May 27, 2021
Financial literacy has always interested me. I recently needed to write my essay for me to apply for Business School International Program, which was the reason to dive into this topic deeper. So, this article is a little introduction to financial management, and if you want to get the issue more profound, you should read more additional sources. But if you want to know the main principles to help you manage your finances better, then continue reading.
Analyzing your current and future financial situation is key to managing your finances more effectively.
It may sound like a trivial issue since we all know the importance of having a salary paid directly into our bank account or of not buying a pair of sneakers when we already have three unused ones in the closet. However, it would not be unusual to meet someone who has been ruined by not knowing how to control their spending.
It is essential to dedicate time to analyze our financial situation and organize our expenses according to our income when it comes to our money. Good planning is necessary for our finances to be in good health.
Analyze your present and future financial situation
Analyzing our financial situation is the first step towards good management of our finances. A good analysis includes evaluating net worth, income, expenses, and all those future scenarios that will involve a disbursement of money that are easy to predict.
We should analyze our domestic economy. Only in this way will we observe it from a distance and identify what economic moment we are in. That is to say, what is our capital, and where it allows us to get to. At the same time, with the analysis, we will also see quite faithfully what our current expenses are and what our most predictable future needs will be—two essential aspects of managing our finances better.
To analyze our present financial situation, we must detail all aspects of our personal life, such as:
For example, it will make a big difference for our finances whether we have children who depend directly on us or not.
A family with two children who both have jobs faces a very different financial situation than a family with the same number of children, but none has a salary. If one parent is unemployed, it will also cause finances to be managed differently than if both parents were working.
An apartment does not have the same expenses as a villa with a swimming pool.
If we plan to move or stay in the same place, but as owners and not as tenants, we will have to organize our money in the most appropriate way to make the desired change.
Once you've analyzed all these personal aspects, it is necessary to calculate our net worth. At the same time, you should prepare a list of our debts. If the latter exceeds the former, we will have a negative net worth, and it will be vital to start taking measures to reverse the situation.
Finally, we should think about our future expenses. It is essential to include all those predictable situations that, sooner or later, will force us to make an extra outlay of money. These expenses include everything from a car or an appliance breaking down to our partner becoming unemployed or us retiring. It's all-important to know our financial situation in detail and manage our finances wisely.
A spending diary, your new best friend
If you want to learn to manage your finances better, you will have to make an effort, at least for a few months, to write down everything you spend and what you spend it on. It's a bit boring but think of it as a personal diary, only for expenses. This routine will help you identify your consumption habits and quickly visualize which areas or aspects to which you dedicate more money; with this procedure, you can also make a comparison between your expenses and your income.
When you have identified your consumption patterns, you can eliminate those expenses that are perfectly dispensable in your day-to-day life in a way that is true to your reality. Thus, you will not lose the quality of life when you cut back. For example, suppose you realize that you are not losing the quality of life after calculating your consumption and income when you cut back. In that case, you will be able to eliminate those expenses that are perfectly dispensable in your daily life.