Money can be an overwhelming thing to handle. This needs a lot of care and thought before letting even a dollar out. Though you may be asking why this is important, just think about your pending bills, debts, essentials, and wants, which you can’t get without your financials.
The only question is, how can you make the most out of your money? From my personal experiences, there is only one concrete answer — following the Financial Order of Operations. So, what is this, and what will happen without this? Read on to the next sections.
The Financial Order of Operations is a concept that aims to help people manage finances.
The first step here is to cover your greatest deductible. This is the very minimum you'll need to get your financial life back on track. It's hard to generate money without taking care of your biggest dangers.
Overall, this revolves around knowing your priorities and being aware of the most efficient financial management strategy depending on your needs.
Making a budget is essential for tracking our family's income and spending on a monthly and annual basis. A budget is essentially a financial plan that assists you in determining where your money will be spent.
You may actively track how much money we spend on different fixed and variable costs (e.g. rent, mortgage, electricity, cable, phone, etc.) by using an Excel spreadsheet or an app like Mint or Personal Capital (e.g. clothes, entertainment, coffee, etc.).
A budget assisted us in determining where we can and should minimize costs. It assisted us in optimizing our spending and conserving by allocating a portion of our income to assist you in achieving our long-term objectives.
Once you start earning money, the first step in your financial strategy should be to open a checking account and a high-yield savings account that can act as your income's home base — allowing you to save money and pay for all of your essential living needs.
What proportion of your net income you'll need to devote to your basic living expenses depends on where you reside, what kind of job you have, and how you live.
And while the idea is for that proportion to decrease as you advance in your life and work, if you're just starting out on your professional and financial path, I'd say you're doing okay if your overall living expenditures are less than 75% of your net income.
It's crucial to save up enough money to cover one month's rent since you never know when something unexpected will happen to throw your life off.
Another important factor to consider in your emergency fund is the expense of paying your medical insurance deductible. Most crises include some form of physical or medical condition, so be sure you have enough money to meet at least the immediate medical expenditures you owe in this scenario.
For us, credit cards have never been a problem, but they can be for others. You must, at the very least, pay the minimum balance on all of your credit cards and other bills. If you don't do this, expect credit collection agencies to harass you and your credit score to tumble.
A note with "Pay Debt" written on it
However, depending on your level of debt, this might be a lengthy process.
Here are some risks that you may face in the long run if you don’t practice the Financial Order of Operations:
- Little to no emergency funds
- Piling debts
- Mismatched financial priorities
- Bad credit score
- High-level financial mistakes
Money does not come with an instruction manual, and knowing how to make the most of every dollar can be challenging. Saving for retirement is a good thing, and high-interest debt is a terrible thing.
If you're not completely content with where you're at this point in your trip, remember that it's never too late to make a change. Recognizing that you need to make a few changes to your money management and taking action is always the best course of action. Making healthy financial decisions is never too late.