There comes a time in everyone’s life where people get confused about what to do next with the money. Whether to save for the house and then for retirement, or first save for kids, or have vacation and then worry about retirement. This is the phase where prioritizing personal finance helps. Many financial practices can be adapted to establish financial well-being. Setting up a budget and planning future expenditure is a great way to manage personal finance. Personal finance plays an important role in achieving financial freedom. Here is a list of priorities while managing personal finance.
Priority one-Your secure account should cover 3-4 months of living expenses.
Having an emergency fund is important. It acts as a pillar and prevents you from falling into debt when you suddenly lose your job or meet an accident. It is better to save 10% of your annual income.
For example, you are earning $80,000 every year, then you need to save $8000 as a liquid asset. The best place to keep this emergency fund is FDIC-insured savings account so that you can use it the moment you need it. Make sure you don’t touch that money unless there is an emergency.
Priority two- Insurance
Imagine a situation in which you are living a decent life and saving ample of money for a peaceful retirement. One day you are seriously injured and all your saving goes in recovering your health, leaving very little cash for retirement life.
Is that how you want to risk all your savings? Accumulating them every month and then letting it go in one shot?
No, this is where insurance plays an important role. Once you have secured 3-4 months of living expenses. You should consider purchasing health insurance for an emergency medical situation. Life insurance is important too. Who will take care of your family if there is a sudden loss of life or disability that stops continuous flow of income?
Many companies offer life, health, disability insurance to their employees. These benefit packages, such as a 401k, 403b, or 457, should be fully taken advantage of when working for an employer that offers them. Workplace retirement plans are convenient and provide greater tax benefit as savings are automatically deducted from the paycheck of the employee.
Many employers provide a matching fund, which increases savings to a greater extent. For example, a matching program plan is 10% of the contribution. If an employee makes $80,000 per year, and he deposits 5000 into his plan, then their employer would contribute 500$ into the program. The best part about this program is no matter how good or bad the financial markets are matching fund give a full return on money.
Priority three- Debt payments
Debt can be categories into two types: one with higher interest rates and other with moderate interest rates. The one that has more than 10% interest rates are considered dangerous debts. Get rid of high-interest credit card debt, car loans, and payday loans. These account increase financial stress. Pay off the debt in collects, tax liens, and high-end interest loans as soon as possible.
Priority four – Live your life within your means
As Thomas Jefferson say “Never spend your money before you have it.” Spend money wisely, if you have 400$ and want to buy a handbag, then go for the one priced within 40$ don’t spend the entire 400$ in just one handbag. Go for the cheaper option if it serves the purpose. We can live our life to the fullest and save for our retirement simultaneously. There is no need to put off all your desires and enjoyment until retirement.
You must be thinking why I should save for future when Social Security payment exists. Are you aware of the fact that average a retiree gets from Social Security is just over $1,000 per month? What if this program stops in the future? So it is better to start saving early for the future. Saving at an early age gives more time to contribute to and leverage the power of compound growth.
“Save a part of your income and begin now, for the man with a surplus controls circumstances and the man without a surplus are controlled by circumstances.” -Henry Buckley
Once all the above priorities are achieved, focus on financial freedom by saving and investing for future. As Robert Kiyoshi says “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
Determine ways in which you can earn and save more. Invest your saving to venture, which yields more. One does not need to work once financial freedom is attained. It is a stage where there is enough.
James Paul is a personal finance blogger at Basic Finance Care, who writes everything about personal finance management, money management, and frugal living.