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Originally Posted On: Personal Finance Roadmap (The Foundation For Your Financial Future) – MoneyMagpie
For all but the luckiest of us, a secure financial future isn’t something that will just land in our lap. Instead, it is a long-term financial goal, which we will have to work towards. Indeed, the road to financial security often feels long and winding at times. That said, the personal finance roadmap outlined below can help guide you, and ensure you address all the most important stops along the way. Keep reading for clear suggestions and explanations of the basics of personal finance.
Before we begin, it’s important to note that every aspect of financial security is affected by interest. You pay interest when you borrow money with credit cards, loans, and mortgages. However, you can expect to be paid interest when you loan other organizations money as you do when investing, or saving. What this means is you always want to look for low-interest rates when borrowing and high when investing or saving.
Also, the concept of compound interest is particularly important here. Compound interest is the interest you earn on your investment or savings. This means you end up with more money in the account, and this, in turn, means even more interest, therefore growing your return exponentially. Some financial experts describe it as ‘interest on interest’ and you can make it work for you in some spectacular ways when it comes to growing your money, as you will see in the growing your money section below.
MANAGE YOUR DEBT
Many personal finance articles begin with how to budget. However, while budgeting is an essential skill that we will address in the next subsection, debt is the single most significant factor that can prevent individuals from achieving their long-term financial goals. That is why we are dealing with it at the very beginning.
From the outset, the important thing to understand is there are two types of debt – good debt and bad debt. Good debts are those that you can easily honor (make the payments each month) and so help you to raise your credit rating. Indeed, by having a high credit rating you can help to secure future borrowing at a preferential rate.
You will find that all kinds of providers from mortgage lenders to firms like Plenti who offer a range of loans, reward a good credit rating with a lower interest rate. Something that can help save you a great deal of money in the long term and better manage any future debt.
Bad debt on the other hand are debts that you struggle to keep on top of each month. The issue here is that as soon as you miss a payment all sorts of penalties are triggered including charges, fines, and even a note on your credit report, thus lowering your credit rating and upping the amount of interest you will need to pay.
Of course, the route to walk here is to stay away from bad debt, as much as possible, by making your payments on time each month. Also, you mustn’t borrow more than you can comfortably afford to pay back each month. Finally when paying off debts be sure to identify which is charging you the highest amount of interest and pay that off first, as this can save you plenty of money in the long run.
MANAGE YOUR BUDGET
Budgeting is more than just writing out what you spend each month. It’s also a commitment to keep to the plans you make for your money, and to not let impulse buys get in the way of your long-term financial goals.
With that in mind, there are two things that every good budget must be to be effective. The first of these is that it needs to be accurate. What this means is that rough estimates are not what you want here. Instead, you need to know precisely how much is coming in, how much is going out, and where it is going each month.
Next, a good budget has to be realistic. Indeed, this involves a psychological concept known as conceptualized choice. This is when we confuse planning to do something for actually taking the steps and doing the work required to complete it.
For example, it is much easier to plan where your money will go at the beginning of each month than to do the hard work involved with logging each purchase, and avoiding sale bargains or small treats when you are having a bad day. However, it is by mastering the psychological and emotional issues associated with budgeting that we provide ourselves with the best opportunity to be successful.
MANAGE YOUR RETIREMENT
Similarly, planning for your financial stability in retirement is not the same as taking the actions to truly prepare for it. Indeed, the sooner you can begin to lay down money for your golden years the better as the important issue of compound interest comes into play here.
In particular, taking advantage of the pension or retirement plan that your employer offers is a good move. The reason being that they will often match your contribution and that you will benefit from tax breaks as well.
However, some people prefer to use a private pension plan or invest money to provide for their retirement. A topic you can read more about in the grow your money section, below.
GROW YOUR MONEY WITH SAVINGS
Experts suggest that saving around 10% of your gross salary each month is ideal to build up a good pot of savings. Of course, having some money squirreled away for a rainy day is important too, as it can help provide for emergencies, earn you more money, and ensure a greater sense of emotional well-being. However, there are some issues associated with saving that everyone needs to be aware of.
The first of these is that you mustn’t overextend on the amount you save each month. This is because by doing this you can create a pattern of failure instead of success, something that may inhibit you from saving more in the future.
Instead, it is a much better idea to consider realistic living expenses such as entertainment, and eating out and achieve a balance between these things and saving money.
CLEARLY DEFINE YOUR GOALS
Next, saving for its own sake may not motivate you enough for success. Instead setting clearly defined goals is a far more effective approach. What this means is you need to define your goal in a way that makes it meaningful to you, and set an exact amount that you are working towards saving. By doing this you can help to stay on track, even when temptations rear their ugly head, as they will from time to time.
Investing is another great way to grow your money. Of course, before you begin parting with your hard-earned cash you must have a good grasp of the type of investments you can make, as well as how much risk you are exposing yourself to with each one. Usually, the lower the risk involved the lower return on your money you can expect and vice versa. You will find some of the most popular investment options below.
Probably the most well-known of all types of investments, stocks are when you buy a small percentage of an established business. The goal here is to choose a business that is on the up and up, as this means the value of your investment should also rise. Then you can sell your shares and earn a good return on your original investment. Some stocks also offer dividends – these are annual payments made to stockholders in line with the success of the company.
Traditionally, stocks have been the least accessible form of investing for ‘regular’ people – folks that don’t have any experience in the financial world. However, recently, the popularity of e-trading platforms has risen, and this has democratized stocks and made them available at 0% commission to all!
Other options to consider when investing are bonds. Bonds are when the investor loans money to a financial organization like a bank or the government. They are often used to provide an injection of income in times of need – for example, Government war bonds.
As it is you that is lending the institution money, they will pay you for the privilege. That means you can expect your original investment back along with interest. Bonds are a safer option for many investors, but this does mean the returns tend to be on the low side.
Crafting a stable financial future is not a short or easy task. However, it is most certainly one that can be achieved. Of course, it will require thinking about what goals you have for your retirement years now. It will also require a significant amount of commitment and consistency. However, by addressing each of the issues listed above you can create an effective roadmap to a much more financially secure future.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.