4 rules for preventing future debt and mastering your finances
Money. It’s great to have, and terrible to not have enough of. The only problem is that no one ever feels like they have enough. Even some of the wealthiest people on earth are discontent with their exorbitant riches, and a shocking number of A-list celebrities seem to manage to become bankrupt down the line.
In fact, it’s been suggested that most lottery winners find themselves broke within 5 years or less after their big win.
The secret is that being wealthy isn’t just about earning a lot of money, it’s largely about being able to handle it appropriately so that your savings endure, and ideally, grow. Even in an age where tax debt advice is easily obtained, many people struggle with living beyond their means.
Here are some top tips for becoming better at managing your finances, so that you can stop letting the extra pennies fall through the cracks.
Don’t spend what you don’t have
This is, of course, a blindingly obvious point, but it’s nonetheless one which an extraordinary number of people seem to struggle with.
The principle is simple: don’t spend money you don’t have, or to put it differently, don’t live on credit. A credit card should be viewed as a tool that you use to, for example, add an extra layer of security when making online transactions, or as a last-ditch resource to pay for unavoidable and unforeseen expenses which you haven’t accounted for, but which must be dealt with. It can also be used sensibly to build a credit score.
Too many people, however, view a credit card almost as if it were a way of getting things “for free”. Bank account’s nearly depleted, but you want a new pair of boots? Just put it on the credit card. No room in the budget for a night on the town this weekend? Ah, just put it on the credit card.
It’s essential to realise and remember that a credit card is not a second bank account, it’s all borrowed money. It’s a way of spending what you don’t have, and spending today what you’ll only earn tomorrow. Get into the habit of doing this too often, and you’ll constantly be living on tomorrow’s income, unable to catch up or properly gain control of your financial destiny.
Live within your means and always avoid spending money you don’t have unless it’s absolutely necessary. When you do use your credit card for a purchase, pay it off as soon as possible.
Sleep on every substantial financial decision
Among the various terrible financial habits which people develop, one of the worst by far is compulsive buying. It’s those purchases where you know on some deep level that you should just walk away, or at least should check your budget first, but instead choose to silence that little voice inside and just act on the spur of the moment to appease your immediate desires.
Compulsive spending can easily become a way of life in its own right. Many people condition themselves into spending all their money a soon as they get it, and often on things which do not serve them in the long term at all.
Even in the case of purchases which might be wise investments, deciding to buy on the spur of the moment, without due consideration, can be disastrous.
Fight against the urge to spend compulsively. Whenever you are drawn to make a purchase any bigger than buying a snack at the grocery store, take a break and sleep on it instead. Maybe, the next day, you’ll decide to make the purchase after all — but at least you’ll be making your decision with a clearer head.
Compulsive spending is driven to a large extent by overactive and out of control excitement. You see a thing, and you’re incredibly excited about it, and you just must have it. Giving yourself some time to cool off before committing to the purchase will allow your initial excitement to subside a bit and your rational mind to have its say.
Budget for the unexpected
The best financial planning falls apart when an unaccounted for expense rears its ugly head. Your budget may seem airtight to you now, but unless you’ve set aside some money for unforeseen expenses, it simply isn’t properly constructed to address the financial circumstances you’re likely to encounter in the real world.
At the same time, a budget which focuses on spartan living, where every spare penny is assigned to a great savings project but none is put aside for your hobbies, nights out clubbing, or mid-morning snacks, is likewise doomed.
When constructing your budget and deciding which categories to allocate your funds to, be honest with yourself.
Always have a budget category for “unforeseen or forgotten expenses” and assign a substantial amount of money to it each month. Sooner or later, a car will break down, or you’ll need to book flights for an unexpected wedding, or your favourite pair of jeans will rip in an inconvenient place and need to be replaced.
Use digital tools to help you keep track
Gone are the days when “balancing your books” has to involve actual books.
Computers and the internet are marvellous tools which have near-endless application, and their ability to help us manage our finances is no exception to that. Personally I use an Excel spreadsheet and update it throughout the month as expenditures go out and our bank balance changes. However, I know not all people enjoy Excel or even have it and need a simpler tool.
One of the best ways of managing your finances is to sign up to a dynamic, web and app-based service such as YNAB, which allows you to record your spending and adjust your budget on the fly, as well as having that data sync between devices.
If you run a business and want to track your expenses, a service like Quickbooks may be just right for you.
If you have no idea what you’re actually spending your money on in the first place, Money Dashboard can probably help you out.
If you want help to manage your investments at your broker, this rebalancing tool may be for you.
Whatever area of your financial life needs a bit of polish, the right apps and bits of software can help you get the job done.
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