Originally Posted by
TinCow
Well, the first and most important step is to learn how to budget. You need to categorize your income into three separate areas. First, determine how much money you need to pay for essentials, such as food, housing, transportation, etc. Do not include any luxuries in here, only the bare minimum necessary. Second, set yourself a specific level of savings to put away for the future. More on this later, but a good rule of thumb is 10% of your income. So, with an income of 500 GBP per month, this would be 50 GBP. Third, everything else left over is your disposable income. If you do not already have them, open two bank accounts, a checking account and a savings account. Every month, deposit 450 GBP into the checking account and 50 GBP into the savings account. Ignore the savings account for now; pretend it doesn't exist. Pay your bills exclusively from checking. Your disposable income will remain in checking and will slowly accumulate. You can do multiple things with your disposable income. First, you can spend it on luxuries, like entertainment, a good meal, or some nice item or piece of clothing which is not covered by your essentials. Second, you can save it for bigger luxuries. For example, you might want to buy a new computer which costs 1000 GBP. Obviously one month's of disposable income is not enough to pay for this. So, don't spend your disposable income for several months and instead save it up. When you've got enough got the computer, then you buy it. Third, make larger than normal deposits into savings.
Do not run up debt. Credit cards are good things, and I recommend using them. They are easier than carrying around cash, will build a credit record for you (which is important in future years), and you can even save money with them if you've got a card that gives you some kind of cash-back or reward system. The important thing, though, is to NEVER run a balance on the card. Always pay the balance of the card in full every month. If you do this, the credit card costs you nothing (avoid annual fee cards like AMEX, you don't need them). If you cannot afford something based on the amount of money in your checking account, you just don't buy it.
Continue this way until your savings account has enough money in it to allow you to live off of that account with no other source of income for six months. That money is now your emergency fund, and you will never touch it. It exists to bail you out of bad situations, such as unemployment or unexpected medical expenses. It is a safety net for your financial life, and you should always keep it safe in a savings account and never invest it or put it someplace where you cannot access it immediately and in full. From this point on, your monthly savings can instead be diverted into investments. These are the stocks and bonds that you hear so much about. There is a lot to learn about this stuff, but you're still at the beginning of the process so you don't need to worry about it yet. When you get there, find someone who's knowledgeable about it and pick their brains. As your income level increases, your lifestyle will increase as well and you should regularly rebalance the 'essentials' and the savings to ensure that they keep up with your means and your needs. Also make sure that your six-month emergency fund remains a six-month fund. If your lifestyle has changed such that your emergency fund will now only cover four months of living, you need to spend some time topping it up again. You also want to immediately top it up if you ever have to take money out of it.
Above all, do not go into debt for unnecessary things. You will probably need a loan to buy a house or a car, but those are special cases and worthy of their own discussion. Other than that, if you cannot pay for the item in full, do not buy it.
Re: How do you make money.
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