7 Tips to a Better Personal Finance Lifestyle

One of the worst things you can do to yourself is get entangled in debt. You’ll be unable to make ends meet as a result. Dave Ramsey’s personal finance book, The Total Money Makeover, takes a step-by-step strategy to debt elimination and wealth accumulation.

He has authored many personal finance best-sellers. His strategy is to do all that is possible to minimise debt. In an ideal world, you should be debt-free, but if you aren’t, you should work to eliminate it as quickly as possible. Additionally, Islam teaches us to avoid debt as much as possible.

The Prophet Muhammad (ﷺ) frequently sought refuge with Allah from debt and sin. One of his companions once inquired as to why this was the case, and he said, “Whoever gets into debt, speaks, and lies, and makes a promise and breaks it” [Nas’ai].

Ramsey outlines a seven-step strategy for overcoming financial insecurity and developing into a “financial super body.” He refers to them as “baby steps” since they are taken sequentially. You do not go to the following stage until the preceding one is completed.

Ramsey, like many other personal finance experts, emphasises four critical steps that must occur in order for a person to regain control of his or her finances.:

1. Strive to live within your means

2. Budget

3. Stop relying on credit cards, which will only compound your debt. If you visit a store and find anything for which you cannot pay cash within a month, do not purchase it.

4. Invest

The acts listed above may appear to be common sense, but you’d be shocked how many individuals suffer from and are unable to manage them.

Ramsey’s seven-step strategy for financial stability and wealth creation is outlined here. Remember to do them in the order listed:

Step 1: Save $1,000 for an emergency fund

Your first task is to save $1000. An unforeseen car accident, hospital stay, funeral, or job loss may need you to use this emergency fund.  Do everything it takes to get this done as quickly as possible, even if it means working additional hours. Remember, holiday shopping isn’t considered urgent so only use it for true emergencies!

Step 2: Begin the debt snowball

Once you have your emergency cash, go after your debts (except for the home mortgage). So start paying off your education debts, credit card debt, car payments, etc. one by one. Ramsey is a big fan of the debt snowball technique, which involves paying off smaller obligations first while paying the minimum on larger debts.

After paying off the smallest obligation, one moves on to the next slightly larger small debt, and so on, gradually proceeding to the larger ones.

After paying off the smaller debts, the extra money saved is used to pay off the next larger obligation, hence the phrase snowball. Small triumphs give you confidence and keep you motivated to keep going. Studies have shown it to be highly effective.

Step 3: Complete your emergency fund

As soon as you’ve paid off all of your debts (except for the mortgage, if you have one), and you have $1000 in your starter emergency fund, it’s time to complete the emergency fund. Three to six months’ worth of costs can be covered by a properly stocked emergency fund. How much money would you need to survive for three to six months if you were to quit your job?

The next stage is to save up to that amount. Because this is also an emergency fund, the same principles apply as in the case of the starter fund. Use it only if you have no choice but to, or it is an unforeseen expenditure (car accident, hospital, job loss, funeral, etc.).

There is no one-size-fits-all answer when it comes to how much money you’ll need for three months or six months. According to Ramsey, it might range from $5,000 to $25,000, depending on the individual’s or family’s lifestyle. Adding up all of your monthly reoccurring costs is an excellent place to start (utilities, grocery, mortgage, gas, etc.). This should give you a good indication of how much money you need to set aside.

Step 4 – Save 15% of your income for retirement

Investing early is the key to a healthy retirement income! This is crucial since we don’t know how long we’ll live. In many eastern cultures, children take care of their parents in their old age, thereby serving as their retirement plan. In the West, this is unusual and it is not uncommon for  Muslim fathers in America to beg for zakat money because they don’t have enough and their children refuse to support them. Others who saved early for retirement are now retired and stress-free. Therefore we should save as much as we can for our retirement. 

The goal is to save 15% of your annual gross income before taxes. So, if you earn $40,000 before taxes, then every year you should save $6000 for retirement or $500 dollars every month.

Consider these good choices if you want to invest in Islamic firms. Open a retirement account and invest in Amana Growth, Amana Income, Azzad Ethical, and Wahed ETF. Sign up with E-Trade, Fidelity, Vanguard, etc. Compare the account’s fees and costs to find the most cost-effective.

Step 5 – Put money aside for your children’s education

The first step is to conduct some research about the current cost of a college degree in your area. Ramsey opposes incurring debt to obtain a degree. And he most certainly does not encourage traveling out of state for it if you cannot afford it. Sending your child to college inside the state is far less expensive, and should generally be your sole option unless your child receives a full scholarship or you have the financial means to send them out of state.

Ramsey advises parents to establish an Educational Savings Account (ESA) and invest it with a growth-stock mutual fund. However, not all parents will be willing or able to establish an ESA account. That is acceptable. Then look at the option of enrolling your child in work-study, which allows them to earn while learning. Employers provide similar programs in collaboration with various colleges.

Additionally, encourage your child to apply for scholarships. Each year, hundreds of scholarships become available. Bear in mind that there is a fair chance to be accepted since they are not only reserved for individuals who thrive academically and athletically.

Step 6: Pay off your mortgage

If you’ve followed the previous procedures and are routinely putting 15% in your retirement and your children’s education fund (if you choose), you can now focus on paying off your mortgage with the additional income you have each month.

Ramsey advises paying cash for a property, even a small one, and avoiding borrowing money. Because you may use the additional money you would have spent on a mortgage to invest and grow wealth. Since most individuals cannot afford to buy a property outright, he suggests a 15 year fixed mortgage.

Trying to pay it off in 15 years is the limit, but if you can afford it, make extra payments each month to pay it off sooner. Adding a few hundred dollars to your mortgage each month can cut years off your mortgage term, and you won’t be enslaved to the financial institution for their full term.

Step 7: Generate wealth

By this point, you should be completely debt-free, with just periodic contributions to your retirement and child’s education accounts (if you decide to go that route). It’s now about you and your family, not an institution. Now you can have FUN, INVEST, and GIVE to charity.

Investing in mutual funds or real estate is a great way to create wealth. Most individuals choose mutual funds. Open a new personal brokerage account and invest heavily in mutual funds with a 5-10 year track record of strong returns. Remember to invest for the long term and not only for the short term. Amana and Azzad mutual funds are both ethical and perform well!

Individual stock investing is not advised because of the need for diversity in order to offset the loss of one stock. If you insist on individual stocks, find one with a proven track record and commit to it for 5-10 years.

Conclusion

Debt is one of the worst things you can fall into as it will keep you poor financially. Thinking with the mindset of building wealth is not a sin for Muslims, however, it’s only harmful if it consumes your life and makes you forget about the afterlife

In order to gain wealth, we should not be greedy, self-serving, arrogant, or stingy. As long as we stay faithful to our beliefs and seek appropriate methods to gain money, then this is a favor from Allah and we should be grateful. Our goal should be to provide for our families and contribute to others in charity for Allah’s pleasure.