Give yourself reasons to celebrate this year by improving your personal finances. These tips will help you set savings goals that will support your vision for financial independence and mitigate your financial worries about the present and future. If you haven’t already adopted these ideas, why not do so, today?
1. Create a budget to get your personal finances in order
The first step to improving your money management is to record where your money comes from and where it goes. This is essentially a personal or household budget will help you get your finances in order, as well as solve any money problems you’ve been facing. When you create a budget, you hold yourself accountable for every dollar earned and every dollar spent. Your budgeting exercise helps you set a savings goals and makes you achieve them, which is essential to attaining financial freedom.
When deciding how to setup a personal budget, the only rule that really matters is to save before you spend your income. This ensures that you savings target is met, and if you automate the taste of saving money, you can make the process efficient as well. How you decide to create your budget is also entirely your prerogative, because all methods are effective:
- A computer spreadsheet,
- A manual envelope system,
- A pen and paper to scribble everything the traditional way, or,
- A phone app to help you budget and manage your money.
As long as you setup and follow a financial budget, the method you use hardly makes a difference, because the real value is delivered by the budgeting exercise itself.
2. Setup your retirement fund (IRAs and 401ks)
If you live in the United States of America, one of the best retirement planning tools available for you is the Individual Retirement Account (IRA) and the 401(k). You can open traditional IRAs and Roth IRAs at banks and brokerage houses to save for retirement individually, while your 401(k) can only be created with the help of your employer and comes with a range of benefits. These specialized savings accounts offer significant benefits:
- The IRA gives you deferred tax benefits (you do not pay income tax until you withdraw the money) on your contributions,
- There is an annual limit of $5,500 on IRA contributions, which can be increased to $6,000 per annum if you are 50 years old or more. Make use of these catch-up contributions,
- The 401(k) plan can come with a matching feature where your employer promises to match your contribution to the fund. Maximize your contributions to the 401(k) plan to yield the greatest benefit from this matching feature because it is like a 100% return on your money,
- The annual contribution limit to your 401(k) is $18,000 but this limit moves up to $22,000 if you are 50 years or older, to accommodate “catch-up contributions”.
If you happen to live elsewhere in the world, you can start saving for your retirement using other financial tools ordered by your employer or by private banks, such as investments in target date mutual funds or long term savings accounts.
3. Say No to lifestyle inflation and adopt a frugal lifestyle
Lifestyle inflation hampers progress towards your financial goals because it puts downward pressure on your savings. Anytime you get a raise or an increase in income from other sources, lifestyle inflation leads to an increase in your expenses too, which means the extra money that could have been saved, added to your emergency fund, used to pay back debt or to invest, now goes to someone else, without benefitting your future. An easy way to avoid lifestyle inflation is to differentiate between your needs and wants.
On a broader scale, it’s best to adopt a frugal lifestyle because it not only helps you reach financial independence, but also leads to happiness.
There are plenty of ways to adopt frugal living and one of them is to celebrate occasions, such as birthdays, Easter, Christmas, New Year’s Day and Valentine’s Day while sticking to a tight budget. Here are some popular low budget ideas to celebrate the holidays:
- Shop for presents throughout the year to catch the best deals as they become available,
- Limit the number of presents given out by running a secret Santa gift exchange, so everyone gets one present and buys one present. Agree to a universal gift budget so everyone’s on board.
- Re-use last year’s decorations, or make your own. There are tons of frugal holiday decoration ideas online. Google is your friend.
- If you host lavish dinners, maybe cut back on the menu or prepare low-cost meals this year to suit your budget. Remember, frugal food can also please the palate, not just the wallet.
4. Pay off high interest rate debt
Holding on to high-interest rate, short term debt is particularly damaging to your financial position because it reduces your wealth. It is debatable weather all debt is bad, considering some of it can be used to build assets, such as buying a house or funding a college degree to advance your career. This kind of debt adds value to you and helps build wealth. However, one thing that all financial experts agree upon is that short term, high-interest rate consumption debt, such as the one you get from credit cards, is bad and should be paid off as soon as possible.
There are different ways to reduce the interest rate on credit card debt, and that will buy you some time to arrange for the repayment. The most drastic of these methods is to move your debt to a balance transfer card which will help you avoid interest payments altogether for a few months. However, this is only temporary solution and can even be detrimental to your budget if the introductory period for the balance transfer card is short and balance transfer fee is high.
5. Setup an emergency fund, if you haven’t already
Life is a bumpy road for which we all need an emergency fund. Despite buying insurance to cover a variety of risks, we are often faced with unforeseen emergencies that do not get coverage from the insurance agency. This could be:
- A car accident for which we are responsible,
- A medical issue not included in the insurance contract,
- Getting laid off or,
- Damage to our property or other types of maintenance expenses.
While these expenses can be covered by liquidating a retirement fund or by pulling money out of a savings account or a college fund, it’s better not to touch those specialised savings accounts because of associated penalities.
It is therefore a good idea to setup a savings fund to deal specifically with emergencies. The target balance for this separate savings account can be half a year’s expenses and this balance should ideally not be used for consumption purposes, unless absolutely necessary. One way to ensure this is to place the money in a bank account and opt not to have access to the funds via an ATM card, debit card or a credit card.
Related: 3 Benefits of an Emergency Fund
Bonus Tip! Financial gifts for others
Give to charity
The gift of charity is not only a gift for the receiver but the giver as well. As we get ready to celebrate different occasions with our loved ones, we must not forget how lucky we are to do so. There are literally millions of people who do not enjoy these privileges and can use our help. The truth is, charity teaches us empathy and gratitude, and that is one of the best ways to find peace.
There are lots of ways to teach your kids about being charitable too, such as asking them to tag along when you’re paying a visit to Goodwill, or by showing them the inequalities around them. Check out our article on the different ways you can encourage your kids to help the poor.
Save for your children’s college (or use this fund to secure your own future)
This would make a unique and valuable gift for your children, as well as teach them about the importance of planning for their future and reduce your burden in the future. You need not gift away $1,000 for their college tuition, but can simply open up a guardian account and put in an opening balance, to which more can be added over time, by you or by your children.
Some cultures encourage students to pay for college themselves and that has many merits, one of which is that students learn to save and budget their money. However, it can also be an unnecessary burden that leaves a negative impact on their finances for years, proven by the fact that governments continuously introduce student debt relief programs to help repay such loans.
In the other hand, there are also cultures that encourage parents to pay for their children’s education through and through, and they have to regularly save money separately in a college fund.
To each his own.
Remember, you can also help your cousins, nieces and nephews save up for college, which will not only teach them about the benefits of saving from a young age but will also give you a sense of satisfaction as you help others achieve their life goals.
If this additional savings fund is not used to finance your child’s education, you can always use to to secure your own future. The money can be used as the down payment for your house, to invest in the stock market or to help create very medical costs in the absence of medical insurance.