Tips On How You Can Create More Wealth By Managing Your Personal Finances Better

Everyone must have financial goals. Let me rephrase that - 'Everyone must have well defined financial goals'. And these goals have to be realistic to a certain extent.

Goals can be divided into short term and long term goals.

Long Term Goals: There are different definitions of long-term goals. Some people define it as 'goals that can be achieved over your lifetime'. To me this is a bit vague...For me its anything that needs to be achieved in the next 10 years or more. Reaching these long term goals require lot more self-discipline and commitment than reaching short term goals. Some examples of long-term goals are - funding for your child's secondary education or saving up for a comfortable lifestyle for your retirement.

Short Term Goals: Goals that you want to reach within the next five years are called short term goals. Example: saving for the deposit for your home or saving for your next big travel expedition.

Some tips on reaching your financial goals:

* Determine What They Are: Create a file for your goals.. Write down what your long term goals and short term goals are.

* Target Period: Write down by when you want to reach your goal - example by 2010 or 2015 or 2020.

* Make Them Specific: Write down how much you need to save to reach those goals. A bit of research is probably required to make them specific. First you need to determine how much you need in today's terms to reach these goals. Then you need to convert that figure to future date value (its value in the target period).I will write more about the future values in another post.

* Action: Then write down your steps for action. Maybe for your child's secondary education expenses you plan to buy an investment property and pay it off by the time the child begins his/her secondary education. Whatever the action you plan to take to reach a goal, write it down and then of course act on it - Start investing.

* Periodic Review: Go back and visit each of your goals periodically. Look at your investment performance and check to make sure that they are on target.

The first step is to start tracking your spending for a few months. I think three months is an appropriate time frame. You have to keep this whole tracking process simple otherwise you will lose interest at the end of week two.

Here is what you have to do:

Create categories. Categories, as the name suggests, is used to categorise expenses. We should not create too many categories.

One category can have many sub-categories. Here are some of the most common categories and sub-categories: (you can tweak this and add more or remove some but please don't have a huge list of categories).



Now start budgeting...Record the month you are doing it for, then record your income for that month and start entering your expenses.



Have a section to the right (as shown below) which adds up the category totals. There are two columns in there - one for previous month and for current month. For the previous month's totals simply copy from your previous month's worksheet.



At a glance you can tell how much you are spending. Do this tracking once a week...

What Happens At The End Of Three Months? At the end of three months you will have a clear idea of how much you roughly spend in each of the categories. Now you are ready to take the next step. Add two more columns to the category totals section - one is goals and the other is how much you are over or under your goals. So at the beginning of every month set goals for each category and try to stay within your goal limits.

Check out my blog for a more detailed version of the above article Personal Budget Spreadsheet.

Lot of people don't have control over their finances. They might wish to get things back in order but for most of them they don't know where to start from . They find it a very daunting task. The fact is it is not half as hard as you think it is. All that it needs is a firm commitment on your part and couple of hours of extra work.

My tip is to take it one month at a time - I have outlined below the things you need to do every month for the next 12 months...

Month One:

1. Get A Budget Spreadsheet ready. Track all your income and expenses for the month. All expenses (cash withdrawals, credit card expenses) And all income (salary, property, shares, government refunds etc).
2. At the end of the month, categorise your expenses - example: 400 dollars on Utility Bills, 150 dollars on Health Insurance, 200 dollars on Eating Out etc etc

Month Two:

1. Do the same as month one.
2. Apart from categorising, also see how your spending in each category increased or decreased over the previous month.

Month Three:

1. Do the same as month two.

Month Four:

1. Do the same as month three.
2. Set targets for various categories - example only 1000 dollars on groceries in a month. Set targets only for categories on which you have control - remember you will have control on most categories (electricity bills, groceries, eating out) except may be for some odd ones like school fees.
3. Set a reasonable amount of money towards savings each month - Open a mutual fund or any other investment vehicle of your choice and put that money into that account.
Personal Finance Help A couple of tips on Target Setting:

1. When you set your initial targets for categories be sure that it is not too far away from your actual spending - Example over the past three months if you spent around 500 dollars on groceries each month, then don't set a target like 100 dollars. There is no way you can reach that target.

2. Review your targets at the beginning of every month and see if you can reduce it further.

3. The aim of this exercise is to lead a healthy and financially fulfilling life - the aim is not to bring all spending on necessities to zero - example, we can all save a lot if we spend very very minimal on groceries - but we don't want to do that - you will know what your optimal spending is for this category - so try and aim to achieve that.

The aim from this month onwards is to stay within the targets - So at the end of month, highlight the categories that exceeded the targets - Analyse them and understand why you went over targets.

There are only three reasons for exceeding the target:

1. Your initial target was very unrealistic - in this case analyse your expenses over the past months and set a more reasonable target.
2. Some unexpected expense in that category - in this case there is nothing much you can do about it - try and reach the target in the following month.
3. No conscious effort - This is probably the most common reason. Make a better effort in the following month - remind yourself that you failed to reach your targets but will do better next month. Also try and do your budgets every week or every fortnight - this way you will be more in control.

Month Five:

1. Do the same as month four.
2. Pick one major spending and analyse and review it and see if you are doing the right things. Like one month pick - insurance - review what you are paying and if you are covered for the right amount/benefits - analyse if you are really in the right cover - shop around and see if you can move to a better one - many times what you are currently on could be the right one for you.

Month Six To Twelve:

1. Do the same as in month five

Just by going through your finances every month you will get a good picture and understanding of where your money is going. For a few months these things can be a chore but soon it will become a practice. 'Wasting Money' and 'Spending On Unnecessary Things' will be a thing of past.

Assume for a second that you are earning 2000 dollars per month. With this pay assume you are paying off your bills but are unable to save any money. Now assume you get a pay rise and are now earning 500 dollars more.

The point I am trying to make here is that with 2000 dollars we survived quite well - we didn't really need the extra 500 dollars. So after the pay rise if you forcibly put away the 500 dollars into a savings account, you would still survive just fine.
savings-plan Now assume you got a pay cut of 100 dollars per month. You will probably survive just fine with 1900 dollars.

So don't use not having 'extra' money as an excuse. Start a 'savings plan' today.

With a savings plan you can get a pre-determined amount deducted from your pay every month. It can be as little as 100 dollars a month. Almost all banks and fund managers have various accounts which have savings plan. Some of them might need an initial investment though.

Here are some figures which might increase interest in 'savings plan'

100 dollars per month in an account earning 10% will be 7,743 dollars at the end of the 5 year term.
100 dollars per month in an account earning 10% will be 20,484 dollars at the end of the 10 year term.

Check out a more detailed version of this article at Start A Savings Plan