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Do you also get shocked at every month-end, looking at your credit card bill, thinking "Where did it all go?" Well, owning a credit card is like owning a magic wand, you have the power to spend as much as you want to at any given time.
Owning a credit card is like having a magic wand - with the power to spend as much as you want at any given time. However, it's crucial to know the right spells to use. A wrong spell can get you into big trouble, especially when it comes to credit card overspending. By applying a few best practices, you can take control of your finances and spend wisely to avoid credit card overspending.
Monitor & Break it Down!
This is one of the easiest ways to manage finances better. You can make personal money management a lot more efficient and effective by simply monitoring where your money is going and categorizing it into different forms of expenditures. There are a lot of money management apps available online that you can use to do this easily. You can easily log into your credit card account once a week and see where is your money going.
The categories can be as simple as bills, groceries, dining out, health, travelling, entertainment etc. Sometimes you don't realize how much you have spent on a particular category over a month, as the small spending keep getting accumulated. This will help you in planning out your budget for the next month and keeping in mind the categories that you need to save money on.
Suppose you earn a total of Rs. 50,000 a month, out of this you are spending Rs. 10,000 on entertainment. This expenditure is 20% of the total earnings, which is way more than the money you spent on important things like investing! But you don't realize this while purchasing a movie ticket, whose price seems to be in your budget for the time being. As it keeps accumulating, very soon this small amount becomes big and you end up saving nothing by the month-end. So, this is how tracking and categorizing your expenditures can help you to manage money wisely!
6 Jars of Money Management
The only way to become rich is good money management. 6 Jars of money management is a smart way of managing your finances. In this method, you need to create 6 jars / sub-accounts for your expenses. Each jar will have a specific category or purpose for the expenditure, you also need to assign a certain percentage of your total income to it. The categories of the jars can be as follows:
- Necessities (ideally 45-50%) - This jar will include your routine expenses like food, water, bills, rent, groceries etc. A larger and fixed chunk of your earnings will go into this.
- Emergency Funds (ideally 10-20%) - This jar will include savings for your unplanned expenses. You can use this money in an unplanned medical emergency, for a pre-planned vacation, or even for a big purchase.
- Play (ideally 10-15%) - This jar will include money for your entertainment and leisurely expenses like dining out or shopping.
- Education (ideally 10-15%) - This money can be used for self-growth and development. Expenses can be buying a course or a book.
- Investments (ideally 10-15%) - Here you can keep some money aside for investing in the stock market, equity, mutual funds etc. This money will keep growing with time and can help you in the future.
- Give (ideally 5%) - This jar will be a little part of your income that you can use for charitable donations.
Setting Achievable Goals
It is important to keep yourself motivated while you are trying to do better at personal money management. If you are not a big fan of calculations and micro-management, you can use this method to manage your money better.
For this, you can set up small goals and try to achieve them at the end of every month. The goals can be extremely simple like, "This month I will save 1000 bucks in my emergency funds" or "I will try to reduce my entertainment spending by 5% this month."
As you will get closer to the end of the month, you will see yourself getting closer to your goals, and it will give you the motivation to keep going. Even if you fail at achieving those goals, you can try setting up a smaller goal and gradually increase it with the flow. The goals do not need to be huge like becoming a millionaire or a billionaire within a year but they should be attainable for you.
The Zero Sum Budget
The saying "Pay Yourself First!" is the favourite of many personal finance experts. And the zero-sum budget rule can help you in achieving that. In this method of budgeting, you assign every single penny from your income to a particular category of expense.
The categories can be necessities, emergency funds, entertainment, investments, debt payments etc. There should be zero money left by the end of the budget month.
The money which will be left after calculating all the expenses can be assigned to investments and debt repayments. This will help you in avoiding the unnecessary expenses which you might do if you see purposeless money lying in your account.
Here are some simple steps to do a zero-sum budget:
- Determine your total monthly income
- Evaluate your expenses
- Assign money to priority expenses first, like necessities
- Focus on debt repayments and savings
- Remember to assign every single penny to a particular category
This is one of the simplest methods to keep a track of your expenses. Make a spreadsheet on your computer and make two columns in it. One column should be for the expected expenses and another for the actual expenses. At the end of each month, analyze your sheet and see where did you end up spending more money than expected and try to manage that in the next month. Reconciling your spreadsheet will give you an idea of where your money is actually going.
These tips can help you elevate your finances and manage your money efficiently. In order to save and later invest effectively, you need to master the art of money management. try out these tips and see your monetary health improving!