How to manage personal finances, the right and easy way
I’m sure you’re wondering how to manage personal finances and that you must be striving to have the best possible answers for it. However managing your personal finances might be quite easy if you can assess your income and expenses in the right manner.
The following few steps can help you have a good plan for managing your personal finances and help you in achieving your goals. Here are five important steps that you need to follow if you want to manage your personal finances:
How to manage personal finances in five steps:
- Prepare a Balance sheet and find out your net worth
- Prepare a budget
- Control your budget with your income and expenses statement
- Design the plan to reach your short and long term goals
- Implement and monitor your plan
1. Prepare a Balance sheet and find out your net worth
The first step about how to manage personal finances is to prepare your personal balance sheet. A personal balance sheet lists out your total assets and liabilities as on a particular date.
The balance sheet shows the position of your assets such as cash in hand and bank accounts, property, etc. Liabilities including debts like mortgages, credit cards etc. The difference between your total assets and liabilities is your net personal worth. To uncover net worth, is very crucial step in order to uncover what assets and liabilities are held by you as on a particular date.
2. Prepare a budget
You can prepare a simple budget following this general instructions:
- Determine your disposable income i.e. Income minus the deductibles like income taxes, union dues, pensions etc. The resulting figure can be named as value A.
- Make a list of constant and floating monthly expenses. Calculate all such expenses monthly, quarterly, half yearly and annually. All such expenses should be added up and named value B.
- The discretionary income should be calculated by deducting total expenses from total income i.e. Value A-Value B. This difference will be named as value C.
- You need to properly maintain all monthly payments like receipts of credit card and other monthly debts. Thus this price should be named as value D.
- After this you can subtract value D from value C and see whether you still have positive income figure. On the contrary if this value is negative you have to analyze the reasons and set a goal to improve this situation. You can consult to a personal financial advisor too.
Nowadays calculating a budget has become much easier. In addition there are many ready personal financial budgeting softwares available in the market and even on internet.
3. Control your budget with your income and expenses statement
Evaluating the budget is important to find out shortfalls of income in case the expenses exceed income and vice versa.
You need to find solutions to cover expenses by finding extra income sources, investing in assets having high returns and avoiding unwanted expenses etc.
4. Design the plan to reach your short and long term goals
Here you have to dream and decide your short and long term goals. Short period goals might include investments for house renovation, buying new car etc. Long period aims might include purchases of property etc. Once such goals are fixed, you can workout on how much you actually need save monthly to achieve those goals.
Meanwhile it is important to concentrate on other financial aspects if you want to achieve your dreams and goals. First of all prepare an emergency fund for yourself. Have a suitable insurance plan for your family and kids. Allocate funds for education of kids. Do not keep over due payments like credit card bills etc. Plan your expenses and investment with a vision. Spend some time and take a suitable retirement plan.
The financial planning pyramid can help you to define where to start in your journey of how to manage personal finances.
5. Implement and monitor your plan
Monitoring your plan is as important as formulating and implementing steps for managing your personal finances. This way you can keep a check on the progress status and take steps to change in your strategies if in case the plans prove to be unproductive.
Now that you’ve discovered how to manage personal finances please don’t fall into the paralysis by analysis trap. ¡Put in practice what you learned today!
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