Financial rules of thumb
I wish to be financially irresponsible, spend all my money, and exhaust all my savings. Said nobody ever.
Regardless of their financial standing, everyone wants to be prim and proper in matters related to their finances. The rule of thumb of money does not consider rich or poor, but rather, the judicious and imprudent.
Moreover, the way you identify and apply the rules in your life help decide your financial fate. There are, however, no straitjacket directives that could ensure the well-being of your financial health, but there are certain basic principles that could help you navigate your way through it.
Listed below are a few of them:
Set financial goals
- Everyone earns, spends, saves, and invests in ways that suit the circumstances they find themselves in. It, therefore, becomes important for you to observe your surroundings as a rule of thumb for financial management. This will help you identify where you stand and decide where you would like to go from there. You can do this by enlisting your short- and long-term financial goals which is an efficient rule of thumb. It can range from the headphones you were eyeing or buying your dream house, and make a roadmap to help yourself get there.
- This involves, inter alia, tracking your income and expenses and planning your investments in a way that suits your risk-taking capacity and that which is within your means.
Spend what you can afford to
- You might want to separate your needs from your wants in order to prevent prodigal or unnecessary spending. The saying you can afford it if you can buy it twice stands relevant here. Ideally, you wouldn’t want to go into debt to satisfy a want that won’t give your returns or one that would simply be purposeless and temporary. Therefore, in order to make cost-effective decisions, do not go beyond what your finances allow to save money efficiently.
- The importance of budgeting to maintain stable financial health cannot be overemphasized. Budgeting allows you to make yourself aware of what your financial condition is and what it could be. It gives impetus to your financial planning and sets your strategy in motion. It ensures proper allocation of funds which is an important savings rule of thumb and helps you be on your toes if any unforeseen expenses come up. It allows flexibility to your planning by giving you room to be prepared. Hence, if the world of finances is a ride, budgeting would be the seatbelt. So, put your seatbelts on!
Have an emergency fund
- When talking about the finances being a ride, an emergency fund could very well be compared to an emergency exit or the life-jacket which could help you at the eleventh hour. Even if you do have a steady income, you never know if an emergency could come forth, be it a personal, professional, or economic debacle or any unanticipated expenses, for that matter. It is always judicious to be prepared, and this can go a long way in inculcating financial responsibility. Therefore, make an emergency fund and transfer money to it from time to time. This would also save you from taking debt, thereby, minimizing your liability.
Prioritize paying off debts
- While debt is not essentially a bad thing and can, in fact, be the wisest choice in certain situations, being free of debt increases your financial liberty. If not evil, it can surely be an obstacle in your finances. You would be able to allocate money on other things and wouldn’t have to worry about the daunting interest rates involved if you settle it.
- It is advised to get rid of your debts as and when your means allow for it and ensure to not procrastinate debt repayment as doing so would mount up your expenses and make it troublesome for you to repay them altogether. Hence, as a money rule of thumb, you should prioritize the repayment of debts.
Our wealth, regardless of its magnitude, if managed well, always serves more opportunities to increase itself. It depends on us--our tactics, interests, and means--how we can manage it.
And as these things are particular to our own circumstances, technically emulating certain plans or applying certain principles might not suit our best interest if we do not provide a way for flexibility.
Money is merely a driver of your vehicle, it is up to you how much you wish to travel, which way you would want to proceed in, and how you would react to any unanticipated demands.
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Frequently asked questions
1. What is a good rule for saving money?
- One of the most important rules is that savings should be consistent. It should ideally not be a sporadic transfer of funds to your savings account, irrespective of the amount. Hence, after deducting your disposable income and paying off debts, a constant proportion should be saved.
2. What is the 50 30 20 rule of saving?
- This rule suggests that you put 50% of your after-tax income into your needs and necessities. The remaining half should be split in a 30:20 proportion, the former being spent on your wants and the latter being saved every month.
3. What are some money rules to abide by?
- The golden rules of money include not spending more than you earn, keeping a corpus saved for the future or for unforeseen situations, and channelizing your money in a way that it grows.
4. What is a good rule of thumb for saving money?
- The most essential thing to do is to generate a habit of saving out of your monthly income. This could be 10% or 20% or any fraction that you find feasible as per your financial standing.
5. What are the rules of finances?
- For better financial planning, you have to take into account various factors viz. saving, investing, borrowing, and paying off debts, medical expenditures, and working towards your personal financial goals.