5 financial management basics best practices

financial management basics concepts

Study after study indicates that most people are doing a poor job of saving for the future, In this article we will discuss financial management importance of financial planning in business. In this modern era of online shopping, credit cards and consumption, it’s all too easy to spend every dime you make. Technology has made it very simple for you to be separated from your money. You can shop at home online in your pajamas, have your order delivered right to your doorstep and you never had to step foot in a store. It’s no longer necessary to get in the car, drive through traffic, find a parking spot and actually walk in a store and look at merchandise or talk with a store employee.

Today’s modern technology is an awesome time saver. While it has its benefits, I’d suggest you use some good old-fashioned finance lessons to help hold on to more of your money. Here are five basic finance lessons you can practice every day:

Financial management basics concepts and investment strategies

1. Budget

Spend the money on paper first so you know where your money is going. Otherwise it's going to leak out everywhere and you won't have anything saved.

2. Spend Less Than You Make

Ever heard the saying, It’s not how much you earn, it’s how much you save? People with high incomes do not necessarily have high net worth. If you spend everything you earn, you won’t accumulate any wealth. Make it a habit to live below your means. Lesson number one - budgeting - can help you with this.

3. Pay Yourself First

Put money away before you spend. You can tell yourself you'll save what's left, but you won't do it. Make sure you're contributing to your retirement plan. Then try to increase your contribution each year or when you get a pay raise or a bonus.

4. Practice Discipline and Sacrifice

The first two are all about the numbers. This one is about your behavior. We never learned in school that the #500 at Shoprite three times a week is over #78000 in a year. Or going out for a #1000 lunch twice a week is over #100,000 a year. So sacrifice some, have some self discipline and save some money for your future.

5. Don't Buy a New Car

We've all heard the saying about how much cars depreciate the minute we drive them off the lot. Why do people keep buying brand new cars? You can save huge by buying a car that's a couple years old and still low mileage. Let someone else take the depreciation and when it's paid off keep driving it. Put the money you were paying for the car payment into your savings or investments. You really don't need the newest model. You do not have to keep up with the Joneses. Just because it's paid for, don't run out and buy a new one with a new payment. Sock that extra money away. Your neighbor may have the newer model, but you’ll have the bigger bank account.

invesment strategies

Knowing how much you should have saved toward retirement at each stage of your life will help you answer that all-important question: “Have I put aside enough?” Here are some useful formulas that can help you set age-based savings goals on the road to retirement.

Retirement Income: the 80% Rule

Most experts say your retirement income should be about 80% of your final pre-retirement salary. That means if you are making #500,000 annually at retirement, you will need income of at least $400,000 per year to have a comfortable lifestyle after leaving the workforce. This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions and part-time employment, as well as your health and your desired lifestyle.

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Total Savings: The 4% Rule

To determine the amount you will need to have saved to generate the retirement income you want, one easy-to-use formula calls for dividing your desired annual retirement income by 4%. To generate the #400,000 cited above, for example, you would need a nest egg at retirement of about #10 million. This assumes a 5% return on investments (after taxes and inflation), no additional retirement income (i.e., Social Security) and a lifestyle similar to the one you would be living at the time you retire.

Multiples of Your Salary

To figure out how much you should have accumulated at various stages of your life, thinking of a percentage or multiple of your salary at that time can be a very useful tool. Fidelity suggests you should have 50% of your annual salary in accumulated savings by age 30. This requires saving 15% of your gross salary beginning at age 25 and investing at least 50% in stocks and other investments. Additional savings benchmarks are as follows:

Age 40 – two times annual salary

Age 50 – four times annual salary

Age 60 – six times annual salary

Age 67 – eight times annual salary

Another Multiple Formula

Another formula (like the one proposed by Fidelity) holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting, but it includes a combination of 401(k) withholdings, employer match , cash savings and even debt repayment. Following this formula should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:

Age 35 – two times annual salary

Age 40 – three times annual salary

Age 45 – four times annual salary

Age 50 – five times annual salary

Age 55 – six times annual salary

Age 60 – seven times annual salary

Age 65 – eight times annual salary

How Much Can You Save?

Based on figures provided by the Bureau of Labor Statistics (BLS) in its 2015 “Consumer Expenditures Survey,” the percentage of income left over (and available for savings) for workers between the ages of 25 and 74 averages 19.8% on a pretax basis. This figure is well above the 15% savings formula above and potentially within the 25% figure, depending on how much comes from things like employer matching and debt repayment. Following is the average pretax percent of income left over after expenditures by age group:

25 to 34: 19%

35 to 44: 23%

45 to 54: 27%

55 to 64: 22%

65 to 74: 8%

The Bottom Line

Given the nearly 20% of gross income savings potential and an actual savings rate of less than 5% of disposable income, most Americans likely have room to increase savings at most stages of their lives.

Whether or not you try to follow the 15% or 25% savings guideline, chances are your actual ability to save will be affected by life events. Sometimes you will be able to save more – sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to make sure you are staying on track.
Follow these guidelines to get on your way to good money habits that your future self will thank you for.

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