There are certain skills that you need to have, if you want to be effective in managing your personal finances. It is very hard for you to manage your personal finances effectively if you don’t have these skills. They include budget-making skills, budget-implementation skills, debt management skills and financial goal-setting skills. We will be looking at each of those skills in turn, with a view to understand what each entails.
Budgeting is all about coming up with a plan on what you will be spending your money on. So you start by looking at how much money you currently have, or how much money you are expecting to get. Then you put some thought into the question of the specific ‘things’ you are planning to spend the money on, and how much exactly you will be spending on each thing. So you try to create a comprehensive list of things you need. Then you work out what each of those things will cost you over the course of period you are budgeting for.
You are more likely to be successful if your budget is realistic.
Ideally, a budget should be written down, though there are some individuals who are able to work with mental budgets as well.
Views vary on how detailed a budget should be. There are individuals who favor highly detailed budgets, with money set aside for each and every small item. There are others who prefer more general budgets – like where you just make a decision to spend X or Y amount of money per day, and then make the decisions on what exactly to buy/what not to buy as the day progresses – as long as you don’t go beyond the budgeted amount.
There are ‘low-tech budgets’, done using good old pen and paper and there are high tech budgets, done using the various budgeting apps that have become available nowadays.
All said and done, budgeting is the first step towards getting a grip on your money. In the absence of a budget, you will almost certainly feel as if your money is vanishing magically. On another note, in the absence of a budget, you are likely to keep on falling into the trap of impulsive expenditure, ultimately leading to financial failure. It is while budgeting that you get an opportunity to differentiate your needs and wants. Then you can prioritize the needs, even as you also try to figure out how many of the ‘wants’ you can meet within the period you are budgeting for. A budget is a very essential tool in effective management of personal finances. You really need to have some sort of budget.
As many of us have come to learn, creating a budget is one thing. Actually sticking to the budget is another challenge altogether. Therefore, besides having budget-making skills, you also need to have budget-implementation skills. The most important thing, when it comes to budget-implementation, is having self-discipline to stick with the budget. The budget has to be realistic, to start with. If a budget is realistic, making provisions for the whole range of things you are likely to need, your chances of sticking with it are high.
It is important for you to always keep in mind the consequences that may befall you, if you fail to stick to your budget. This would then motivate you to stick with the budget, even when there are numerous temptations for you to stray from the budget and indulge in impulsive expenditure.
It is also critical for you to have some way of tracking budget adherence. You need to be able to know how well you are on track in the budget implementation. If you have fallen off-track in following your budget, you need to know by how much and what you can do to get back on track.
To reduce the chances of falling off your budget, you need to make provisions for unforeseeable scenarios. Thus, for instance, you can have a miscellaneous vote in your budget, to cater for any unforeseeable costs you have to incur in the course of the period you have budgeted for.
Debt management skills
You can’t claim to be managing your personal finances effectively if you are unable to handle debts properly. At any point in time, you need to know how much money you owe others and what your plan for repayment of those debts is like.
Another important aspect here is that of thinking carefully before incurring debt. This applies to not only the formal loans, but also to things like expenditures made using credit cards (keeping it in mind that credit card expenditure has to be repaid later, with interest). Before borrowing any money , you should know what you are borrowing for. You should also try to figure out whether what you have in mind is worth borrowing for. You may then come to learn that you are better off saving for some things, as opposed to borrowing for them/obtaining them on credit.
If you are too deep in debt, it may be necessary to consider things like debt consolidation or renegotiating the terms of the various debts, to ensure that you stay on top of them.
Financial goal setting skills
You should ideally have some financial goals that you are working towards. The goals may be big or small, but they should be there. In the absence of financial goals, you may feel as if your financial life has no purpose, as if you are drifting about in a rudderless manner.
The financial goals you set should be challenging, but attainable within your means. The financial goals you set should also be aligned with your interests and your passions. They should be the sorts of goals that make you look forward to each new day.
After setting the financial goals, you need to create a pathway towards their attainment. You need to have a roadmap, made up of smaller (mini) goals that cumulatively lead to the attainment of the main goals. This way, you can keep track of your progress towards the attainment of the major financial goals. That way, you can also get to celebrate the small wins you get on the way towards attaining the major financial goals. In other words, you would get to enjoy not only the attainment of your major financial goals (which may take years) but also the day by day journey towards the attainment of those goals.