“To invest your time in attaining financial freedom is equivalent to setting your mind free from the worry of what-ifs.” – Suze Orman.
How often have you found yourself broke by the end of the month? At the start of every month, you decide not to spend money on unnecessary things and make some savings. However, sometimes it doesn’t exactly go as you planned. Understand that every financial decision you make will significantly impact your future.
Thus, you must begin understanding the importance of money and use it wisely. It can make you financially independent. Now, the question is- what can you do? Well, the practical approach is to manage your income efficiently by adopting the following financial habits.
Start creating a budget for every month.
First things first, you need to create a budget every month. It will help you prioritize necessary and unavoidable expenses such as rent, bills, insurance, and other costs. Besides that, you’ll also learn about your spending and saving habits. For creating a budget, you have two options:
- 50/30/20 Budget
- 80/20 Budget
According to the 50/30/20 budget, you should allocate your income as follow:
- 50% to the essentials/needs, i.e., Rent, Groceries, and Utilities
- 30% to the wants, i.e., Vacation, Shopping, or Dining out
- 20% to savings.
According to the 80/20 budget, you should spend your income as follows:
- 80% for spending (every type of expense, whether essential or nonessential)
- 20% for savings.
You can decide the option that suits you the best; make sure to stick to your budget.
Take a step toward reducing tax liability.
As a citizen of the U.S., it is your responsibility to pay the taxes. However, if you don’t plan your taxes, it can reduce your income in hand. Therefore, you need to understand all your tax liabilities and deductions available to reduce your overall expenses and save as much income as possible. This technique of saving tax is known as tax optimization.
Sadly, many people get confused between tax planning and optimization, which affect their financial planning later on. To avoid this mistake, you should refer to Tax Planning Vs. Tax Optimization (Key Differences) and get a better understanding of both. It will help you in making better monetary decisions for the future.
Start contributing to retirement plans.
Last but not least, you need to start planning for your retirement. It might look like you have much time for that, and you can focus on other things first. But sorry to break it to you, that’s not right. It would be best if you start contributing in 401(k) when you begin earning. This way, you will be able to benefit from compound interest and several other investment benefits that the government provides.
Besides 401(k), there are several other retirement plans such as IRAs (Individual retirement accounts), Simplified Employee Pension (SEP), Savings Incentive Match for Employees (SIMPLE) IRA, and Roth IRA. You select the one that suits you best.
The bottom line
Adapting these three habits early in your life will help you make better financial decisions. You will learn about saving and investing, which will contribute to your journey to become financially independent.