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Personal finance is such a complex subject simply because there are so many financial concepts that you must know. Each of the concepts are not really difficult to understand but they can be a challenge to implement. Knowing and implementing the right money-related ideas in your life will help you make the right financial decisions that will lead to the growth of your personal wealth.
This is the reason why a lot of financial experts and organizations put so much importance in financial education. You cannot hope to control and make good decisions about your money if you do not have an idea how to manage it in the first place. It is just like how you treat car ownership. If you want to own a vehicle, you should learn how to drive, the rules on the road, and the proper maintenance practices that will keep your car in good condition. Failing to do this can lead to all sorts of problems: car accidents, trouble with the law or even spending too much money on car repairs.
Given that, we’d like to discuss 3 simple yet very important financial decisions that has the power to improve or destroy your life.
Should you live within your means or live below your means?
The first financial decision that you should consider is how you will spend your income. We all have varying incomes but you should not be fooled into thinking that people with bigger salaries are always better off. Sometimes, those with 6 figure incomes have more debt because they do not know how to manage their money. In other cases, those will smaller monthly compensations are living debt free lives and can afford to spend money on their entertainment activities.
The reason why people are miserable with their finances is because they failed to live within their means. This simply refers to having your total monthly expenses lower than your total net income. Here are some of the reasons why this decision can change your life.
While living within your means is important, you should consider if you should live below your means instead. The difference is, the latter will give you more savings than the other.We will discuss this in detail later on but the bottom line is, you may want to go even lower than your means so that you have room for emergency expenses.
Keeps you from incurring debt.
Forces you to make better spending decisions that will shape a more progressive decision making skill.
Encourages you to monitor and track where your money goes.
Prompts you to use a budget plan.
The secret to be successful in living below your means is actually budgeting. There are many templates that you can use - like the one that you can download from the National Debt Relief site. We have a free budget planner worksheet that will help you get started on your budget. Not only that you can also use a budget calculator that will help you determine how much you should be spending based on your income. There are many programs online and we suggest that you use the budget calculator of MappingYourFuture.org - a non profit organization that helps consumers, especially students, to pao out their financial future.
Probably the best thing about your budget is it will help you with all the financial decisions that you have to make. It will tell you if you can afford to buy a particular product or if you have the funds for an entertainment expense.
To save or not to save?
Another important financial decision that you will make is whether you will save or not. There are many reasons why you need to save and here are some of them:
Prepares you for any unexpected expense.
Keeps you from compromising your usual expenses and payments in case an emergency situation requires immediate funding.
Allows you to set up and reach your financial goals (e.g. buying a house, car, etc)
Gives you a feeling of security, knowing that you can finance any unexpected expense in the future.
Eliminates the need to borrow money.
Protects your future self from financial hardships.
Provides you with the finances to celebrate major milestones in your life.
There are other reasons why savings is important but these are the most popular. These reasons encourage people to save for their retirement, buying a home, marriage, parenthood, education and other important events in their lives. While the list can be long, you can prioritize what you will save on. For instance, the important ones include your emergency fund and your retirement. Once you have built up a sufficient amount on your emergency fund, you can start saving up to buy a home. Don’t be discouraged if you can only put in a small amount in your savings. The important thing is to start doing it.
Your savings account will incur interest while an amount remains there. The bigger the amount, the more interest will be added to it. While the interest rate is small, it is still free additional money. Find out how your savings will grow by using the Bankrate savings calculator. There is also a retirement calculator from Money.CNN.com that can help you determine how much money you need to save so you can live a comfortable life during your elder years.
Deciding if you really need credit cards in your life
The last financial decision that can affect your life significantly is the use of your credit cards. Some people find it hard to completely cut off credit cards. It is not always because they have grown so accustomed to it. In some cases, people want to keep their cards so they can maintain a good credit record.
While there is some truth to the notion that credit cards can help you maintain your credit report, you need to understand how to use it properly. It can make or break your financial stability so you need to be very careful. Here are some tips to help you use your credit card wisely.
Limit your credit card use.
Pay off your balance in full within the grace period.
Monitor your interest rate and balance.
Keep only one or two cards.
Take note of the rewards program of your card so you can benefit from it.
Remember that a credit card is only beneficial if you can stay out of debt. If you are burdened with credit card debt and you would like to get rid of it, here is a video that you can watch to find out where you can get debt help.