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Showing posts with label financial literarcy. Show all posts
Showing posts with label financial literarcy. Show all posts

How to manage your Personal Finances, a mini guide

You like it or not, you will be forced to manage your money. If you like it, then it will be fun. If you don’t manage it, then your life may become miserable. Money is important. This miniguide will help you to understand and implement budgeting, manage finances and invest your money.


1. Budgeting & Saving

What’s a Budget? It is a plan to manage your income, expenses, and savings. It helps you avoid overspending, reduce debt, and achieve financial goals.

Start using 50/30/20 Rule

50% Needs: Essentials like rent, groceries, and transportation.

30% Wants: Non-essentials like dining out or entertainment.

20% Savings: Emergency fund, big purchases, or retirement.

 

How to cut Needs?

Rent: Downsize or negotiate lease terms.

Utilities/Phone/Internet: Search and shop for better deals.

Groceries: Buy in bulk, choose discounts, and compare per-unit prices.

 

Why you need to Save?

You don’t know what is expecting you in the future and probably you have big needs and goals like these:

3-6 months of expenses for unexpected events à Emergency Fund, create it by saving.

You want to buy a car, house, or other goals à Big Purchases, create it by saving.

Invest in long-term growth à Retirement, again, you can create investment money by saving.          


Advice: Set up separate savings accounts for specific goals and automate deposits. Compare accounts for fees, access, and interest rates (typically low, ~2-3%).

 

2. Financial Goals

Know Your Money Personality
Take an online quiz to identify your style, your personality may fit into one of these categories:

Spender: Loves spending, may struggle to save.

Balancer: Manages well but can be overly cautious.

Saver: Great at saving but may neglect wants.

Investor: Risk-taker aiming to grow wealth.

 

Set SMART Goals
Make goals Specific, Measurable, Achievable, Realistic, and Time-bound. Example: “Save $100,000 for a house down payment by age 30.”

 

Goal Types

Short-Term (<1 year): Emergency fund, small debts, or gadgets. Save in a bank account.

Medium-Term (1-5 years): Car, college, or house. Use high-yield savings or low-risk investments.

Long-Term (5+ years): Retirement or legacy. Invest in stocks, bonds, or retirement accounts.

 

Financial Plan

Once you have formulated your financial goals, then you can come up with financial plan. Your financial plan may consist of the following things:

Budget: Track income and expenses, set and try not to go beyond average expense limits.

Debt Repayment: Prioritize paying off debts if you have any, pay back everything asap.

Savings Plan: Allocate money for each goal, you can do it gradually.

Investment Plan: Grow wealth for long-term goals, this also can be done gradually with patience.

 

Improve your Net Worth

Net worth – total value of everything you own (cash, house, car, investments) – minus everything you owe (debts, credits, loans, mortgage). It is a snapshot of your financial health. Aim for positive net worth as you age – be wealthy and have no debts to anyone.

 

3. Loans & Debt

What’s a Loan? Borrowed money repaid with interest. It might be useful for big purchases like a house or education. Avoid and minimize them in your life if it’s possible. If there are no other options, then think carefully before taking loans.

 

Loan Types

Installment Credit: Fixed payments for large sums (e.g., car loans). Lower risk, rigid terms.

Revolving Credit: Flexible borrowing (e.g., credit cards). Convenient but risky if mismanaged.

Payday Loans: Avoid these due to high APRs (300-800%).

 

Good vs. Bad Debt

Good: Loans for future wealth (e.g., business, home).

Bad: Debt from overspending (e.g., credit card debt).

 

Key Factors that influence Loan Approval
Income, job history, credit score, debt-to-income ratio, and collateral (e.g., house for a mortgage).

 

Debt Repayment
Prioritize high-interest debt, pay them first if you can, if not then try to close small debts first then come back to it when you pay up all small debts.

 

4. Credit Scores

If you live in country where credit score system works, then read this. If not, then move on to other paragraphs.

What’s a Credit Score? The number between 300-850 that shows your ability to pay bills on time.

High 700s-800s: Great for loans, low rates.

600-700: Decent, higher rates.

Below 600: Poor, may face denials.

 

Factors Affecting Scores

Payment History (35%): Pay bills on time.

Credit Utilization (30%): Keep credit use low (e.g., <10% of limit).

Credit History (15%): Longer history boosts scores.

Credit Types (10%): Mix of credit types helps.

New Inquiries (10%): Limit new credit applications.

 

How to improve Your Score?
Pay on time, reduce credit use, and check your score regularly.

 

Credit Cards

Benefits: Build credit, earn rewards.

Risks: High interest if balances aren’t paid in full.

Schumer’s Box: Details APR and grace period. Pay in full to avoid interest.

 

5. Insurance

Why do you need insurance? It reduces financial risk from unexpected events.

Avoid Risk: Take preventive steps (e.g., safe driving).

Transfer Risk: Buy insurance to shift costs to insurers.

 

Common Types of Insurance
Medical, property, car, and life insurance.

Advice: Get insurance before you need it.

 

6. Investing & Retirement

Saving vs. Investing, which is better?

Saving: Safe, low-risk storage (e.g., bank accounts, CDs). Best for emergencies or short-term goals.

Investing: Higher-risk assets (e.g., stocks, bonds) for growth. Best for medium/long-term goals.

 

Compound Interest
Money grows exponentially as interest earns interest. Start early for maximum growth. If you live in Islamic country, then this may not fit you, look up other options to save and increase your finances.

 

Investment Types

Low Risk: Bonds, treasury bills (~2-3% return).

Moderate Risk: Mutual/index funds (~6-7% after inflation).

High Risk: Stocks, crypto (volatile, high potential).

 

Retirement Accounts

The information below mostly applies to USA, if you live in other countries, then search your country’s retirement/pension system from government or financial institution websites.

401K: Employer plan with possible matching.

IRA/Roth IRA: Individual accounts with tax benefits.

Social Security: Limited government support.

 

7. Scams & Frauds

What are scams and frauds? Deceptive schemes where someone tricks you into giving away our money other assets.

How to avoid them?

If some offer sounds too good to be true, it is.

Never share personal info (e.g., Social Security Number) with anyone.

Watch for emotional manipulation.

Balance caution with openness to real opportunities.

 

8. Taxes

Learn, optimize and pay taxes to avoid problems with law.

 

Types of Taxes

Flat: Same rate for all (e.g., sales tax).

Progressive: Higher earners pay more (e.g., income tax).

 

Tax Benefits

Deductibles: Reduce taxable income.

Credits: Lower tax owed directly.

 

9. Education & Careers

Education Costs
Include tuition, books, fees, and living expenses. Explore financial aid, grants, or scholarships.

Opportunity Cost
Postgraduate degrees cost time and lost income. Research salary outcomes before committing.

Advice: Talk to graduates or professionals in your desired field for real-world insights.

 

10. Banking

How Banks Work?
Banks earn by lending deposits at higher rates than they pay you.

 

Bank Types

National Banks: Secure, low rates.

Regional Banks: Better rates, local focus.

Credit Unions: Member-owned, high savings rates.

Online Banks: High rates, low fees, some risks.

 

Account Types

Checking: Daily use, low/no interest.

Savings: Higher interest, restricted access.

CDs/GICs: High interest, locked terms.

Investment Accounts: For stocks, retirement.

 

Inflation
If savings/investment returns are below inflation, your money loses value.

 

11. Car Buying

Watch for scams and hidden fees. Research thoroughly to avoid financial traps.

 

12. Renting vs. Buying a Home

Costs to Compare

Buying: Mortgage interest, taxes, upkeep.

Renting: Monthly rent, but you can invest down payment elsewhere.

 

Other Factors
Consider stability, homeownership desires, and personal preferences. Renting may be better than buying in some cases.