​5 Personal Finance Tips for Those Who Don’t Have a Clue​

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Personal finance is a tricky thing to understand. With a lack of formal financial education, many adults are left unprepared to manage money. It’s estimated that 35% of all American adults have debt in collections reported on their credit records. And that’s totally avoidable.

Here are some great personal finance tips for those who don’t have a clue about how to do it.

Are You Prepared for an Emergency?

Anything can happen. The things you can’t plan for are often the things that lead to debt. The car might break, the washing machine is leaking water all over the floor, and your son just had to get braces and you don’t have the right dental insurance.

44% of Americans don’t have an emergency fund for dealing with those unexpected expenses. Most of them will have to resort to borrowing if something happens.

As a rule, you should have at least six months’ worth of living expenses in a separate account. The more months you have the better.

Your Retirement is Sacred

You’ve like already heard the news that many Americans don’t have enough money to live a comfortable life when they retire. Just remember that your retirement is sacred.

For a start, you should already be putting 10% of your income into a retirement investment fund. The older you are the higher the percentage you need to be saving to make up lost ground (there are free calculators online to help you work this out).

Furthermore, you shouldn’t use your retirement fund to fund anything else. The number of Americans age 60 and over who have student debt has gone up by 400% in the last decade alone. And that’s all because they borrowed on behalf of their children.

Know Your Budget

This is the cornerstone of short-term financial management. A complete budget showing your weekly and monthly incomings and outgoings will show you how you’re doing and whether you can make changes.

A simple spreadsheet can help you do this. But these days there are apps that can do the same thing automatically when you make a purchase.

Manage Cash Flow

Another advantage of a budget is the ability to manage your cash flow. If your pay check isn’t lasting you until the end of the month, your cash flow isn’t good enough.

Think of ways in which you can manage your cash flow. For example, there’s a reason why companies pay for services with a check by phone online. They want to preserve their cash flow by stretching out payments.

Therefore, many experts advise paying down the largest debts with the biggest interest rates first and ignoring the others for a short time. It’s better for your cash flow.

Pay Down Debt Fast

Credit cards are a necessary evil for building your credit score. A high credit score will give you much better rates when you apply for a mortgage. The trick is to make a purchase and immediately pay it off. Sounds like a ridiculous system? It is, but it cannot be avoided.

If you find yourself in debt, especially multiple debts, pay them down fast and in the right order.

Your first objective is to identify the debt that does the most damage. This is often the largest one, but it isn’t always.

For example, Debt A of $500 may have an interest rate of 20%. Debt B of $2,000 has an interest rate of 3% per month. Which should you pay first?

Debt A will yield an extra $100 of debt every month. Debt B adds an extra $60 every month. Through compounding Debt A will add up faster, so even though it’s a far smaller debt you should pay it off first.

Being able to analyze debt in this way can save you thousands of dollars.

Last Word – The Foundations of Good Financial Management

Good financial management is about making a budget, avoiding debt, saving for retirement, and making sure you have enough cash in reserve for life’s unwanted surprises.

Master those aspects of personal finance and you’ll be in a secure position for the future.

Do you have any other personal finance tips?

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