In a recent blog post, I wrote about how to spot the signs of inflation and its dangers in your financial budgeting process. Now let’s take a look at some more practical things you can do to manage this. There are 6 important aspects to consider when it comes to managing such an outcome and that are;
1- What are your priorities? The most common way is to think of what you will use these dollars on (e.g., saving up money for retirement or buying something new). To avoid spending the money on high debt or unnecessary items, this is not the best strategy. If you prioritize savings over all else (e.g., investing), you are likely to spend less. When you prioritize your investments over anything else, you spend more (unless it’s cash) and then wait for a return, which might be delayed. This might even lead you to miss out on opportunities. So, prioritizing savings over everything else (e.g., investing) often works better, especially if it leads to long term wealth acquisition over time. On top of your investments, be extra careful to keep track of where you actually get these funds, for example, whether it’s from a family member or bank account. And make sure any transfers are accounted for. Any movement in your personal accounts should also be tracked.
2- Are you getting enough cash flow? You don’t want a situation like “I get a thousand dollars from my family and they’re now asking me to pay for groceries”. While it may seem harmless to transfer those funds every six months, you need to understand if it is worth it for all the other expenses coming up over time. At times, you have to deal with large bills like medical insurance. Also, many people have children who need extra attention, so having extra money to cover the kids’ needs seems necessary. However, sometimes it is better to just invest the money. Maybe keep it separate until their next birthday so that you don’t end up paying for the child’s college textbooks. Or perhaps have it in one place until after that child goes to college. Either way, be smart about it and get what you need.
3- Are you putting in your money as you earn it? The money you withdraw and spend should grow over time. Ideally, you would want to build a corpus over time (e.g., having $10,000 in your bank account when you were 20 years old), and you would get your money back each time you earned it. But sometimes your money gets invested in different products in order to achieve higher returns. It’s essential to set aside money for your emergency fund. That way, whenever you lose money, you’ll be able to handle it without worrying about taking care of the next person who needs an emergency.
4- How much money are you depositing? Most Americans deposits a small percentage of their income into their emergency fund. That means that only 1% of your total income can go into the business for emergency purposes, but your emergency fund can give you a buffer and help you protect yourself against unforeseen events that could affect your finances over time. Don’t put too much away just yet. As the economy continues to recover, many families tend to deposit 2 to 3% of their income into their emergencies.
5- Do you have a good credit score? Having a high score is usually a sign of someone with stable income and who can make payments and repay debts on time. But in the case of low income workers or individuals with little or no money in their home, a bad credit score can put them into deep trouble. In fact, when you have a poor credit score, you are more sensitive to interest rates, which means you are more inclined to borrow money on interest rates. Therefore, it might be wise to keep a close eye on your credit report while you’re not working. Your scores are going to change over the period of time so it is important to monitor them while you are making payments etc.
6- Is your budget sufficient? Have you budgeted correctly all along? Did you know where your money went? If you’ve been consistently spending within your budget or not following rules at all when it comes to managing money, then you are most likely dealing with something that needs addressing. We’ve talked about this before, here is another great paper by Gary Bober. But one thing to always remember is that there is a difference between a proper budget and being too tight. Proper budgets should align with the principles of Personal Finance. They should have a mix between fixed, variable, non-monetary and monetary. For instance, you should have some allowances for unexpected cost like grocery or car repairs. Fixed costs are things like utilities, rent, food and housing which can be adjusted for in the future. Variable costs, on the other hand, are like a salary, which is fixed and cannot be changed once it has already been awarded. Non-monetary costs (like childcare) are money like rent in the same household. Lastly, monetary costs (e.g., school fees, child care expenses) should be handled at least once a month. Otherwise, you will forget to do it.
We’re seeing an increase in consumer confidence and spending across America. The question most people ask themselves is “How am I going to cover their expenses?” We’ve written before about what to expect in 2018. One thing to never get used to are the dreaded two year recessions, which will happen again in 2020. Some people are planning on delaying their wedding date to save them money. Others are thinking of postponing vacations or not travelling abroad for Christmas. Regardless of your plans, be prepared for difficult times when it comes to meeting your everyday expenses.