“You either have it or you don't” isn’t something that is as applicable to finance than it is to other things. First thing’s first, you need to check yourself, and your credit, before you start giving yourself more credit than you deserve. Understanding personal finance is a monumental step to establishing yourself as an adult. Whether you’re a “money” person or not, let’s face it, it matters. Now that you are questioning your adulthood, let’s run through a couple easy steps to get you on the right track.
Revenue — Do you have money coming in? Understanding what revenue streams you have is extremely important. I am by no means a mathematician, but I can tell you how much you can buy with $0. If you currently don’t have any influx of cash flows don’t worry , you’re not alone, but you need to find something. Anything. People spend a lot of time focusing what they want to be in the future, not to say that isn’t important, but there has to be a “right now” component to your finances as well. The first step to becoming financially independent and managing your flow of funds is having funds to manage.
Expenses — Yes, the 4 a.m. drunk pizza purchases count. Separating your expenses by fixed and variable costs is one efficient way of handling personal finances. Some examples of fixed costs (recurring costs that don’t change) would be rent and student loans, while variable costs include expenses like food, clothes shopping and speeding tickets. It is essential to address your fixed costs first. You know that you will be incurring these expenses throughout the month and there is no worse feeling than scrambling to gather enough cash for rent. These are expenses that you have the ability to plan for in advance, and will therefore aid in projecting how much free cash flows you have for your variable expenses.
Liquidity — Now that you have an understanding of the amount of money you have available to spend, and how much you are obligated to spend on your fixed costs, it leaves you with your current liquidity. Liquidity is a measure of your ability to meet short term obligations. Further, once subtracting out your fixed expenses, what you’re left with is the available cash flows to fund the variable costs that you will have. Measuring your personal liquidity is going to be essential for your next step.
Planning — The number one issue that people encounter is living within their means, which is probably because they didn’t read this article. Now that you are conscious of the amount of money that you have available to spend, your liquidity, set some limits for those variable costs. It is important to make them reasonable and try to stick to them as best as possible. You should not be going out to eat every night or spending hundreds on clothes shopping if you do not have the liquidity. Lack of planning is factored into the credit card business model, just waiting for you not to have the ability to fund your balance and charging you a huge variable interest rate that puts you in a deeper financial stronghold. (!)
Savings — An integral part of the planning process is factoring in a percentage for savings. There are always going to be some future expenses that you were unable to plan for. If you are able to manage your finances in a way that allocates a certain percentage of each paycheck into a savings account, that you do not touch unless it is an emergency, you will be more prepared to handle these different one-off costs.
Finally... With a structured plan, which you would be able to create following the above steps, you will be more likely to see where you are spending money inefficiently. Going forward you can adjust your planning process and predetermined thresholds to factor those costs in, and use more conservative limits. Instead of spending this money carelessly use these funds to invest in things that can make you money in the meantime…but that’s for the next article.
Finances are important, and have some sort of impact on everyone. Becoming conscious of your own financial situation is beneficial to your well-being. Following this six step system will get you there. Until next time,