Some tips for managing your money, that I have followed for a few years now. Hope you like them:)
1. The "Pay Yourself First" Challenge
This is a golden rule and probably the first one that every financial smartness book will teach you! You pay your bills every month, maybe even through automatically scheduled payments. You pay your mobile company, your utility company, your landlord/bank, and you even pay the credit card companies when you buy that gorgeous new dress. If you notice carefully, whether you pay someone for some service or some goods (clothes, groceries etc) in return you're always paying someone. However, there might be someone you're forgetting to pay – yourself! You canpay yourself by investing for yourself. So here you'd be buying assets for yourself rather than the goods or services we spoke of above. Just like your bills have a due date so will this and you will make arrangements with your bank such that 25% of your money will be withdrawn and invested automatically on the 1st of every month (or whenever it is that you get your major pay). There are various investment vehicles you have to choose from (based on your risk profile). More about that later.
The challenge is simple - always pay "yourself" first before you pay others - your mortgage, credit cards or any other monthly bills. But in practice it is not that simple! The only tool you have with you to play this challenge is "budgeting". To begin with, for every $100 you make,pay yourself at least $25 first. Only after you've paid yourself you are allowed to pay "others". Infact, if you are still unmarried you should be able to pay yourself between $33-50 but lets start with $25 now. In short, you will first invest 25% of your money before you're allowed to spend any of the rest. You will, and absolutely will, cut down on other things if you cant pay yourself that 25% but you will NEVER cut down anything from that 25%. And, you're NOT allowed to touch this money for the next 15-20 years.
Actually it's not very difficult - believe me. I've been following this rule for several years now and I think you will agree that I've not fared badly! I do remember to enjoy the rest 66%-75% of the money I make to the fullest extent. So all those gadgets I buy, all the vacations I take and all the crazy stuff we do is out of that remaining money only after I've paid myself first:) A little bit of planning, discipline, smartness and practice - and you wont feel even a bit of pinch about that meager 25% I'm challenging you with!
2. The four quadrants rule of spending
This is a strategy that extends the Pay Yourself First concept and will guide you in budgeting and controlling how you spend - wisely. If you can master the four quadrants rule of spending you will never fall short of money in your lifetime:) There are four quadrants that any spending can be put in.
This is the "Pay Yourself First" quadrant. So I wont explain much here. You will put 25% of your money in this quadrant - and effectively invest this for LONG TERM (15-20 years).
This is the quadrant that is for the expenses that you cant avoid. Your rent, your utility bills, your necessary conveyance etc. So in short anything and everything that you cant avoid spending on. However you can definitely decrease and adjust these expenses if you cant fit them in this quadrant i.e. 25% of your money. If you're rent is too high you might want to compromise by taking public transport to work. Or reduce utility usage (i.e. mobile, air conditioner etc).
This is the quadrant that is for spending (rather saving) for the SHORT TERM. That vacation you're planning for. Or that new phone you've wanted to buy. Or say, an expensive gift you've been thinking about for someone (me?!!) :) Or, say for spending on your wedding expenses too!
This is the quadrant that is going to make you happy. You work so hard so you have all the right to party harder. Or to buy that amazing dress you saw at the mall. Or to eat at that fav restaurant of yours. Or to give to charity. In short, spending on anything and everything that makes you happy. Always remember what Dhirubhai Ambani said - you can be rich only when you spend. And happy only when you begin spending on things that make you happy. Else you will never be able to enjoy all the money you've made and will get old and die without making use of your wealth.
Note: As you see above each quadrant is 25% of the money you make. In reality this may not be sufficient for each of the quadrants. So the rule here is, the top quadrants - i.e 1st and 2nd quadrant - are hard and cant be touched. But the lower ones - 3rd and 4th - are soft and can be used for transferring to the top quadrants. So if you were unable to pay yourself (i.e. 1st Quadrant) 25% in a particular month then you transfer/borrow from either the 3rd or preferably the 4th quadrant. Or, say you suddenly had a major car/bike repair that couldn't be avoided (i.e. 2nd Quadrant) then you transfer/borrow from 3rd or 4th Quadrants to be able to exceed that 25% you earmarked for unavoidable expenses.
Again trust me, it's not very difficult. Like I said, a little bit of planning, discipline, smartness and practice and you can master this like I have.
3. Never put all your eggs in one basket
Again, a helper rule for the "Pay Yourself First" concept. Now you've begun paying yourself 25% of your money first before you pay others and spend. But with that 25% what do you do? There are many assets to invest this money in - Gold, Stocks, Life Insurance, Mutual Funds, Bank FD's, Real Estate, etc. The rule is to not put all your eggs in one basket - or not investing all of your money in just one asset class. Try to diversify your 25% into various assets based on your risk profile so that even if one of the asset is in its downs, the other one will balance out.
4. Risk and reward are a married couple
Always remember this - the more the risk you can take the more the reward can be. Conversely, the lesser the risk and the lesser the reward. Risk and reward are directly proportional. So if you invest in Fixed Deposits (least or no risk) the rewards are also the least. Or, like I explained to you, if you consider the inflation rates you will eventually not even get that reward because there was no risk with this in the first place! Similarly, the highest risk you can take is a small-cap or mid-cap company stock. And it could give you the highest reward by doubling or tripling your money in 6 months! The former was being very conservative and the latter being very aggressive. But instead you would rather want to find that perfect balance of risk and reward so that you always have a win-win. Understanding yourself, your priorities, your lifestyle, your dependencies, your commitments, your patience, and your risk appetite will help you arrive at this balance. While you're young you have more risk appetite so you should be able to invest in stocks and mutual funds more. As you grow older and have other responsibilities you will have to start investing more in less-risky options. They say that you should invest (100 - your age)% of your savings in stocks and mutual funds. With you being 25, you can invest 75% of your savings in more risky assets like good stocks and/or good mutual funds. Dont get confused with the 75% here. This is the 75% of the 25% that you earmarked for "Paying Yourself First" - that is, out of that $25 you paid yourself, you will invest upto $18 in more risk investments like stocks, mutual funds, gold or real estate. The rest $7 in low risk assets like Govt bonds, life insurance, CDs etc.
Hope these tips can help you make most of the money you make:)
P.S. I'm just a passionate follower and reader of personal finance and my views above are just suggestions. Please take your financial decisions by yourself and not merely based on my suggestions. Obviously, you are yourself responsible for any gains/losses and not me!!