Managing personal finances isn’t something that you’re taught in school. It’s a skill that you have to learn through experience and also acquiring the right knowledge. Luckily, Castle Finance Direct has put together a couple of tips that should help anyone in need of advice on budgeting and loans.
How to Budget
Firstly, the foundation of good finances is budgeting. For those that don’t know, budgeting is about ensuring you know where your money is going and how it’s being spent. If you don’t know this, staying on top of your expenses and financial planning can be difficult.
It is usually a good idea to budget on a monthly basis as bills tend to come out every month.
For effective budgeting, start by writing down your expenses. List out recurring ones, especially whether utility bills, groceries, or toiletries. Use your bank statement to give you a clearer picture of your expenses.
After doing this, right down your income as long as it’s recurring. Include pensions, wages, benefits, and any other regular income you get. If some of your income comes in weekly or 4-weekly, calculate it by calendar months instead. You can do so by multiplying your weekly figure by 52 and then dividing it by twelve.
The last and most vital step in budgeting is subtracting your expenses from your income. This will tell you whether you’re living within your means or not. If you have a ‘budget surplus’, you will have money left over after all listed expenses are paid. However, in the instance that you’re spending beyond what you earn, then you have a ‘budget deficit’.
Taking Out a Loan
Loans are something that many people have access to, especially if they’ve got good credit. However, in order to ensure responsible borrowing, you’ve got to make sure you’re well informed before making long-term commitments. Loans deal with a transaction between two people and the terms are usually agreed on before anything is made final.
Secured vs Unsecured Loan
For those that don’t know the difference between secure and unsecured loans, the core difference is in whether collateral is used or not. Loans such as mortgages or car loans are secured as collateral is used. On the contrary, credit cards and signature loans are unsecured as they aren’t backed by collateral.
Compound vs. Simple Interest
Understanding how the interest rates on loans work could save you a significant amount of money. For instance, you should know that compound interest is interest on interest which could result in you paying back more money over a longer period of time. On the other hand, if you get a simple interest loan, then you only pay the interest on the principal loan.
Revolving vs. Term
Another important loan type to understand is evolving vs term loans. While evolving loans can be spent, paid back and spent again, term loans have to be paid off in equal monthly instalments over time. In more practical terms, a credit card is an unsecured revolving loan, while a home equity line of credit is a secured revolving loan.
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