Chances are you have gone down the “Personal Finance” rabbit hole at least once or twice before. There are countless ideas that you are bombarded with when you go looking for financial advise in the internet and this can very well leave you clueless and without any action.
Everyone’s goal when “managing finances” is to build wealth and achieve financial freedom eventually. But if you focus too much on the end goal the whole process becomes disorienting and you’ll quit even before you start. So I think it’s better to start small, build a foundation and be comfortable with it, achieve goals step by step and after some time the path you’re looking for will become clear. So the first step in this journey is to take control of your cash inflow and outflow effectively.
Here, I’m proposing a straightforward 3 step process which is the opening dialog for managing your finances and ultimately build wealth and give back generously.
Step 1: Define your ratios
The ratios are in a very basic sense your expenses(1), savings(2) and charitable giving(3). This could include investments(4) further down your journey and expenses can be further categorized if you want more definition to the plan. But the the three categories work well as an opening step. I recommend your charitable giving be at least 10% of your income. This is very important to start from the beginning because it’ll help in cultivating a generous attitude towards life. This will help more and more when your wealth increases.
For Savings my minimum recommendation is 20% of your income. 30% would be a better percentage to maintain. You could however try to increase this as much as possible if it doesn’t interfere with you living your lifestyle adequately. That means managing finances shouldn’t result you becoming a cheapskate.
Whatever ratios you decide on, try to be realistic, experiment for one or two months and make adjustments accordingly. But once you finalize on the ratios stick to them for at least a year or so. You can and should re-evaluate your ratios and progress after that.
Step 2: Define the tools to keep track
Once you figured out the ratios for your monthly expenses, the next step is to figure out a tracker that will record all your incomes and expenses. Having a tool like this is important because it keeps you motivated for achieving the targets and also gives more information on your income and expense patterns. This can be used to adjust habits and lifestyle choices to better achieve your goals.
I recommend to use a spreadsheet based monthly finance tracker for this. This gives the most versatility in creating and adjusting along the way. I’ve been using an Excel template to record my finances since I started working and it has been evolved a lot over the past two years. Using an app or a website that has finance trackers could also work, but for me the versatility of an Excel sheet outshines all other trackers out there.
You have be somewhat creative in making the system tailored to you and your specific style of finances. For example, it’s tricky to fit credit cards into a monthly budget. Credit card statements are usually generated in the middle of the month. Purchases you make in a month from a credit card are scattered over two statements, that are then to be paid in one or two months later. This system is confusing by design to throw people off. So, if you are using credit cards, the process of making a tracker can be not as straight forward as when using just debit cards. That’s where the versatility of making your own tracker comes in handy.
Step three: Keeping track and Making adjustments
As with every process this is the most important step. By continuously keeping track of your finances the process can be repeated with adjustments. This repetition allows habits to be formed around your Finances. And with time you’ll have more data from this. More data means, more informed decisions can be made. For example, if you have a complete finance record for the previous year you can then predict how committing to something financially will play out for you the next year. This can prevent you from making uninformed decisions that add stress to your life.
Final thoughts
I believe this gave you a basic idea on the opening dialogues of finance management and wealth building. Once a system similar to this is adopted you can then start working on Investments and budgeting for major financial decisions like housing, your family and retirement. I’m not a financial guru and I won’t try to be one here. The goal of this was to introduce you to personal finances in a lifestyle perspective as it’s the goal of drinkupsl.com
If you’d like to see an article on how to use personal goal tracking tools check this out. On this I have some expert knowledge and I highly recommend you look at it.
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