Income and spending are two starting points when it comes to personal finance. You can’t do progressive and life-changing financial planning if you don’t understand your income and spending habits.
Income is the money you make from your employment and maybe also side-job or side-hustle but also profit from your investments.
Typical during the early stages of your employment your income is low. Later on, it will increase until your retirement. During retirement, your income will consist of the profit you make from your investments.
However, it doesn’t mean it has to be that way. That’s just the typical way for most people.
Be aware of your total income (including fluctuations) will enable you to make better budgeting decisions. Then you can have an overview in terms of the amount of money you are saving and investing, how much you are spending on stuff and how much debt you can afford and whether you need debt at all.
This can help you take control back, make your own plan and build up the life you wish.
Keep control over your spending habits
This is tough for many people but if you are out of control with your spending, you could end up in a situation with serious financial problems with a lot of insecurity.
Spending habits can have a very negative impact on your financial health and put an end to a more enjoyable life.
I have allocated money for consumption every month. I have a smaller amount for myself that can spend on what I want and a smaller amount for activities with my wife. In this way, I make sure to minimize and consider my consumption. If I consume too much then that amount will be deducted the next month.
Spending the entire monthly income (or the biggest part of it) is quite negative for you because you won’t have money aside to cover for unexpected expenses or unforeseen activities or investment opportunities.
The worst case is if you start to accumulate debt because of your spending habits. Then you have a serious problem that needs to be addressed with a strict budget but also personal support.
The need for an emergency fund
If you don’t have an emergency fund it will create financial insecurity. It’s highly important to have.
There is always a chance that some unforeseen expenses could occur sometime in your lives (car broke down, suddenly becoming unemployed, fixing your home, etc.).
Such a situation could be easily overcome if you have set aside a certain level of cash. The cash which you have saved for “rainy days” is called an emergency fund or reserve fund.
I have also established an emergency fund that can cover 6 months of expenses. This money is used not for investment but for creating a good financial foundation.
Imagine for a second that you have to make some major damage repairs in your house. Where would you find money to cover the repairment cost? If you have an emergency fund, then you can use this money and fix the issues, without any financial stress.
But what happens if you don’t have an emergency fund. Then you will become stressed out because you need to find the money. The basic choices are to borrow from friends and relatives, borrow from a bank, or sell something you own. If you borrow money, you will increase your debt levels. Moreover, if you borrow money from a bank or other financial institution, you will have to pay the cost. Thus, not only you will spend money to fix your problem, but also, your problem now becomes more expensive because of the interest rate you pay to your bank.
Let me ask you, do you know how to select a loan and the cost of a loan?
You should understand that the quoted interest rate is not representing the full cost of the loan. The total cost of the loan is reflected in the Annual Percentage Rate (APR), which is also provided by the financial institution.
If you have loans then I suggest you check these up and see if the agreements can be improved. I contacted my bank and got a lower interest rate on my mortgage. I simply just asked them and compared with the market trends.