Personal Finance for most of us should not be complex. It might not feel easy, but it's not complex. It might feel difficult and overwhelming for many of us. And most often, that has more to do with the emotions tied to changing our lifestyle and behaviors, than to do with the complexity of managing money itself.
In its simplest form, personal finance comes down to a simple formula.
Wealth = (Income - expenses) * Growth
Income is how much money you make (or can make).
Expenses are how you spend the money you make.
Growth comes from how you protect (via insurance, estate planning, etc.) and invest the difference between what you make and what you spend.
For most of us, the first step really is just optimizing the (Income - Expenses) part of this formula, which is Saving. As the old adage goes, "Its not how much you make. It's how much you keep that's important". So let's take a look at some simple and critical steps in optimizing Saving.
We won't go into the details of making money here - everyone has a different skillset and different available opportunities. Today we will focus on what we could do effectively with the money we are able to make.
So how to manage your expenses effectively? Let's try to break it down into 6 distinct steps:
1. Know how much you make in income.
Make sure you're getting paid for the hours you've put in. Understand the deductions from your paycheck. This is the money you get in the door to manage everything in your life. So always know how much you "take home" each week, and try to make it predictable. If you know how much you're taking home, you'll be more effective at planning the use of that money.
2. Make an inventory of all your expenses
Go through your checking accounts, credit cards, and cash expenses for the last few months. Make a list of everything you've spent on.
As you make your inventory, classify them into "necessities" and "nice-to-haves". Use this to prioritize your expenses.
3. Set your goals
Once you know your needs and wants, decide what kind of future you want. Set your short term goals (like paying off your credit cards) and long term goals (like buying a home).
Without a destination in mind, it's hard to map a route to go there.
4. Make a plan to achieve your goals
Usually, plans take the form of a budget. Once you know your income and expenses, create a budget for yourself. A good rule of thumb to budget your money is using the 50/20/10 rule.
Notice the use of "up to" and "at least" here. Always lean towards maximizing how much you save or invest, and minimize how much you spend.
5. Stay on budget
This is perhaps the hardest part of personal finance. Because you have to deal with human behavior.
Review each month how well you're sticking to your budget. Adjust your spending to stay close to budget each and every month.
6. Review your budget regularly
Some things change over time. You may get a pay raise and have more money to manage in your budget. You may have new necessities, like if you have a new child. You may achieve certain goals you set for yourself and might be ready to move on to new goals.
So review your budget at least every 6 months, and make sure you're refreshing how best to manage the money you make.
Review each month how well you're sticking to your budget. Adjust your spending to stay close to budget each and every month.
Once you commit to achieving healthier finances, most things on this list of steps are simple mechanics. The hardest part for most folks is the committing, and the follow through. If you're able to do these 2 well, you're already ahead of most people.
At River, we make it easier to make and keep your money commitments to yourself, by automating most of the work needed to build healthy finances.
Find out if you have access to River - ask your HR / Benefits leaders, or reach out to us at hello@GetRiver.co.