If you’ve been looking to manage your money but don’t know how or where to begin from, you’re not alone. Money management isn’t a course that’s taught in school (however, things have been changing with time) and most of us probably weren’t taught how to manage money by our parents.
Fortunately, money management is something that’s very straightforward. Here are 10 easy rules and steps you can apply when learning the best way to manage money smarter in order to accomplish any financial goals you set.
10 Easy Steps on How to Manage Your Money
Below are 10 simple steps you can use for money management tips that will help you set the right financial goals, budget your finances and start a savings fund for your future.
1. Take Inventory of Your Finances
Before you begin managing money properly, the first step is to take inventory of your recent financial state. Most people don’t keep track of their spending habits or know where their finances are going every month. I have experienced this before, and I can assure you that you’ll get over it soon.
Begin with your salary. How much money do earn on a monthly basis in terms of salary, online income, commissions, tips, rentals or stock dividends? Do you earn the same income each month or does it vary from month to month? Create a list with all your sources of revenue and record how much money you’ve been getting from each one of them for at least 6 to 12 months.
The next step is to review your expenses. How many fixed expenditures do you have, such as car payment, rent and insurance? Take note of how much money you use on variable costs like groceries and gas. Then, look at all the unexpected expenses you have every month like car or home repairs. Lastly, record yearly or twice-yearly expenses such as taxes.
2. Tune Up Your Money Mindset
Once you’ve gone through all the numbers, you can now tune up your way of thinking. If it always feels like you don’t have enough cash for all the things you want to do, try having positive thoughts instead. Consider everything you can use your money to accomplish in the future. Be grateful for all the things you have, even if you’re not able to afford what you’d like.
Think about the way you view wealthy people or those who are doing better than you. Do you take wealthy people to be evil or are you glad that they are successful? Tune your mindset into positive thinking and let yourself think that if you have a lot of money, you can do more good in the world.
If you have an open mind set that considers money to be good, you’ll do a better job of receiving it. The most important things to think about some of the dangerous beliefs about money that you learned about when you were young and start thinking about the positive beliefs you’ve learned about so that you can have better goals.
3. Set Goals for Your Money
Before you’re able to learn about how to manage your money properly, you need to understand “why”. Why are you looking for better ways to manage your money? What is your ideal life? These are some of the questions you need to figure out because you won’t get answers from any financial expert.
One of the reasons why most of us want to manage our money better is so that we can stop working our current high-stress jobs. It may also be because you’d like to save enough cash for your children’s college education. Or you simply want to take some time off from work and travel to different parts of the world.
I think of my “why” on a regular basis. Since I have two children, my biggest desire is to ensure that I can cater for all their financial needs, from buying them clothes, paying for pre-school and extra-curricular activities and paying for an occasional family vacation. Every time I feel consider giving up, I think about my kids and it reminds of why I need to carry on.
Think of those short, medium and long-term goals you have for money. You won’t be able to work accordingly towards keeping a solid foundation on money management if you lack motivation. So, know your “why” first, make a list and hang it somewhere you can see it every day. This step is very important when you’re looking for the right money management strategies.
Related: The Ultimate List of Financial Goals
4. Make a Financial Plan
With all the money goal in place, you can now choose your focus. Do you have any financial priorities?
Financial experts recommend that you start by paying off a large portion of your unsecured, high-interest debts such as credit cards. You can then move to other low-interest secured depts such as car loans. You’ll also need to add things like home equity lines of credit and second mortgages to high-priority list of things to pay off.
Once all your high-interest debts are paid off, you should look into a retirement savings plan, a home renovation or make a down payment on a house.
Ultimately, you have to decide what you need to focus on first. Consider all your goals and select the areas that you need to prioritize, it doesn’t matter if you’re going to focus on a single thing or you’ll need to divide the money to cover things in different categories. If you have a partner, this would be the best time to sit down and discuss about your joint financial goals.
5. Create a Monthly Budget
Making a budget is an important step to take when you’re learning about money management. Once you know how much money you’re making every month and can estimate how much goes towards your expenses and goals, you can now create a monthly budget. This is the most important step when managing money and successfully working towards the right financial goals.
There are various different options to select from when it comes to budgeting:
A zero-based budget will help you account for each dollar you earn every month. This is one of the best ways to control how your money is spent and ensure that you’re working towards realizing your goals.
A 50/30/20 budget is an easy budget suitable for people who would like to track their expenses without spending a lot of time on it. The 50% on the budget is meant for needs, 30% for wants and 20% towards dept payment and savings.
The envelop system is a very effective but low-tech way for people to track their expenses. You’ll be required to withdraw enough money at the beginning of every month to cater for all your monthly expenses. You can then divide the remaining cash in every envelop. The advantage of using this method is that you really don’t have to track your expenses. You’ll soon discover how much money is left in you account and if it will last.
Reverse budgeting (pay yourself first) is the perfect tool for someone who’s main goal is to save money or pay off some debts as quickly as possible. Reverse budgeting allows you to pay yourself first. This means that you’ll be able to save a certain amount of money and spend whatever is remaining. This method is perfect for people who are looking to save money and pay off some outstanding debts ensuring that they still have enough money remaining for their livelihood. Without this budgeting method, your debt cycle will never stop.
6. Track Your Spending
Tracking of expenses is the next step. This can be done with the help of the budgeting apps like Mint, You Need a Budget (YNAB) and Personal Capital.
The budgeting apps connect to your bank and credit card accounts automatically. The apps will import transactions and enable you to allocate every expenditure to a particular category.
I personally rely on YNAB for all my budgeting needs. Although the app requires a monthly fee, it doesn’t have any ads which is a great bonus.
Like I stated before, the envelop system is also reliable and it’s the perfect option for someone who doesn’t want to keep tracking their expenses through spreadsheets or budgeting apps. The envelops will always notify you about your expenses and how much money is remaining by counting what is left. You’ll also be able to print paper envelops, design personalized ones and directly record your expenses on the envelops.
7. Building an Emergency Fund
Although an emergency fund can be mistaken as the final step, it’s something that you should actually be one of the first things you take care of.
There will always be some unexpected expenses. Instead of having to reorganize your budget so that you’re able to cater for unplanned expenses, save some extra money every month as an emergency fund. This will ensure that you have all the money needed when your water heater needs to be replaced or your car breaks down.
For example, several months ago, my partner needed some extensive dental work done. Even though it drained a large portion of our emergency fund, it was a good thing we has set aside some money and didn’t need to take cash out of our monthly budget.
The best way to start is by stashing aside at least $1,000 in an emergency fund kit, giving it 3 to 6 months to grow before you can start withdrawing cash from there.
8. Create a Debt Payoff Plan
When taking care of debts, experts recommend that you begin by paying off the minor ones first. This is meant to give you a psychological boost so that you can eventually win. You can also consider debts that will have more weight on your credit score or those that have high interest rates.
Depending on you decide to use when taking care of your debts, start by handling them one by one. It’s normal to feel like you can’t take care of you finances since you don’t know how to pay off your debts. Don’t get discouraged. Your main focus should be on clearing one debt after another every month until they are all paid off.
People with college loans know how frustrating it can be when trying to pay off this debt. Don’t let the stress weigh you down, as long as you’re paying a portion of the bill each month, you’ll soon finish paying the debt.
9. Start Saving for the Future
Saving money isn’t an easy task as it appears to be especially if you’ve been trying to pay off your debts. However, you’ll be grateful you did so in the future.
The best and simplest method for saving for the future is to begin with your company’s 401 (k) matching program if it’s available. Find out how it operates and set aside enough money every month that will cater for this.
The benefit of using a 401 (k) contribution is that it’s removed from your paycheck before it gets deposited into your salary account. After some time, you won’t even notice that the money is missing. If possible, contribute as much money as you can and adjust your living situation accordingly.
If your employer doesn’t have a 401 (k), you can check out other options like IRAs. These are best possible tools for dealing with tax-deferred savings. Don’t forget to confirm with the IRS rules set for the maximum amount on such contributions.
If you start saving towards a retirement fund early enough, it will increase over time.
10. Don’t Neglect Your Credit Report
Your financial life is majorly affected by your credit report. Don’t forget about this financial tool because it is very important. There are no charges for checking a credit report, and doing so is a great way of ensuring that your accounts are in the best condition and your identity hasn’t been stolen.
Credit reports are very important due to several reasons. For instance, if you’re planning on getting any type of loan to buy a car or house, the first thing the lender will do is look at your credit report. They will then determine if you’re qualified and how much they can give you based on your income and credit score. Most importantly, this will determine the interest rate you’ll be given.
If your credit score is high and you have a clean credit report, it will help you save thousands of dollars over the years in form of interest. If you don’t have a clean record, the first thing you need to do is to fix your credit score. Work toward repairing your credit score before you make any bulky purchases.
Also, make sure you carefully go through your credit report, looking for any mistakes. Most mistakes can be easily rectified by the credit bureau or the lender who found the issue can handle it for you.
Being Smart with Your Money Can Save You from Unnecessary Stress
Ultimately, money management doesn’t need to be very challenging. The 10 tips for managing money mentioned above are the best place to begin from. It can take you a few months or years to accomplish these steps, but it’s the best way to achieve great financial goals.
Don’t forget that money is a tool that if it’s used properly, it creates several options for you. if you manage your money well, you’ll be free to live the way you’ve always wanted to live. Also, having control over your finances as well as creating a monthly budget ensure that you live in peace.