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How to manage finances

Managing finances or money management is an essential skill for you to be able to run your household smoothly.

Just as the Government manages its budget, you should also be able to manage the budget of your house and ensure that your home finances are in good condition.

Managing your finances effectively is essential for you to save money for your future needs, especially for your retirement. 

The 50:30:20 rule

When it comes to managing your budget, there is an interesting model outlined by Elizabeth Warren, called as the 50:30:20 rule. According to her, you must spend 50% of your income on needs, 30% on wants and 20% must be saved for the future. 

Needs

Needs are the essential things for living a comfortable life. Food, rent, electric bills, water bills, telephone bills, insurance premium, and loan payments are things on which you have to spend money, you have no choice. According to Warren’s rule, you must reserve 50% of your income for all this. What this means is at the beginning of the year, you need to make a budget, where you estimate the income you get (after taxes) and then reserve 50% of the income for meeting all your needs. If it exceeds 50%, then you need to look at cutting some expenses, to make it fall in line.

 Wants

Wants are those things you desire, which may not be essential. Movie shows, annual holidays, a foreign trip, the latest fashionable clothes, a meal at a luxury hotel and the latest gadgets; these are things you want, but if you don’t have, it may not affect you much. Everyone wants to enjoy life and so fulfilling your and your family’s wants is a way of enjoying what life has to offer. But make sure it is within budget. Reserve 30% of your income for satisfying all your wants.

 Savings

The leftover 20% of your income must be saved. You need to save for a lot of things. A house, a new car, your children’s college education, your future health needs and your retirement fund – all these need money. You can get all these only if you practice saving regularly. Make sure you save money every month and invest it where you can get good returns. For safe, risk-free returns you can put the money in a bank deposit so it earns interest. If you are ready to take risks, invest in mutual funds or in stock and shares. Depending on your risk-taking ability and the money you need for your future, start saving money and investing it. You can even cut down on some needs and wants, so you will sufficient money for the future.

 Tips for managing your finances

Before you make a budget, set your financial goals. Your goals should include how much money you need for various future needs and wants. Estimate the money you need for your retirement or for your children’s education. Once you have a target, plan how you can achieve that target by saving and investing money. If you start investing money from a young age, you can get a sizeable amount by the time you retire. So, make sure you develop the habit of saving as soon as you start earning money.

One more common thumb rule of managing finances is to have a reserve amount of three months expenses. This means the money you need for three months – rent, bills, etc, must be available on hand,in your bank account or as cash. This is a reserve fund to be drawn on for emergencies.

While making a budget, make sure you consider insurance. Health insurance and life insurance is a must for everyone in the family. You can never predict what will happen tomorrow, so make sure you add insurance bills in your monthly needs.

Managing your finances is not a rocket science. With a little effort, you can easily manage your budget and stop worrying about money.