No matter what our current financial situation is, we’re always looking to improve it. Here are 10 tips to improve our finances instantly.
1. Have an emergency fund
It’s always good to prepare for Murphy’s law: a stolen laptop happens, so does a broken car. You might want to protect yourself from any unforeseen event with an emergency fund.
Simply put, an emergency fund is cash that you leave aside for emergency purposes. It might be on your checking account, or even on your savings account. The whole point of an emergency is that it requires a quick reaction; so make sure that the cash in question remains highly liquid and ready to be spent.
How much should you leave aside? A good rule of thumb is between 3 to 6 months of your need expenses. This would ensure that you could live for the same amount of time in case you were to lose your source of income.
2. Define budget caps
Budgeting is such an effective tool when it comes to cutting down expenses. It’s the perfect trick if you want to live below your means in order to invest in your future.
Take the time to analyze how much you have spent on various categories in your past and try to define how much you should spend on each. Set a fixed budget and stick to it. Your future self will thank you for it!
3. Track… everything!
We hinted at it in the previous one, but tracking your expenses is a must if you want to be aware of the state of your finances. Your wallet might be “leaking” without you even realizing it. Take the time to analyze your cash outflows, but not only!
In fact, it is wise to track your overall progress: income, money saved or invested, … that way you will always have a clear indication of where you are and where you are going.
We’ve got you covered. financia.io is working on a free to use all-in-one dashboard to track your personal finances. All of your progress integrated into one simple web app. Simple and free to use.
4. Define goals
You’re not tracking only to understand what happened, you also want to be tracking goals. It’s important that you keep looking forward, at all times. That is a rule you should stick to, no matter how you feel your current situation is.
Set goals for yourself, personal and financial goals. They go hand in hand. Make sure to pin them somewhere to remind yourself of what you are trying to achieve. That’s where tracking goals comes in, it will motivate you.
A good rule is to always break down bigger goals into smaller ones so that you always feel that you are making progress. Slowly but surely, you’ll get there. It’s easier to keep going if you understand that you are progressing and sometimes goals can feel “too far away”. That shouldn’t stop you from setting any though.
5. Align personal and financial incentives
We often do things for the sake of security, sometimes for greed, and in the process, we can end up hurting our true personal incentives. At financia.io, we believe that you should never separate personal and financial incentives. We believe it to be the key to consistency, and success in the long run.
When emotions make it hard to keep a lucid mind, make sure to always ask yourself if your financial decisions are aligned with what you truly desire. This way, you will minimize errors and have fewer regrets over time. Remember, personal finance is a crucial part of your development as a person. Not as an end, but as a means.
So if you find yourself in need to make a decision, whether it is about buying something spontaneously or applying for a mortgage, think twice before doing it. It’s not about living in fear of spending money, but rather ensuring that you spend on what maximizes your happiness over the long run. Try to protect yourself from unnecessary materialistic expenses or over-consumption.
It goes without saying that you should be especially careful not to commit to something as big as buying a house if you have mixed feelings about it. You don’t have to do it because everybody else does it neither. There is perfect timing for you, it might not be the same as everybody else’s. Make sure that you are the one in charge, not your banker, not your parents, not your emotions.
If you have a partner, depending on how you proceed with that person, it might be wise to speak out each other’s incentives and to build around them. This can boost the efficiency of financial decisions and prevents feelings of frustration within the household.
6. Minimize cash outflows
This one is rather obvious, but it might be worth re-thinking. Living below your means and reducing your expenses as much as you can is definitely something that will profit your wallet. However, it might also be worth understanding where those efforts are best spent. Best to be efficient rather than cheap.
In fact, much of the spendings that hurt your wealth might be on things you do not expect. Things like maintenance costs, insurance or subscriptions are recurring expenses that quickly add up over time. Keep track of that and try to have it under reasonable control.
You probably don’t need 2 or 3 different streaming services. Spending the same 20$ on something else (a karting session with your friends for instance) might prove much less of an expense in the end. That’s because it is not recurring. Up to you to understand what brings the most value to your life.
7. Compound as much as you can
The reason why cutting down cash outflows is important is because they represent huge opportunity cost over time. In fact, you are not only foregoing the amount (the principal) but also its interests. We all know that over time, those interests–as well as continuous investing–are essential to building great wealth. Those expenses can thus go as far as hurting your retirement cushion.
Compounding is a force of nature. It takes time to see the effects of it, but you do not want to risk missing on that. Luckily, compounding works with more than just interest on a bank account. Reinvesting investment earnings is a good way to profit from it, no matter the type of investment.
In general, compounding also works from the personal capital perspective. You do great to compound everything you have. If you think about it, your intelligence, skills, knowledge, experience and time are resources that you carefully seek to compound. Put those resources to good use, align them towards the same end.
8. Invest rather than save*
This takes us to a really important point. The difference between investing and saving money. While stacking money on a savings account might be considered a good move by some, it can hardly be considered an investment anymore. Previous generations might have been able to enjoy a decent interest rate on their savings account, sadly they do not even cover inflation today. This means that if you leave your money on a savings account, it actually loses value…
We strongly advise moving towards investing your money into something with a more decent annual rate of return (ARR) than a savings account. That way you will be able to enjoy the effect of compounding interest and also protect your capital from getting eaten.
Before investing anything, make sure to research what you are investing in, no matter what you pick (stocks, real estate, cryptocurrencies, precious metals, …). It’s fine if your money sleeps for a few more days on that savings account before you invest it.
*You might be more acquainted with this tip depending on where you live. Americans have the habit of investing in a 401k and other types of accounts that are not typically present in Europe as part of their retirement funding. Most pensions are funded through government programs in Europe which are funded through the taxation system. Unfortunately, this might contribute to increased ignorance about financial markets in Europe.
9. Manage debt the right way
Debt is an extremely important topic in personal finance. One that divides. Our position is that debt is not all bad if you know how to use it. Although it costs money to borrow, debt allows for major financial steps. Widely used in mortgage forms or car loans, debt generally facilitates access. That’s also the case for investing in some instances such as rental real estate. Leverage investing can be very risky so please make sure to proceed with care.
When it comes to credit cards, for instance, they provide a great way to extend your financial possibilities without hurting (if you repay in due time). In general, no matter what type of debt you would face, it is highly advised to use debt only in the sense that it will provide a true financial benefit. Avoid credit card penalties and debt such as small consumer loans.
Debt is an extended topic that would require many other articles to be tackled. In general, it is never a bad thing to try to stay away from debt if you do not feel at ease with it.
10. Learn about multiplying your revenue streams and passive income
We left this one for the end knowing that many consider passive income as somewhat of an unreachable Eldorado. Passive income is certainly hard to achieve, but it is not impossible. We reckon that the first step before seeking passive income is to seek to multiply your revenue streams. Multiplying revenue streams is a great way to increase your investment purchasing power in order to be able to achieve passive income later down the line.
It is easy to understand that this is achieved through investing or business. The latter might require the former. Some ways like rental properties, stocks dividends or cryptocurrency staking are an efficient way to earn passive income. The required investment budget and the risk levels may vary.
Several “schools” of personal finance such as the F.I.R.E. movement (Financial Independence Retire Early) target living on passive income exclusively, mainly with the help of the “4% rule”. For many, the years of consistent investing is worth the effort. Even if retiring early is not your objective, there is little doubt that you would enjoy a more comfortable life if you earn passive income. Both passive income and multiplied revenue streams allow for a faster compounding effect.
These tips are a great start to make you financially aware and in control. If you want to read more of these and be the first to test our free personal finance dashboard, leave your email down below!
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