Gaining control of your finances might look impossible, especially if you find yourself swimming in debt or without a high paying job. Financial freedom is never attained overnight, however, so keeping things in perspective and sticking to a plan is very important. By learning what successful investors do to maximize each dollar, you can quickly put yourself on the right financial path.
Create a Realistic Budget
There is no point in creating a budget if there is no way that you can stick to it. If you always spend $200 to commute back and forth to work, do not allot only $150 of your budget towards this, as you will never meet your goals. All of your goals should be reasonable and based on what you have spent in the past, as this will give you a better chance of reaching them.
Learn About Healthy Spending
Most consumers have no idea what healthy spending looks like. As a general rule, go by the 50/30/20 plan, which means that 50 percent of your monthly income goes towards needs, 30 percent goes towards wants and 20 percent goes towards your savings. This plan can help you to avoid financial mistakes and will build your savings quite quickly.
Decide on Needs
Perhaps the largest financial mistake that people make is classifying wants as needs. Many of the items that you spend money on each month are luxuries, rather than necessities. If you can survive without an item, it should be labeled as a luxury and, therefore, you should not spend money on it unless you have money after you have purchased your necessities.
Only Spend Money That You Have
Some people make the mistake of spending money before it arrives in their back accounts, such as relying on a bonus that is not guaranteed to come. This is always a gamble because a bonus is never a sure thing. Choose your spending based on your current financial state, rather than your projected financial state, as this can prevent some serious problems in the future and leave extra money for investments.
Overusing credit cards usually leads to financial problems. If 20 percent or more of your monthly income goes towards paying off your credit cards, it is a sign that you have a problem that could escalate in the future. If you are unable to pay off your entire credit card balance each month, you end up paying more for all of your purchases. This limits the amount of money that goes into your savings and will prevent you from reaching your financial goals.
Work Towards Retirement
Many people do not even think about retirement until it is too late. The main reason to start putting money away for retirement right away is the compounding of your earnings. Basically, the earlier you begin putting money away, the faster this money will grow, since it compounds monthly. Starting earlier also means that you can put less money in your retirement fund each month and still end up with the same payouts once you retire.
It might seem pointless to put a few dollars into an account each month, but this money really does add up. It is always a good idea to save something, rather than nothing, as this money will grow over the years. Even if your lifestyle has made it so your bills and loans are high in relation to your salary, if you can invest some money while you are in your 20s, it could grow to something significant by the time you reach your 60s.
Avoid Getting Ahead of Yourself
Countless young people make the mistake of changing their lifestyle too greatly once they start making money. While it is a good idea to reward yourself for working hard, make sure that this money is spent in a short-term manner, rather than one that you could pay for down the line. For example, it is perfectly fine to take a vacation or buy yourself a new computer, but you should avoid buying a fancy car or moving into a new apartment just because you have a little extra income. Purchasing these things commits you to higher spending in the future, which limits your ability to invest.
Diversify Your Portfolio
Simply put, investing in a number of different things lessens your risk. While a diverse portfolio is also less likely to outperform the market, it allows your more successful investments to float any investments that do not work out for you. When starting out, this is the best way to prevent yourself from taking a massive hit.
Look at Bonds
When looking for investment ideas, United States Treasury bonds are about as risk free as you can get. This is because the government is highly unlikely to ever default and high interest rates are the only thing that can hurt your return. If you are looking for a place to start investing, this is as good as any.
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