Who taught wise men how to manage money?
It is not a surprise, there are very few teachers who can teach money management.
There are institutes that teach law, medicine, engineering, sports, art, music etc.
But are there any institutes that teach people how to manage money? No.
So what is the result? What I see is not good.
There are very less people who actually know how to manage money.
No matter how educated is the person, but they still fail in the subject of financial education.
In this article we will see what we missed to note in our childhood days.
#1 First save for self…
What we budget first are expenses. This is a mistake?
Not really, but lets learn a new rule.
The new rule is to “first save for self” This should be number one priority.
Saving money should be given priority over expenditure.
First save and what is leftover must be spend.
Generally we do the opposite.
The logic goes like this.
Before committing to any expense, first take out the savings-component and lock it (invest it).
Not a lot of people follow this important rule.
They think that budgeting is all about allocating ones income to expenses alone.
This is one reason why most of the budgeting resolutions fails in its second month itself.
The trick is, to budget and first save for self.
#2 Invest today, spend tomorrow…
Every dollar ‘not-spent today’ has power of making one rich tomorrow.
Consider this, invest $1 today in index fund, after 36 years it will compound to become $60 (growth by 60 times). Wow…
This idea triggers two thoughts in mind:
- The longer the money stays invested, the higher will be the corpus.
- More one will save today, the bigger will be the corpus.
Consider a case where instead of $1, one saved $1,000.
Investing $1,000 today will build a corpus worth $60,000 in 36 years.
Take this example. One saves $1 each day for next 36 years, and invests it is index fund.
In this period $1 will grow to become $6,500. This is the power of SIP.
#3 Use savings bank account to save money…
Savings account is the account which you shall ‘not’ use to pay debit card swaps. Surprised?
But its true, savings account in meant for saving money, not for expenses.
Ideally the balance of your savings account shall only increase gradually without any ‘dips’.
Does your savings account behave like this? Probably no.
This is because we have a habit of using savings account as current account.
Majority use savings account not to save money.
It is just a drop box where the paycheck is deposited. After that all money is either spent, or withdrawn.
We do not know how to utilize savings account.
Savings accounts are tailor made to generate interest on our deposits.
Banks are glad that we kept our money in their bank. In turn they pay us interest.
Maintain at least two bank accounts.
One should be designated as one where savings only grows.
The savings can grow when it earns interest.
Savings can also grow when you ‘add’ more money to it.
Promise yourself that every day you will deposit at least a dollar in your savings account.
Feel motivated to that savings grow drip by drip.
The other bank account should be used to pay all bills.
This is that bank account only from where the money comes out.
#4 Do not depend on loan…
What are the major loans we acquire in our life?
Auto loan, personal loan, home loan, education loan and credit card debt.
If one is not budgeting properly and simply acquiring loans endlessly, it is a personal finance disaster.
How much loan is too much?
If your total cash-out is so much that you are not able to ‘pay yourself’, at least 25% income, then it means you are living with too much loans (or spending needlessly).
#5 Maintain good credit rating…
Building a good credit rating is a priority no one can compromise.
As soon as one get a first job opening two bank accounts becomes a priority.
After this, distribute your money into savings and current accounts.
Maintain this logic for six months and then apply for a credit card.
It is not easy to get a credit card for a newbies.
Hence developing savings before applying for credit card is necessary.
Once the credit card is issued, learning how to manage credit card is essential.
Always pay 100% of credit card balance dues within the free credit period.
Home loan or personal loan can also be used for building a credit limit.
Timely payment of EMI’s without defaulting will ensure a above average positive score.
There are simple rules how wise men manage money.
The first and most important rule is to start budgeting before committing any expenses.
Never forget to save at least 25% of your income.
When I say save, I do not mean, save today and use this savings to buy car tomorrow.
Use this savings to buy only income generating assets.
It is also important to handle loans very carefully.
People often fall prey to easy loans offered by banks.
Managing your debt is absolutely necessary. These simple rules will make you really rich.