saving for it, and you can’t afford to spend that saving elsewhere. But that’s ok; you can still have some fun with family without spending too much.
Think about backyard camping, fishing, hide and seek, indoor board games, and farm picking, and so on. You can even arrange a movie night at home with everyone tucked in one blanket. It will help bring the family closer to the family and let you explore your locality’s scenic nature.
Don’t Spend On Anything Unless You Don’t Need It
Sometimes, shopping goes out of hand, and you can’t put a rein on the spending train. That isn’t how you take the road to personal finance management. If you see something that’s been on your wishlist for some time, but it isn’t anything that caters to your needs, then don’t buy it.
Keeping your needs intact is the way to get your planning on the path to perfect management. If you have your priorities set, there’s a small chance your finances will wring out of control. To keep up with your financial goals, stick to the lists of the stuff you need and buy it with cash only. That’s good enough for a starter.
Start The DIY Tradition
If it costs too much, make one. From the DIY marble coffee table to fall home décor, you can make anything at home. Not only will it save you the costs, but it will also strengthen the family and friendship bond. You can pick anything you like to make, search for a tutorial online, and get the supplies. Then involve your family or friends in your DIY project to help you out and have fun as well.
Keep A Separate Account For Utility Bills
Please make sure the money you’ve kept for bills never loses its availability status. It’s hard to keep it when you’ve got other expenses burdening your shoulders. To keep that hassle away, open a separate account for all the fixed utility bills and keep them scheduled for payment.
In these accounts, you can designate the amount per your usage of a service and transfer the required amount from your primary income account.
The Final Word
Personal money management can make anyone feel stuck, and one can feel bombarded with unexpected expenses at the time. Still, with the rules mentioned in the article above, we hope that you develop a system that works fine for you without having to sacrifice your financial stability goals.
Besides the tips mentioned, you can also find several others that you find fitting to your approach. However, you first need to understand the structure and your needs to manage your needs best, wants, savings, and debt payments. This way, you can fast forward to enjoy life with moderation.