Tips on how to manage your finances effectively

Managing personal finances is a vital skill that is not taught at school. Most people manage their finances serendipitously, by learning tips on the way, although developing this skill in the early stages of your independent life can be quite advantageous. Let’s explore the steps that you can take to become financially stable.

Calculate your income and expenses

The first step is to calculate your monthly or yearly income and expenses. This can be done either manually or via Excel or Google spreadsheets, or budget calculating apps.

To do the calculation manually, start with listing all your income sources and the amounts accordingly. Next, write down all your expenses, starting with rent, utilities, insurance, and credit payment, food expenses, and finishing with discretionary expenses. Take into account that there are three broad categories of expenses: committed and fixed, or payments that you need to do every month, such as mortgage or rent payments, loans, and tuition; committed and variable, such as groceries, clothing, and maintenance spending; and discretionary, such as spending on entertainment, hobbies, traveling, gifts, and luxury items. Of course, you can divide your expenses into narrower categories.

You can also use spreadsheets or free budget and expense calculating and tracking apps like Arca, or paid apps, such as Wallet or YNAB to make the calculation process faster and to see all your finances in one place. If you choose spreadsheets, repeat the above mentioned steps. In case of using an app, first, you create an account in the app, attach your bank and card accounts to it, and afterward list all your expenses.

Analyze your finances and make changes

The next step is to analyze your calculations. Try to understand where the money goes and how you can manage your finances better. Naturally, your expenses should not exceed your income. If they do, then it is time to either increase your income or reduce your spending.

To reduce unnecessary spending, evaluate your expenses, determine where you spend the most, and make changes.

Have a look at your committed expenses, and see which expense you can reduce. For example, If your house rent is too high, try finding a more affordable option. Likewise, make your long-term high-interest credit payments first as the longer the term, the more is the interest payment.
Buy wisely. Wait for a few days or even a week before making big impulsive purchases. However, sometimes it is better to spend more for reliable quality. An example of impractical purchase is buying an old car that might require significant spending on repair later.
Pay with cash. According to some studies, people are more likely to spend more when paying with a card than with cash.
Plan your shopping and groceries. Always have a list when going to the store or the mall to avoid non-essential purchases. Follow promotions and sales announcements. Also, it is more cost-effective to buy some products in bulk or large packages.
Substitute costly supermarkets and brands with more budget-friendly alternatives.
Plan your weekly meals and buy only the necessary products.
Limit eating out at restaurants and cafes to once a week. When eating out, opt in for choosing only a main course. Not ordering drinks, appetizers, and desserts can save you money.
After careful analysis, continue keeping track of your daily expenses to have those under control.
Automate your savings. Some apps, like Arca, allow you to automate the process of periodically sending a certain amount to your savings account.
Cancel subscriptions and memberships that you do not use. Surveys show that more than half of gym memberships are not used. Instead of going to the gym, other good options can be exercising indoors or outdoors, running, and biking.

Below are some additional income sources you can explore:

Open a bank deposit and collect the interest over time.
Rent out your extra property or become an Airbnb host.
Invest in stock shares to collect interest and sell them when the prices rise.
Teach courses or organize expert webinars.
Monetize your social media accounts by partnering with companies and advertising products.
Use cashback services and referral programs to receive rewards when you refer a friend.
Use websites that offer coupons and coupon codes, such as offer.com, which allows you to save on purchases.
Use services like Inboxdollars or Cashcrate through which you can earn extra money online by taking surveys, watching videos, etc.

Plan your long-term budget

Finally, the key step is planning. Nowadays, the global situation proves how important it is to plan and budget personal finances and have savings in case there is an emergency. There are numerous planning strategies to choose from. Our advice is you can try out all of them for a short period, let’s say three months, and see if that strategy works for you.

One simple budgeting strategy is the 50/30/20 rule proposed by an American lawyer, politician, and former senator Elizabeth Warren and her daughter, Amelia Warren Tyagi in their book “All Your Worth: The Ultimate Lifetime Money Plan”.

According to the rule:

Around 50% of your income should be spent on committed expenses.
The next 30% goes to discretionary spending.
The remaining 20% goes to your savings accounts, such as emergency, investment, or traveling budget accounts.

*Tip – You can create different accounts for different saving goals to have your funds more organized. Keep your passive income in a special savings account so that you can gain high interest income over time.