My interest in money management did not develop until I was studying at an American high school with a USD 125 monthly stipend. As as a clueless teenager in a foreign country with “so much” scholarship money in my hand (USD 125 at the time were PKR 9000), I made mistakes like buying all too many cheap, sticky lip glosses because they were on sale. Yikes!
The defining moment came when a few months into my American escapade, I learned that USD 125 doesn’t buy you a lot in America. The realization quickly humbled me and I started thinking of ways to reduce my expenses and increase my income.
Two blocks stood in my way to gaining control of my finances.
Firstly, women did not work in my family, so could I?
Secondly, I could not fathom what type of work qualifies as suitable work for women.
I grew up with my family hiding my mother’s nursing education and short-lived career as a nurse prior to her marriage to my father because nursing is not considered “respectable” in a lot of conservative Pakistani families. This made me wonder if I could in fact mow my neighbor’s lawn or babysit their daughter for extra cash while staying respectable?
Working through these blocks, I unpacked many cultural biases and unlearned them (still a work in progress on that). I came to realize that no work is beneath me and that financial independence does not come with a gender tag. So, I made extra cash by mowing lawns, babysitting, and writing travel guides. It was the first time I was in charge of money and let me tell you it was thrilling.
Fast forward 12 years of managing my own money, I have learned a thing or two that may be useful to some. Take my advice with a grain of salt though because full disclosure I am not a financial advisor.
Since I plan to make this a personal finance blog series, I would like to first share the three tips that set the foundation of a solid personal finance plan.
Create Clear Financial Goals
Sit down and reflect over your financial priorities. Is it debt repayment? Building an emergency fund? Saving for a house? Putting away money for retirement? Supporting your family? Buying a designer bag? It is crucial to get clear on what matters to you financially.
Once you have your list of goals, organize it based on what is most important to you. One way to do that is by determining where your money can best create value. This depends on many factors.
For example, let’s say you can either save for a house down payment or save to pay off your student loan in full. For simplicity’s sake, let us assume both will cost you the same amount of money. Ask yourself what will create more value.
If you are buying a house in a booming housing market, saving for a down payment might yield more value, especially if the interest on your student loan is zero or low. But if the interest on your student loans is high and the housing market where you plan to buy is average, then debt repayment might be a better first priority.
Asking yourself tough questions about creating value with your money should help you break down your goals in the order you would like to achieve them. You could also work on multiple goals simultaneously for instance building an emergency fund for the short-term, but also saving for retirement in the long run.
The point of this exercise is to create self-awareness about your financial priorities and what you need to do to start working towards them.
Set a budget
If you are rolling your eyes, I do not blame you. We have heard enough times how important a budget is. At some point, all of us have created one too but most of us did not stick to it because we were too lazy to modify our spending habits.
But let us try again.
Start with writing down all of your expenses from rent / mortgage to the coffee you buy every morning. Leave absolutely nothing out.
Now go through your all your account statements (banks, credit cards, PayPal, Venmo, etc) of the past year and check the list you created against the expenses on your account. Did you miss something?
The reason I recommend reviewing statements of a whole year is because not every expense recurs monthly, for instance certain taxes are paid quarterly and your Amazon Prime subscription may be yearly.
Now that you have a realistic view of your spending, categorize your expenses into essentials and non-essentials. Take your income and subtract your essential expenses from it. The amount you have leftover should determine the non-essential expenses you indulge in and how you save for your financial goals.
To create a budget, you can use a budgeting app or you could use a good old spreadsheet. Plenty of budgeting templates unique to college students, singles, couples, families are available for free online so a quick browse should get you what you need. Whether you go with a spreadsheet or app, make sure you are able to access it at all times.
Track your spending
It is easier than ever to spend money, and also to lose sight of where you spend your money. The first is dangerous as is, but the second can do real damage to your finances.
Tracking your spending will ensure that you stick to your budget and inevitably meet your financial goals.
Make a list of all your accounts and cards and review your transactions regularly. Depending on how out of touch you are with your spending habits, you might choose to make a note in your phone every time you spend money and check at the end of your day against your decided budget or you could do a check-in every two weeks to make sure you are staying within the spending limits in your budget.
I have learned through my salary raises that no amount of income is ever enough. The creativity, dignity and intelligence with which I use my income make a difference. These three personal finance principles have truly transformed my relationship with money. If it were not for them, I would not have been able to pay off a huge portion of my college student loan and cover expenses towards buying our first home. I hope you too get financial benefits out of these foundational money tips.
I have a few ideas for more posts in the money management series, but if you have suggestions, let me know in the comments.