I bet, you at least know one person in your life who became a millionaire only by working average paying jobs over a time. If you are curious how he or she made it, then follow these 7 ideas to manage your personal finance and be your own millionaire.
1) Pay back the debt first
Debt is one of the most influential factor while you manage your personal finance. Whether its credit card loans or student loans, pay back the debit first. Most of the debt incurred have to payed back with interest. If the payments are not made in time, there is a penalty for that as well leading to default of the loan in itself. Remember with loans one is not just losing out on opportunity but also incurring losses to his or her capital.
Read More: 7 Financial Best Practices to Starting your own Business
2) Save before you Spend
When we receive our pay checks we have the urge to get out and splurge that cash on fancy dresses or the latest gizmos and gadgets that we longed for. This need for instant gratification, will leave anyone of use dry even before the next pay check arrives, let alone talk about savings.
Learning to save before you spend is a good motto to live by. A healthy percentage of the income should go towards savings before we could go and spend. These little savings will in no time pay back with huge bonuses that will make you a millionaire.
3) Do Asset Allocation
Any ordinary person with a little knowledge and reading can easily maximize his wealth with asset allocation. One should know to allocate his assets for better returns. Some people buy art, properties and homes, few more will invest in gold or other commodities. Others will invest in bonds, fixed deposits and other fixed incomes.
One rule of thumb is to allocate low risk assets equaling to your age. For example, if you are a 35-year-old. Your portfolio should at least have a 35% low risk asset. Try to assume the need of your future and make plans according while you do asset allocation.
4) Earn a Fixed Income
Wise people know better to not rely on a single source of income while planning their personal finance. Look out for that secondary income that you can generate without much effort. You can earn a fixed income may be from a fixed interest as income or turning your hobby into a part time business. If you have an appetite for higher risk you should allocate informed higher equity investments to manage your personal finance efficiently.
Bonus: Take Insurance
Insurance is a cover for anything that we might have not foreseen in the future. From medical expenses to property damage risk, insurance has the ability to protect from it all. Make sure spending a little premium on insurance will provide you a peace of mind and adds safety while you manage your personal finance.
5) Investing in Equity
A good strategy to manage your personal finance is investing in equity. A good equity investment portfolio would help you outperform the fixed returns by at least 5% margin for a year. Equity markets has the risk of losing your capital investment, at the same time it also has the potential of multiple returns on your investment.
That said, you can also let trusted third parties to manage your portfolio or invest in mutual funds. You should also use the expertise of a financial planner if needed to manage your personal finance. Try to understand that in the big picture, investing in equity pays a major share that makes you a millionaire.
6) Invest in Installments
To avoid the volatility in prices or other affecting factors, always invest in installments. Let’s take a classic example, most people mirror the sentiment of the prices going down after they have bought something. You have the same product at a discount, available now. When you invest in installments this averages the price for you to benefit in the long run.
By investing in installments for your personal finance, you also mitigate the risk of a price rise. Invest in installments, applies not just to investing in equity but also to buying a product like gold. If you wait to buy, say 100 grams of gold it would take a lot savings and time. The price might rise in time and for the same amount of money you would only get 90 grams of gold. If you were to buy gold in 25 grams at a time, then the price rise would have benefited your investment.
7) Understand the Effects of Compounding
I am just saving the best ideas to manage your personal finance like a millionaire to the last. By understanding the effects of compounding, any person can aspire and become a millionaire. The capital grows with time using all the above ideas. If you understand the effects of compounding your capital grows exponentially.
Consider you have a $1000 today. With an average return of 10% that $1000 will become $1100. Next year calculating the compound interest for the same return of 10% will be calculated for $1100 from previous year which would give a return of $1210. Approximately in 7.2 years you will have double your savings.
Finally, by combing all these ideas together if you manage your personal finance. Living life as a millionaire or more is very much in your reach in time. Start today.
