Here's a quick question for you: how much time do you spend managing your finances each month?
We would think that for a large number of you, the answer is not very much...
Depending on your personal situation, it could be anything from 30 hours to 30 minutes a month; that is if you can fit it around all your shopping!
Of course, if your money is in more of a mess than Newcastle's back four, you know it takes a lot of effort to manage and monitor it. On the other hand, if your finances are more efficient than a German car engineer, your money management can be plain sailing!
Most of us fall somewhere in-between these two categories. A number of us have a simple plan to help achieve long-term financial goals; however most of us are also incredibly disorganised and tend to procrastinate, so we are clearly our own worst enemies.
So, if you need a swift kick in the rear towards sorting out your finances, (and with a little help from our Foolish friends), you need to look after these 7 important areas:
1. Budgeting
Yes that word ...
Although many of you regard budgeting as a boring topic, it is the very cornerstone of good financial management. By learning how to budget, you can start building financial security by spending less than you earn.
What an amazing concept eh?
2. Spending
Budgeting (holding onto as much money as you can) goes hand and hand with spending (letting your money go).
Most of us struggle with the first and don't have a problem with the second...
What you should worry about is over-spending and paying over the odds for goods. So, you need to shop around and haggle, and ensure that every purchase is a bargain.
Paying with a cashback credit card can help too!
3. Borrowing
After budgeting, the second-best financial skill is learning to control your borrowing. Alas, few people are fortunate enough to be debt free; especially as the UK has a record £1,163 billion of mortgage debt and a further £216 billion of other debt.
Nevertheless, if you'd like to shake off your debt shackles and become financially independent, then visit Fool's Get out of Debt centre.
And another thing...stop spending on interest-charging credit cards!
Take out a card offering 0% interest on new purchases instead, and try to start paying your debt off every month.
4. Saving
Generally speaking, yearly interest rates on credit cards and overdrafts are between 15% and 25% APR. On the other hand, a half-decent savings account will pay perhaps 5% a year; and that's before any tax due.
Thus, in almost every circumstance, it makes sense to pay off your debts before starting to save. However, once you're back in the black, then you should start saving in earnest. Ideally, you should pay into a savings account which pays a high rate of tax-free interest, such as a cash ISA.
Over time, and depending on your personal attitude to risk, you should aim to build up a 'cash cushion' of 3 to 12 months living expenses. This will tide you over when times get tough, and cut down on your need for insurance, which is up next...
5. Protection
We all have very different attitudes to life's mishaps. Some of us are very risk-averse and take great care to avoid falling foul of bad luck.
Conversely, some people are quite happy to gamble and hope for the best (bungee jump anyone?)
Where you fall (no pun intended!) in this 'risk spectrum' will govern your outlook towards insurance. If you're anxious about the financial impact of unforeseen events, then you're far more likely to buy insurance as a safeguard. Thus, for your own peace of mind (and that of your dependants), you should establish which insurance policies, and the extent of cover, you need.
For example, popular policies include:
- car insurance (mandatory)
6. InvestingInvesting (turning cash into yet more cash), is the best bit of financial management.
Although you can invest in a wide range of different assets, a good preference is stock-market investing. It's up to you whether you invest in individual companies listed on the London Stock Exchange, or if you buy the whole market via a low-cost index tracker.
Then again, what you must do is ensure that you invest enough of your income to build wealth over the long term, which includes saving for retirement. Even putting a mere 10% of your income away over a long period can leave you seriously well-off.
7. Reading
Finally, as a bonus tip, we recommend that you read money saving sites like Fool.co.uk, and Money Saving Expert as well as the Money Hospital several times a week.
Amazingly, regular readers have discovered a great deal from reading some of the the things we have written...!
Source:©Fool.co.uk
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