Financial independence is something all adults want to achieve, especially when they undergo the transition from being a student to a salaried employee. Managing your finances on your own is a challenging task that takes considerable discipline and practice to get right. Unfortunately, there is no standard course or procedure to instruct young adults how to handle money.
If you are one such person facing money troubles, unable to make ends meet, not able to understand how or where you are spending money, you need help with money matters. Here are six simple guidelines that will help you get started on handling your income responsibly. Remember that the onus is on you to follow these steps and stick to it, but you can also improvise on these to suit your lifestyle needs.
6 Methods to Manage Money the Right Way
1. Understand Your Expenses
A crucial step that many young adults consider boring or tedious is preparing a budget. The best way to manage your money is to plan how you are going to spend every pound and penny and making a short-term and long-term budget is the way to go about it.
Most of your initial costs are likely to be recurring: monthly rent for your house, daily travel and food costs, weekly groceries, and other necessities. Estimate your expenses for these items for the next month or so. Long-term goals include expensive, one-time purchases in the future like a house or your kid’s education fees.
When you have prepared the budget, use a financial app or a spreadsheet to note every transaction: income and expenses. Now, you will never lose track of where your money goes.
2. Never Take Advantage of Credit
In the UK, borrowing money has been made simpler by several government schemes and initiatives by banks. However, borrowing money and entering a debt is always a dangerous venture if you are not in a position to repay the amount. In general, if you plan for an expensive purchase in the future – a car or a house – it is better to save money for it instead of taking a loan.
Similarly, you should also use your credit card wisely. It can be tempting to splurge money on shopping or other purposes when you have the option of instant purchase using a card. Use a credit card solely for emergencies, as much as possible.
3. Settle Loans as Quickly as Possible
What about loans you have already taken? If you have studied in the UK, chances are you would have opted for a student loan to pay for your college education. Most graduates plan to pay back the loan amount using their income.
Along with your necessary expenses, the amount you set aside to settle the debt must be a priority. If you can pay more than the required monthly premium, do so and settle the loan in a shorter period. The sooner you get it over with, the better, for delaying the payment will only make the burden heavier on you.
Loan refinancing is an option that is common to pay back student loans. In this case, you opt for a new loan to pay back the earlier debt, typically with a lower interest rate. It is a good idea to check the Experian credit score range in the UK to know what your chances are of securing a second loan.
4. Invest Your Income and Diversify
Investing money in various assets and markets has become much more accessible than it was at one point in time. You are free to invest in real estate, stocks, commodities, or any other asset you feel is likely to yield positive returns. The ROI you get from these, supplement your regular income.
However, not all markets perform equally well; some generate high returns while some have an abysmal quarter. So, you should plan accordingly and diversify your investments (or “portfolio”, in technical terms). Read up about the prospects, pros, and cons of whichever asset you want to put your money in, or consult with an investment advisor before investing.
5. Save Up for Emergencies and Retirement
Apart from expenses and investments, it is good practice to allocate some money every month for emergencies, like accidents, unexpected medical bills, or loss of your job. Handling a crisis like these is always tense, but you are likely to perform under stress much better when you have the money to deal with it. An emergency fund does not mean you stash the cash under your pillow; you can keep it in a bank account and let it accumulate interest, but use it for the right purpose when necessary.
Some of you consider it early to save up for retirement when you have just started working. Contradictory as that may be, it is always better to save money towards retirement now and gain interest on that amount rather than wait till you are 40. Most employers have a standard retirement policy for their employees, so that is something you can check out.
6. Regularly Review Your Financial Status
These five methods are not a one-time process; you should keep monitoring your financial health regularly, just like how you take care of your physical health. Keep assessing where you stand financially: did you save enough this month, did you have any unnecessary or unexpected expense, did your investments pay off well, and other parameters.
You should also frequently read about financial management through various resources available. Keep checking if there are better investment openings, more robust money tracking apps, new loan opportunities you are eligible for, and so on.
Whatever advice about handling money you see, don’t follow it blindly. Instead, absorb the message and reflect on how it can be applicable in your life. Ultimately, you are the best judge of your needs, wants, obligations, and priorities.
No More Money Troubles!
The sooner you start practising these steps, the sooner you can get into the habit of keeping yourself financially secure. Financial management is a skill that everyone needs to master. A bit of extra effort and a few months of a frugal lifestyle can go a long way in helping you live a financially stable life later.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.