Sooner or later each of us is faced with the issue of planning our personal budget. Some of us wonder how to effectively use the money we have set aside, while others want to get out of the vicious cycle of paying off monthly loan payments. Here are 7 steps to rebalancing your personal finances.
Acknowledging the Problem
Sometimes it’s hard to take an honest look at the financial component of your life and admit to yourself that your spending is in chaos, your last loan was clearly unnecessary, and your bank balance before your paycheck is traitorously falling into deficit. Or maybe you’re just wondering where to start building your passive income and don’t know which way to approach your task. Admitting to yourself that there is a problem is the key to success, because it means that you are already on the path to solving it.
The Psychology of Money
Knowing the “official” part of finance isn’t enough to effectively manage money. A great help in this matter is the psychology of the relationship with money. And the result is achieved by the synthesis of the official theory, the psychology of money and practice.
So it’s worth starting with identifying the root causes, psychological processing of negative attitudes and removing blocks in relation to money. Without a change of mindset and a charge of motivation, our hands are very quickly lowered.
Setting a Goal
It’s important to spell out your goals and formalize the steps to achieve them. The first thing to do is to make a personal financial plan, which can be short-term (up to a year), medium-term (up to 3 years) or long-term (from 5 years).
To make a financial plan, go through the following steps:
- Describe the goal – specifically, measurably and with a fixed deadline. There can be several goals, such as a bankroll for betting at 22Bet, a vacation in a year, a car in 3 years, and an apartment in 5 years. Each goal is part of a financial plan.
- Analyze your financial capabilities and outline a strategy for implementing the goal: save, take a loan, get income from investments, etc.
- Compare the risks associated with each possible option to realize the financial goal. Decide on the option that best suits your goals and opportunities.
Planning and Analysis
In order to understand what you can count on and which way to go, you need to understand where you are right now. To do this, analyze your expenses and income and make a budget. Organizations, banks, and states make budgets, so why don’t we do that?
First, count all your income: wages, part-time jobs, benefits, tax deductions.
Second, count your expenses.
The difference between income and expenses will tell you where you stand in your budget.
- A balanced budget – income equals expenses.
- A deficit budget – income is less than expenses.
- A surplus budget – income is more than expenses.
The ideal variant of the budget is certainly the one in which revenues exceed expenditures. This is what we should strive for in the future.
Getting Rid of Debts
According to statistics, the average family has 3 loans. Just imagine how many mandatory payments weigh on the family budget.
Loans are a separate and important topic; there are many nuances both in processing the loan and in its further repayment. What types of mandatory payments the bank offers you, what method of early repayment is suitable for your financial situation?
After passing the first 5 points, the second breath opens. Money begins to stay. From this point life from paycheck to paycheck ends and the accumulation of funds for subsequent investments begins.
Savings are an opportunity for major purchases, the basis of passive income and the formation of a “financial safety cushion”.
When we talk about investments, the first associations are securities. But to invest in securities on your own, you need to understand the market situation, follow the news, listen to expert opinions, and use all of this as a basis for analysis.
Where you can invest your first savings:
- Investing in yourself (learning).
- Investments in your business.
- Investments in real estate.
- Precious metals.
- Investing in securities: stocks, bonds, mutual funds.
Money Makes Money
At this stage, compound interest plays a major role and income from investments begins to increase much faster than in the first 2-3 years. Besides, during this time, you will add significantly to your knowledge and investment skills.
In investing, it’s important to understand that the higher the return, the higher the risk. And vice versa, low risk – low profitability. That is why many experts recommend diversifying your portfolio, i.e. investing in securities with different risk levels, liquidity and income in order to keep losses to a minimum.