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Effectively Manage your Personal Finances
• Grow your personal wealth.
• Maintain a good Credit Score.
• Reduce your risk of financial hardship.
The Facts
• Personal Financial Risk is increasing as managing personal finances becomes more and more complex in a rapidly changing environment. Adequate healthcare coverage is essential. (Healthcare costs are the major cause of personal bankruptcies)
• Accumulating savings is more difficult for many people as they have less discretionary money to save, there are low interest rates and a very volatile investment marketplace.
• Having a disciplined approach to managing your money is critical.
Income greater than expenses = Happiness
Expenses greater than income = Misery
To know which is greater you have to know what they are!
Most people don’t know what they are. You have to have the discipline to know and plan a budget. The less money that you have the more critical this is!
Understanding Personal Finances:
The amount of money that you have available after tax and deductions. You therefore also need to know (estimate) what your tax and deductions are likely to be. Your income may also be variable based on bonuses/commissions or irregular work.
You must establish a cash reserve to cover expenses in low income periods. This is not what you should use credit cards for.
Fixed expenses – predictable expenses that occur on a regular basis, weekly/monthly/ annually: Mortgage/Rent, car payments, healthcare, basic food insurance,…………..
Variable expenses – expenses that are dependent on circumstances and vary in cost but are likely to occur. You have to estimate the likely amounts and budget for them.
Gas, clothes, additional food, utilities (gas, electric, water…), car maintenance, house maintenance costs, healthcare payments, credit card bills……….
Reserves/Emergency money – Risk Management
You must have rainy day money to cover any loss of income for a time. This should be at least 3 months expenses. Maintaining this reserve has to be a planned variable expense. This and keeping your credit card debt to the minimum, will be major contributors to getting and keeping a high credit score.
One of the major drivers of credit card debt is defaulting on payments.
Discretionary Money
This is the income that you have left after paying all fixed and variable expenses and maintaining your reserves. Credit availability is NOT discretionary money, it should be treated as short term emergency money and paid off every month.
If you do take out credit payments on a purchase you must be able to pay them and maintain your cash reserve.
Discretionary money will be used for funding savings, retirement, entertainment, college funds, luxury items………….
You should prioritize how you spend this money, the first priority should be maintaining reserves, then savings, particularly for healthcare costs and then starting a retirement fund.
RJB 9/16/2015