How come some people have enough money to pay their financial obligations? While others struggle to make it through the last two weeks of the month,
While you might believe it is related to the amount of one’s salary, the reality is that good cash flow depends more on financial planning and effective financial management than on how much one earns. Earning a lot doesn’t make it any less important. If we are able to learn how to manage our finances, almost everyone can overcome financial instability.
No matter if your age is in the mid-twenties, or in your early thirties; if you don’t plan your finances now, it will be difficult to manage your financial affairs over the next few years. These are five important things to know about personal finances.
It is Important to Keep Accurate Records
Record-keeping might seem only for large companies or medium-sized enterprises. A documented account of earnings and spending is the first step in financial management. You should know what you earn, and how much you have to pay.
You will have a grace period of 6 months if you are graduating with student loans or just graduated. Most students will call their financial intermediary to find out how much they owe. You can restructure student loans or determine how much you should save for next year’s vacation. It is important to understand your essential expenses and foreseeable debts over the next 1, 2, and 5 years. You can either write them down in a notebook or use Excel to record the details. You can also use the Prillionaires personal finance software. It’s tempting to believe that you have all the information, but it’s much more difficult than you think.
Understanding your financial situation will give you a better understanding of what you should do next.
Do Not Underestimate the Value of Money
The most important concept in modern finance, “time value”, isn’t just for financial gurus and investment bankers. Time value simply means that every $1 you have now is worth more than any $1 you’ll have in the future.
This is why? You can invest any amount of money today to earn interest and profit. The longer the amount contributes to an investment, the more money it will make. To maximize your long-term income, you need to understand the time value of money.
It is Important to Save Early
It isn’t difficult to go from $100 to $259 over 10 years. And, in fact, with small amounts and short time periods, the money value doesn’t seem all that significant. The amount you earn, and the time period are both larger, however.
This is particularly important for people in their twenties or thirties. The earlier you start saving, the better the returns. Do not think in the short-term. The long-term is where the money is.
Benefit from a Great Retirement Plan
Although saving early sounds great, there are other options. You can check to see if your employer offers a tax-advantaged plan for retirement. Many employers offer a plan called a 401(k), which can be tax-qualified and is based on the matching principle. Your employer will match any amount you save and pay a dollar per dollar that you have saved through the account.
Even if you don’t have a 401K, you can still benefit from products like the Roth Individual Retirement Agreement (Roth IRA), a retirement program that gives you a tax break for the money you withdraw.
Do Not be Afraid to Invest in the Stock Market
More than 60% of people aged 18 to 35 don’t have a long-term stock portfolio. They are not able to earn interest on their investments and can weather economic downturns.
Stocks can fluctuate like crazy in the short term; but in the long term, volatility and speculation tend to cancel each other out to zero. This is what it means in layman’s terms. Your stock market return will be positive if you begin saving early. You’ll end up making a lot more than what you lose over the long term.
The most difficult question for potential savers is where to begin. Some people don’t have the time or the will to research which stocks to buy or follow the financial performance of companies they’ve made investments in.
An index fund is one solution. An index fund is a mutual fund that is designed to track or match a particular market index such as Standard & Poor’s 500. An index fund buys all kinds of stocks in fixed ratios and results in a performance that is representative of the entire market. Additional benefits You get more from index funds than with actively managed mutual funds because they don’t require active management.