A big part of maintaining personal fiscal responsibility is understanding one’s actual financial position. That includes understanding the relationship between one’s income and the expenses they incur on a monthly basis.
Understanding Personal Finances
They don’t spend much time in school teaching people how to manage their finances. If you feel a bit lost on this topic, you are not alone. With that said, you really do need to invest some time and effort into understanding how to better manage your personal finances. Part of the process should include learning how debt affects your life and how learning to create personal budgets can keep you in good financial position.
The Importance of Preparing a Monthly Budget
If you plan on having good control over your finances, you need to control your spending. For most people, the amount of monthly income they have to manage is a fixed amount. It’s the individual’s expenditures that can vary from one month to the next.
The best financial tool you have at your disposal is preparing a monthly budget. Using your income as a guide, you can determine how you want or need to spend that income throughout the month. When budgeting, you need to make sure you always put away some for savings. That comes first. After that, you’ll want to make you handle your statutory financial responsibilities like rent and any installment loans for which you may be responsible. Those are your highest priorities because not making said payments can result in long-term legal and financial issues.
As part of the budgeting process, you would take all the above items into consideration and anything that’s remaining would be discretionary income you can use on variable expenses like food and entertainment. That’s how you set up your finances to assure you don’t get over-extended.
Enjoying a Financially Secure Life
The last thing you want in your life is to deal with stress related to your finances. That’s one sure way to affect the quality of your life. For that reason, you want to always focus on doing what’s necessary to give yourself as much financial flexibility as possible.
As you contemplate your current situation, there’s several things you need to understand. First, you should only take on installment debt as long as you have the ability to make timely payments on a regular basis. It is quite common to carry some form of installment debt – for example, both mortgages and auto loans are types of installment loans. Short-term installment loans are intended for times of emergency, like unexpected medical expenses or urgent unavoidable home repairs. As long as you can make the payments on time, this debt should not be alarming.
Second, as you manage your expenses, you should do all you can to position yourself to pay off debt as early as possible. By doing so, you could be opening the door to other financial opportunities. This can also have a positive impact on your credit score, which open up opportunities should you find yourself in another financial pinch down the line.
All of the above information is a road map to financial sovereignty. Bottom line: If you control your expenses then you control your financial future.