6 Steps to Manage your Money like a Pro
Every person in this planet wants to earn enough money to spend a better life with secured future. Some of them have a dream to become richer and gain more wealth. But how many of us are aware of some basic fundamentals related to financial literacy and money management? Being able to effectively manage your money will make life to flow much smoother and save you from many potential headaches like debt.
I believe that most of us struggle financially because we are kept under false perceptions about money, wealth, and prosperity. But if you’re serious about building positive cash flow in your life, you have to start with the basic steps of money management as explained below:
Understanding of Assets & Liabilities
Any resource that generates a passive income for us is called an asset. It may be your home, property, jewelry or investments. On the other hand, liability is something that extracts money from your bank or pocket. Liabilities might include a mortgage, student loans, rental home, and credit card debt. Your net worth is calculated annually by adding the value of all your assets and subtracting your liabilities. Your assets should always be greater than liabilities. The ratio of your assets/liabilities must be at least 2:1. This can help you to keep tabs on your overall financial picture and enable you to efficiently manage your money.
Miracle of Compounding
As early as you start investing your money, the sooner you enable the power of compounding to work for you. Compounding is the addition of interest to the principal sum, which also includes the accumulated interest of previous periods. It means that you’ll get interest not only on principal amount but also on the interest you’ve generated so far. It can significantly boost your investment returns over the long term. If you are not interested in math and want to calculate the compound interest then you can simply click here for online calculator.
Mutual funds offer one of the easiest ways for investors to reap the benefits of compound interest. Since the interest-on-interest effect can generate incremental returns based on the initial principal amount, it has been sometime referred as “miracle of compounding”.
Inclined towards Investment
Investing is one of the most effective way to manage your money. When you are young and don’t have so much financial obligations, then investment is not often used to be your priority. But do you know that this is the best time to save and invest our money? It’s quite necessary to have an investment plan for your cash on hand to maximize its earning potential. Understanding the time value of money and the exponential growth created by compounding is essential to optimize your income and wealth allocation. The miracle of compounding can work for you when it comes to your investments and can be a powerful factor in wealth creation.
Whether you invest in stocks, gold or real estate, you need to manage your investment portfolio like a business. By thinking strategically about your investments and being held accountable to the bottom line, you can identify ways to make your investments more effective and manage your money.
Diversification of Income
You can diversify your income by having multiple resources of earning money. By exploring some ideas to create passive income as per your talent and skills, you can easily grow and manage your money. It’s not so difficult to start looking for a part-time business or other way to earn a little more income while following your passion. But if you are aimlessly pursuing opportunities without thought for the bigger picture, you can easily find yourself holding a portfolio that does not allow you to realize your dream. According to me, investment and passive income is always an evergreen option to create an extra source of earning.
Cut Back All Doodads
Doodads are those extra things in life that we all crave but don’t have a huge need. It might be a sport bike or going out to dinner at expensive restaurants. Whatever your doodads are, stop the habit of purchasing them impulsively just to impress others. This habit will extract all the money you earn and thus disable to save something for investment. Admittedly, this is where your self-discipline and willpower come into play.
In short, start getting in the habit of watching how you spend a dollar here and a dollar there. Give yourself a month and just check on how much you can save by not buying the expensive stuffs or not going out to dinner. Every single thing that we do comes at a cost, the cost being everything we could have done instead of what we actually did. Hence it is very compulsory to stay mindful of spending within your means.
Conquer Bad Debt
There are mainly two types of debts: Secured debt and bad debt. Secured debt is the debt that has collateral backing it up. Typical examples would include an education or home loan. Whereas bad or unsecured debt lacks any collateral that usually includes credit-card bills, personal loans, and medical bills. Your goal should be to get rid of bad debt as quickly as possible so that you can start looking towards a better future. Then you can start building assets that will generate the passive income to pay for your electricity bills, insurance policies, and more.
Unusual purchasing habit and impulsive use of credit cards are the major reason behind your bad debt. And the sooner you can eliminate it, the more in control of your finances you will be. Changing bad habits and getting out of debt is how you learn to manage your money. The best news is that those individuals who have the willpower to follow these simple steps will find themselves financially strong and free of major bad debt within a few years.
Managing your money might be confusing sometimes but it is not hard to do so. There is a lot to learn, regardless of how much you already know. Once you begin executing your plan in the real world, you will certainly recognize a need of making adjustments. You need to be agile in your investing by being quick when responding to changes and opportunities. It is a lifelong process. But the good news is that the hardest part of the process is starting to manage your money. Once you make the commitment, life really does get easier and easier.