Start to improve your finances

You want to improve your finances? You want to become wealthy and stop worrying about how to put food on your table every day and pay the bills at the same time? That is the reason I have created this site.

I used to work in service company in north-east Italy and, despite working full time for many years, I was still living at my parents house at 38 years of age and I was not saving much. Obviously I didn’t like that and so I started to investigate and learn how to improve my situation.

And now I want to share what I have learnt (and still learning) with you. I have already shared some guides on this site, but before we can continue we need a recap. The first steps are very important to improve your finances; therefore you need to check to following check-list and be sure to complete all the steps.

Assess your situation

The first step we saw was to asses your current financial situation. It is very important that you check what do you have (bank accounts, saving accounts, assets); it is also important to record how much you earn and how you spend in different categories.

To have a better idea of your situation, I recommend to either use a service like Mint.com or a software like GnuCash or KMyMoney. Once you have it, you need to record all transactions; all of them no matter how small.

Every personal accounting software/service offers different categories where you can associate your income and expenses; be sure to select the appropriate one for each transaction. Dividing the transactions on the appropriate categories is important to discover the weight of each category on your income; it will be important on the next step when you will optimize your expenses and have a budget.

Ideally you should do this recording phase for at least more than 3 months; the reason is to have a broader picture of your expenses pattern since each single month may be different from each other.

Make a budget

Once you have a clear picture of your earning and spending habit, the next step is to make a budget and optimize your expenses.

On budget guide I indicated some benchmark for different categories of expenses; that is why I have suggested you to properly categorize your transactions on the step above.

You should calculate your current spending proportions by dividing the average expenses in a category by your net income;  then you should compare those proportions with the benchmarks I have provided.

If you are spending above the benchmark on a category, you will know you need to optimize it. On the budget guide I have provided some tips for each category.

You should go through all the expenses categories, but I recommend you should prioritize any “debt” you have. Especially bad debts, like credit cards, you have to pay it out as soon as possible; that is because not only you pay for the debt, but also for the interests, and those are wasted money.

The objective here  is to end every month with a surplus of money and not with a deficit. That surplus is what you will be able to invest to improve your finances.

Have an emergency fund ready

Even with the best of budgets, you will face unexpected expenses. You may have an unplanned medical emergency or your car broke down; or maybe your company made a mistake and lost many clients, and now it is “reducing redundancies”.

Since those events are unavoidable, it is important to have an emergency fund available. I recommend to have it on a saving account for two reasons:

1. you will earn interests while you are not using it;
2. by having it separate from your main checking account, you are less tempted to spend it on unnecessary expenses.

Lets reiterate the first point above, as it is very important; from the time you set the money aside to the moment you spend them on the unexpected expense, you will earn positive interests; basically you earn more money by just not spending them earlier for frivolities, but keeping them for emergencies.

Now imagine the opposite scenario: you face an unexpected expenses and you don’t have an emergency fund; you will probably need to ask for a loan or accumulate credit card debt; in this case you will pay negative interests to your bank.

For the same unexpected expense: if you have an emergency fund you earned extra money and if you don’t, you spend extra money. This scenario is very important to understand, because it is flipping situations like this that make or break your finances; not big salaries or inheritances. You can earn all the moneys in the world, but if you waste them in situations like this, you will be always poor.

Think about your retirement with a private pension fund

It is widely know now that the public pension systems are not paying much. It is therefore imperative you start as early as possible to save for supplementary pension fund.

You may think that you are still young, but believe me: retirement is expensive; especially since the average life span is getting longer and you will spend a couple of decades, if not more on it.

If you start early on your retirement fund, you can afford to save small amounts each year; those small amounts will not break your yearly budget, and at the same time they will grow exponentially by the time you retire.

Further improve your finances

If you correctly followed this guide, and the linked guides for more details, you are:

• ready to face any emergency you may encounter without touching any other investment or asset you have;
• you are making good progress to your retirement;
• and, even with the above two points, you are still ending each month with a surplus of money.

When you have completed the three points you will be able to take advantage of other lucrative investments and opportunities to improve your finances.