You have succeeded in life when all you really want is only what you really need.
– Vernon Howard
Massive unemployment, a drowning economy, and dwindling demand are some of the most unexpected things we have come to normalise in the wake of COVID 19. With lockdown being extended worldwide and re-opening still not in sight, it is important for you to manage your finances.
These lessons are not only important during the epidemic but in the course of your life. I cannot emphasise enough on the importance of exercising complete control over your financial discipline.
Having great financial health goes beyond being well off in life, it can actually improve your physical well being as well. An independent research conducted by PwC found that more than 40% of employees who are distracted by financial stress have significantly heightened stress levels. Such heightened stress levels are directly related to the surge in overall cases of fatal cardio-pulmonary disorders in professionals above the age of 35.
It is thus of paramount importance to incorporate sound financial knowledge and exercise them just like jogging or yoga.
Know What You Need & What You Want
Any independent adult would list ‘overspending’ as one of their top concerns in life. This concern arises from our inability to differentiate between our wants and needs. Now obviously the needs and wants will vary from person to person. However, we will consider the following example to be our standard.
You go to your local Walmart to buy supplies, those are needs. You need those supplies, however as you are checking out you feel like having a go at Starbucks, there you end up having some snacks along with your coffee. Absolutely not needed, certainly a want but not a need.
This does not look like much but it adds up and then there is the question of opportunity cost. MFC conducted a research in 2019 which revealed that an average American aged between 25-34 spent upwards of $ 2000 on coffee per year. To put that into perspective, that is about 7% of the research pool’s annual income. Spent just on a want, not a need.
To summarise, your needs are those basic requirements you must spend on, to survive in a reasonably well to do manner. Wants are those goods and services which you’d like to have but don’t need to.
A good practice is to learn and incorporate financial minimalism. That allows you to discern between your needs and wants.
However, you must not take it to an extreme. Remember, make sure your ‘needs’ are taken care of before you splurge on your ‘wants’. If you master the art of differentiating between your needs and wants, you will be less likely to overspend an improve your financial health overall.
The Importance of Budgeting
Budgeting is the stepping stone to your financial wellness. If we are talking about minimalism with respect to finance, budgeting is the stepping stone to financial wellness. The only prerequisite for making a workable budget is to understand the difference between need and want.
Forming a budget is simple and you have a lot of tools at your disposal to help you with it. I will link my personal favourite below. You however do not need anything more than a pen and paper to do your budgeting.
To get started, you have to understand how much money you can dispose of (income) and what you have to spend it on (expenditure). First you have to draw out what are your essential expenses. These will include –
- Debt Repayments;
- Investments &
- Essential supplies.
Now the allocation for each will depend on your lifestyle choices but it is of tremendous importance to not let debt repayments and essential supplies cost you more than 50% of your portfolio. Allocate funds accordingly.
This will help you keep track of your expenses and also help you get that much coveted $ 10 Cappuccino. However, you must remember to do this meticulously and regularly. Make a habit out of budgeting and stick to your budget, that is the most important part of the equation.
My Budgeting Tool of Choice – You Need Budget (YNAB). It’s a powerful tool and it is free for students!
Use Your Credit Cards Wisely
It is very easy to get carried away by the elusive allure of credit cards especially if you are just starting out. However, you can use credit cards to make a positive impact on your financial health just by following these simple rules-
- Safety & Convenience: One of the most important reasons credit cards are beneficial is the fact that you can save on opportunity cost with your cash. By paying back your card dues at the end of month, you have cash in hand for the month time. If your credit card charges no interest in the period, all the better! Apart from this, you get points for spending on your credit card. Not the mention the plethora of perks and free upgrades a good credit card can get you.
Safety comes with the insurance of credit cards. With frauds on the rise, if you lose money from your debit card, its your headache. If you lose money from a credit card, its the issuer’s headache.
All this gives you the user a pretty good reason to opt for credit cards.
- Paying on Time: The entire premise of having credit card is to save money. However, if you do not pay it back on time, the interest will keep racking up. After the repayment cycle, your months are not interest-free. In addition to that, you will also incur massive fines and a poor credit score. The same goes for paying the minimum balance, although it is best if you can pay it off wholly. If for some issue you can’t, then your best bet is to pay the minimum balance and avoid penalty.
- Reckless Spending : Go back the the starting notes of this article. Use a credit card to pay for your needs and your expenses which must always be ideally less than your income.
Credit card companies encourage spending by awarding points, however you must be wary of this and use your card only when needed, treating it just like a debit card.
With due discipline you can master the art of handling credit cards and manage your financial health with ease.
Financial Freedom and Minimalism
Minimalism is about being grateful. It teaches you to be grateful and joyous with the most basic of things you have.
Minimalism is also about simplifying your life and routines so you have time, money, and energy for things that bring meaning and purpose into your life! It’s about being intentional in all aspects of life.
As I talked about before, financial wellness is more than just being better of economically. It also drastically improves your quality of life. In the constant rat-race of today’s world, it is pivotal that we understand what we need and what we want. At the end of the day, if we can fulfil our needs we stand a chance at fulfilling what we want to.