subject: Responsible Personal Finances [print this page] The world of personal finances comes complete with an insurmountable number of decisions, strategies, and plans. To most people, it is also confusing, unknown, and scary. Unfortunately, in the real world, one cannot simply pull the covers over their eyes, like a child in bed at night, hiding from the darkness. Our finances are a beast we must all face, and while I cannot offer a perfect, catch-all plan, I can and will outline what works for me, and what I believe to be the best and most effective way to manage your finances.
The first issue that must be addressed is the issue of debt. The single largest problem most people have with their finances, and the main reason why people dread them, is an ever-increasing, unmanageable amount of debt. To make things worse, many people are in denial about how much real debt they have, the fact that is growing, and the futility of ever building any real wealth if things continue as they are.
Growing, endless debt is primarily caused by living beyond ones means. This is simply spending more money than you bring in on a monthly basis. Since the 1970s, the problem has grown exponentially, as newer generations are conditioned from birth to "have it now, pay it later." The solution to this problem is simple, and is my first step in managing your personal finances.
1. Live on less than you make
This is simply the most basic principle of money management. Regardless of your age, your Grandmother was trying to teach you this as a child. At the end of the month, the total amount of income must be greater than the total amount of outflow.
It sounds simple, but for most, it is not. In North America, in addition to rent or a mortgage payment, most households have at least one vehicle that is financed. Depending on the total financed amount, interest rate, and several other factors, the monthly payment can vary wildly, but on average, North American families will pay between $300 and $430 per month on a vehicle.
This is where many have problems balancing the budget at the end of the month. Everyone thinks they are the exception to the rule. The false logic is that you MUST drive a brand-new car to avoid repairs. The reality is that perfectly good used cars are available, and that a $400 car payment on a $40,000 per year salary is nothing short of insanity.
2. Use a written, monthly budget and stick to it
In order to keep spending under control, you must use a written budget prepared at the beginning of the month, before any money arrives. The idea here is to spend every dollar on paper before it comes in. Every dollar bill gets assigned to a purpose, and they ONLY go toward that purpose.
This is another area where many people falter. We, as a whole, have become accustomed to getting what we want, when we want it. We do not like being told, "No." Doing a written budget at the beginning of the month is where we tell ourselves, "no." If $100 is set aside to be used for eating out, and that money is gone the second week of the month, that means no more eating out until next month.
It is simple in theory, but difficult in practice. However, this step is vital to personal financial success.
3. Say goodbye to credit cards
This is the part where almost everyone will disagree with me. You do not need, nor should you have, a credit card. Now, I know every counter-argument in the book about why everyone HAS to have a credit card, and quite simply, I do not buy any of them.
Credit cards allow, and in turn, encourage, you to spend more than you would with cash, check, or debit card. A major North American-based fast food corporation did a nation-wide study on credit card purchases versus cash purchases, and found that in ALL areas of the country, credit card users were likely to spend an average of 47% more money than patrons paying with cash.
Like most things, there are always exceptions, and there are also many other facets to managing your personal finances responsibly and subsequently building wealth. These are the most basic guidelines, which, if followed, will put you on a straight path to financial success.
Instead of, "have it now, pay it later," we should plan to PAY it now, so we can truly have it later.
Responsible Personal Finances
By: M. Holland
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