Financial management is a task that everyone must do, but not everyone does it well. Financial management goes beyond simply having all of your bills paid on time and saving a little bit of money in a savings account. It also includes financially positioning yourself for the future so you will be able to handle the unexpected without a severe financial hardship, like a job loss, an extended illness, or the death of your spouse. There are a number of financial management rules to follow to put yourself in a better financial position for the future. Here are some of the best ones to add to your financial management plan.
Keep Your Debt To Income Ratio Low
One of the best things you can do for your finances is keep your debt to income ratio low. The ratio of the amount that you owe to creditors and other companies each month versus the amount that you are bringing home in income is one of the best indicators of your financial health. When the ratio is high, it means that you are spending an outsized amount servicing your debts and spending money for interest payments that could have been put to better use in a savings account. When the ratio is low, it means that you have an ample amount of money to pay your debts as well as take care of all of your immediate needs without resorting to using expensive credit. A good financial management rule of thumb is to have a debt to income ratio of less than 36 percent.
Carefully Manage Your Discretionary Expenses
It is very easy to slowly grow your discretionary expenses without realizing it, often leading to you spending more than you plan each month on these types of expenses. When times get rough, these expenses are typically the first ones cut to save more money to pay for other needs. However, you do not need to wait for a financial issue to occur to trim these expenses. Several times a year, you should review what you are paying for your discretionary expenses and trim what you can from your budget to have more money available for emergency savings and retirement savings.
Have Money Saved For Emergencies
Nearly half of all Americans do not have an emergency savings account with enough money in it to withstand a loss of income for several months and a significant portion of those people do not have any emergency savings at all. This is generally due to them spending nearly all of their income on fixed and discretionary expenses each month. If you are not saving anything at all, start small by saving $50 each time you get paid. Once you get used to saving this amount of money each time, slowly increase the amount until you are saving at least 10 percent of your pay each month. If you deposit the money into your savings account as soon as you get paid, you will not even miss it.