How to improve the way you manage your finances.

If you want to manage your personal finances more effectively, it is essential to first analyze your present and future financial situations

As soon as you enter the labor market and receive your first salary, you have to learn how to manage your money.

It may sound like a trivial matter, as we all know the importance of having a paycheck deposited directly into our account, or not buying a pair of sneakers when we already have three pairs in the closet that we don't use. However, we have all heard stories of people who have been ruined because they mismanaged their finances. The main reason we purchase products that we don't need, or we sign up for services that end up working against us, tends to be a lack of information on our part. When your money is at stake, it's essential to analyze your financial situation and manage your expenses according to your income. To ensure your personal finances are buoyant requires good planning.

Analyze your present and future financial situation

Before you can improve your financial health, you need to analyze your current finances. A good analysis includes an assessment of your net worth, your income, your expenses and all the future scenarios that will require paying money and that are easy to foresee.

We should consider the analysis as being like taking a photograph of our household finances. This way you will be able to stand back and have a clear view of your current financial situation. In other words, how much money you have and what you can do with it. At the same time, this analysis will give you an accurate view of your current expenses and your most foreseeable future needs. Taking these two essential aspects into account will help you to manage your personal finances better.

To know your current financial status, first make a list of details of your family life, such as:

  • The number of individuals that make up your household. For example, it will make a big difference to your personal finances if you have children that directly depend on you.
  • The number of individuals that live in the home and contribute a monthly income. A family with two children who both work faces a very different financial situation to that of an identical family in which none of the children have a wage. If one of the parents is unemployed, this will also lead to the finances being managed differently to how they would be if both were working.
  • The type of home and the arrangement under which they live there. An apartment does not have the same expenses as a chalet with a swimming pool, just as rent is not the same as a mortgage.
  • How long you are going to live in your current home and under the current arrangement. If you are thinking about moving house or staying in the same one but as owners rather than as tenants, you will have to organize your money accordingly.

Once you have analyzed all these personal aspects, it is time to calculate your net worth. First, draw up a list of all your possessions and then draw up another list with your debts. If the latter exceeds the former, you have a negative net worth, in which case it will be essential to take measures to reverse the situation.

Finally, you will need to take some decisions on how to reduce your expenses. At this point in the analysis, it is important to include all the foreseeable situations which, sooner or later, are going to require spending money. These expenses should include everything from a broken down car or household appliance, to your partner becoming unemployed or your retirement. Everything is important to know your financial status in detail and be able to manage your personal finances wisely.

An expenses diary, your new best friend

If you want to learn how to manage your personal finances better, you will have to make the effort to write down everything you spend and what you spend it on, at least for a few months. It's a little boring, but treat it like a personal dairy, only for expenses. This routine will help you to identify your spending habits and to quickly see which areas or on what things you spend more money. This process will also allow you to compare your expenses against your income.

When you have identified your spending patterns, you will be able to eliminate any unnecessary daily expenses without sacrificing your quality of life when you make cutbacks. For example, if upon drawing up your expenses diary you realize that you have two coffees out of the house on a daily basis, it would be recommendable to prepare a large coffeepot in the morning and take it with you in a flask. You will see how at the end of the month, with that small gesture, you will have saved a considerable amount of money. It will also help the management of your personal finances to identify the things that you have at home and never use: if you sell them, you will earn valuable money.

Set yourself a monthly budget and include savings

A perfect way to better manage your personal finances is to establish a monthly budget. It might be difficult to keep to it at first, but this is like the gym or a diet - with willpower and perseverance you won't take long to get used to it. Moreover, keeping to a budget is really the only way to guarantee that you will be able to handle an unexpected payment without running out of money. Living with this peace of mind is not only good for your finances but especially for your health and well-being. 

In order for your monthly budget to be accurate and complete, money allocated to savings must be included as one of the expense items. Learning to save will ensure that you enjoy good long-term financial health. Although at first it might seem difficult, if you include savings as just another part of your budget, you will soon include them automatically. If you still find it difficult, set yourself goals, from smaller to bigger, and always keep in mind the purpose of your savings: a long trip, a bigger house, your children's studies or anything that gives you more comfort than spending your money now.

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