6 Steps to Manage Your Personal Finances Effectively

In this post I would like to provide some simple yet very effective steps to manage your personal finances effectively. Most of us struggle when it comes to managing our money. This is why most Americans are drowning in debt unnecessarily.

The purpose of today’s post is to help you get back your peace of mind. You will do this by managing your money properly and as a consequence you will start fixing your financial problems.

As I have said in a previous post there is no peace for those that are steeped in debt. How can they have peace when they are “tormented” by debt collectors calling them every day.

On average the average credit score for most Americans is very high and therefore making it possible for them to easily buy things on credit. While this may appear on the surface to be a good thing it can lead to more and more people getting into debt to take advantage of their credit score.

In actual fact, most Americans are busy servicing their debts such that they have little in terms of savings. This other day I was reading a report that said that nearly 70% of Americans have less than $1,000 in personal savings.

Steps to Manage Your Personal Finances Effectively

This means that in case of emergencies such as losing a job most Americans would really struggle to survive. No wonder during a crisis millions end relying on foodbanks to survive. It is a sad situation that needs to be sorted out.

This is more reason for all of us to learn how to manage your personal finances.

How To Manage Your Personal Finances

Below are some of the best tips you can get on how to manage your personal finances or money efficiently and effectively.

1. Understand Your Current Financial Situation

Just like we do when planning a trip the first thing that you need to know how to get somewhere is to know where you are at the moment. Otherwise how can you get to your destination if you are in the dark about your current location.

The same works in financial terms too. You have to know your current financial status first before you start planning for the future.

At this moment I would suggest that you try to paint a general picture of your situation first without going into details.

How much money or income do you earn each month? How about your expenses? How about any loans? Let us go into details on each of these now.

  • Income

On this point you need to list down all your sources of income. Whether it is salary, blogging income, bank interest.

List everything if you are to know your real income. Most people only think of salaries when asked about their income. Unfortunately, this does not give a full picture of your income if you have other gigs.

To do this properly, you need to check all your bank accounts to help you not miss any incomes. If you are like me you probably get income from all sorts of places and it is easy to miss something.

Steps to manage your personal finances.
  • Expenses

Here is the most important part of the exercise as it is easy to miss out on some expenses. You, therefore, need to have all the documents, bank statements, credit card statements, receipts, bills, etc you can collect to help you in this exercise.

Jot them all down and find a total sum for them. I would suggest that you split the expenses into two groups namely, needs and wants.

If you want to know more about needs and wants, I urge you to visit my previous post The Difference Between A Need And A want.

This is especially important if you are facing some financial difficulties as you can as your cuts will mainly fall on the wants.

  • Loans, Mortgages, credit card debt etc
Credit cards: Steps to Manage Your Personal Finances

In this one you will focus on how much you owe in mortgages, credit cards, etc. Here you can use your statements to know the amount you still owe.

You will also create another column for the monthly repayments as these repayments will be deducted from the income to see where you are financially in terms of outgoings.

The goal is to make sure that your expenses and loan/credit card repayments do not go beyond your income. If they do then in the next steps you may need to pick out some tips that can help you to make to reach a situation where your income is more than the expenses.

2. Setting your financial goals

Once you know your current status, then it is time to set your financial goals. These can be anything from, vehicle purchase, get out of debt, save a certain amount before the age of 50, go on a vacation, etc.

Setting a goal will give you focus every month. It will also help you as you plan your budgets every month.

Companies do it all the time and you too need to do that too.

As you set your financial goals you can order them in terms of priorities. You also need to split long term goals from short term goals. This will help you to focus on the short term ones first such as going on a vacation.

3. Create a Budget and follow it

There is no better tool to help you reach your financial goals is a budget. It will help you based to monitor your income and expenses. A budget will help you to allocate resources i.e. money properly and efficiently.

It can also help you to identify areas that you can improve upon in terms of expenses and even income. To live without a budget is to live blindly.

In creating a budget the work you did in understanding your financial situation will come in handy. As you have almost all the data you have about your past income and expenditure.

You can then use this to plan for the future. If you are married it is advisable to prepare your budget with your whole family.

In this way, your family can help you to stick to your budget. You need everybody on board if you are to be successful.

There are so many ways of budgeting. Some can start from zero and prepare a fresh budget every time.

You can also use a previous month’s budget and make adjustments here and there. It is all up to you. Just make sure that it is a complete budget.

Nowadays there are so many apps out there to help you in the budgeting process. And there is no better way to manage your personal finances than through budgeting.

4. Consolidate your debts

Debt consolidation is when you combine all your existing loans into one and pay them as one loan. A debt consolidation loan can either be unsecured or secured.

If your credit score is poor the lender may offer you a loan secured against your property. That property can be immovable property like a house a movable chattel (property) like a car. It is all up to the lender to decide after seeing your credit score.

If you are sinking in debt it may be a wise decision in most cases to consolidate all your debts into one if possible. There are organizations that can help you in that respect.

In this case, then you can find a better and affordable way of repaying your debts. In this way, you won’t have to deal with many lenders as you will only deal with one.

One of the advantages of ad debt consolidation loan is that you can end up lowering your overall interest rate. This is more likely in most cases and more especially if your debts were composed of payday loans and credit card debt which usually attract high interest rates.

Another advantage is that you can end up paying lower monthly repayments, making it easier to repay your loan than before. It is also much easier to keep track of your debt as you now have only one repayment.

If you are faithful in your repayments you will likely also boost your credit score. After all, the repayment amount in a consolidation loan is usually lower than before making your repayments manageable for you than before.

There are also some disadvantages to taking a consolidation loan. One of those disadvantages is that if your loan is secured you could easily lose your home or car if you fail to pay.

Another disadvantage is that the setup fees could be very high. These could comprise of early settlement charges from your previous lenders.

5. Get rid of debt

If you always struggle with debts then maybe it is time to get rid of all your debts and start again on a clean slate. It is easy to pile on debts when everything is alright but emergencies will reveal that it is not wise.

Get rid of debt: Steps to Manage Your Personal Finances

You can lose your job and soon interest will be piling up if you cannot afford to make your repayments. And before you know you will be in a situation where you are struggling to repay them.

There are a few steps that you can take to get rid of your debts.

  • The first step is using your budget to find areas where you can cut and use the money towards settling your debt. You can save on things like cable tv subscription, gym membership, eating out, cinema tickets, using coupons to reduce expenses, etc.
  • You can also for instance take up a second job to get an extra income. For example, you find under the table jobs like mowing your neighbors’ lawns, dog walking, taking care of people’s pets, childcare. Other cash-paying jobs can include helping people who are moving out, taking care of elderly people, and money more. You can find these job opportunities on Facebook, newspaper classified ads, etc. Besides these, under the table jobs, you can also find proper jobs like warehousing jobs on job sites like indeed.com and others.
  • Another way to raise more income would be by flipping some unused items in your house. Related Post: How To Flip Items For Profit. If you don’t have unused items in your houses which should be rare you can get these items from thrift stores or charity shops. After finding these items you can offer them for sale in Facebook groups, eBay, Craigslist, etc. There actually people out there who do this for a living. If you want to learn more about this I would urge you to visit Flipper university. On this site, they will teach you how you can flip second-hand items successfully.

6. Learn to Save

As pointed out earlier very few Americans have sufficient savings to help them in an emergency, that is a sad state of affairs.

It is therefore very important as a way to manage your personal finances properly to set aside money every month as savings.

Senator Elizabeth Warren suggested in one of her books saving 20% of your income. Not all of us can afford that but it is a good starting point. We all need to go into the habit of saving money every month.

If you think that is a crazy idea just look at the number of Americans that are struggling at the moment due to the Coronavirus lockdown in America and other countries.

Savings are needed in such emergencies when you lose your job or income.

Therefore as you prepare your budgets every month make sure that you set aside some money as savings.

To make sure that there is no mixup I would suggest that you open a separate interest-earning bank account for that.

It is fine to invest in stocks etc but in times of emergency you need hard cash, so learn to save.

Related Post: Best Budgeting Apps For Couples.

Conclusion

As you can see managing your personal finances is not a complicated process. You just need to commit to it. I, therefore, call upon you to follow all the steps to manage your personal finances that I have shared in this post and I know that if you do you will make it.

If you mismanage your finances you can easily fall into serious debt that will make you a “slave” to lenders. I know how it feels to be steeped in debt. You lose your freedom and peace. It can be a very stressful thing especially in times of economic stress when people lose their jobs.

Please share your experiences and responses to this post in the comment section below.