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Financial tips

How to Spend Money Intelligently?

If you dream of safe future and saving more effectively, you have to obey some simple rules. It's not only about savings account, high salaries and great investments. Actually, one of the most crucial things about private finance is spending money intelligently. Here are some things which you definitely should do:

1. Absolute essentials go first

You should start with spending money on things that you actually need. Think about all of food, water, shelter and clothes that you cannot do without. They should be your first priority. Homeless or starving people can't meet their financial goals – the pyramid of needs doesn't lie. You have to be 100% sure that you have enough money to cover essential requirements, then – and only then – you can spend money on something else. Please note: there's no need to be lavish or wasteful when it comes to the most important expenses. If you have such possibility, you shall try to eat out less or find some cheaper house to live in. Experts argue that your rent can reach maximum 1/3 of your income.

2. Pay your debts

Huge debts are devastating all the effort to save some money. Do everything you can to pay off your loans as soon as possible, unless you want to live long, boring and exhausting life on the loan. In general, paying off your most important loans first is considered as the best thing you can do with your money. Don't hesitate to devote almost all of extra income for that purpose. The problem start if you don't have emergency fund – then you should split your earnings into covering essentials, debts, and raising such fund. People who are seriously in debt should consider consolidating their loans into one huge debt with a lower interest rate. Also, try to negotiate better terms with your lender.

spend money intelligently

3. Create an emergency fund

Emergency fund exists to ensure your safety – it allows you to survive if you suddenly lose your source of income. With such savings people feel much more free and confident – they change their jobs for better ones more willingly, and so on. Cover your essentials and loan installment, and devote the rest to build up your emergency fund (equivalent of 3-6 months of your living expenses). You shouldn't dip into that money unless you're forced to.

4. Save some money

If you have cover your needs, established an emergency fund and paid all of your debts (or at least as much as you can due to bank rules), start transferring extra money into a savings account. Thanks to regular savings you'll be able to cover some big expenses, like medical treatment, new computer or car repair. Please note: if you avoid spending your savings, they will grow over time. Start save in your twenties and devote for this goal at least 10 to 15% of your income. Try to put some money aside as soon as you get paid. Automation of this process is the key!

5. Smart non-essentials and luxuries (in this particular order)

Now you're left with some extra money. Investments that can be profitable in the long run and can help you get a better job or improve the quality of your life are smart choice to made, so they should come first. Examples? Buying a new water heater (which is going to eliminate repairs), monthly transit pass (it'll allow you to get to work cheaper) or an ergonomic chair (a present for your back, thus for your health). Now it's OK to spend some money on yourself. Celebrate your good financial situation with a luxury purchase – a dinner in a good restaurant, expensive vacations, a pricey gadget or something else.

 

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