Is money management something which only companies and rich investors engage in? No, it isn’t. It is actually a strategy which each and every person can and should adopt. How do you get started? Here are the basics which you need to learn and adopt as soon as possible.
- Proper Budgeting
When people hear about budgets, they imagine huge spreadsheets and complex charts, but things are much simpler especially for individuals and households. Starting from the basics, you have two cash flows – inbound and outbound (income and spending). Hence, you can use two columns on a spreadsheet and list the sources of income which you have and the bills which you have to pay plus your monthly expenses on food, clothes and so on.
The key to success is to prepare the budget for each month in advance. You have a pretty clear idea of how much money you will get so the spreadsheet will help you to adjust your spending accordingly. If you are expecting to have a major expense, which isn’t fully covered by your budget, you can plan the use of a credit facility accordingly. The earlier you do this the better your chances of finding the most affordable option will be.
Budgeting is in the core of money management and you cannot really go without it. Turn it into a habit and this will pay off.
- Spending for Creating Value
Although the point is not to promote frugal living, you really have to sit down and think about how your expenditure actually affects your quality of life. The reality is that most people spend a considerable portion of their income on things which don’t bring any value to them, be it financial or moral. How can you get rid of this “unhealthy” spending?
You can use a valuation system for every expense which you make. This may seem a bit over the top, but once you get the system up and running, you will notice that you will start making the best spending choices naturally. The goal is to place a plus, minus or nil sign to every product/service which you plan to purchase depending on how it will actually contribute to your standard of living.
Let’s look at a simple example. When you create your grocery shopping list for the week, evaluate each product using the system. Fruit, for instance, will give you more vitamins and energy so you can place a plus sign. Chips, on the other hand, can increase your cholesterol levels so it deserves a minus sign. You can readily cut your spending on chips and improve your financial situation and health too. The system works extremely well for controlling your spending on luxuries and “trendy goods” like the latest smart gadgets.
- Well-Organized Banking
We’re back to the core aspects of money management – putting your finances in order. You cannot keep your money under the mattress as this is neither productive nor safe. Opening a checking account is mandatory for every person of legal age. Compare banks based on their reputation and customer handling and accounts based on accessibility, convenience, limits and fees. It pays off to keep a minimum account balance even if the bank doesn’t require it. Ideally, it will be 10% of your monthly income. You can think of it as your emergency fund.
When it comes to banking, you should watch out for alluring product offers like the addition of a credit line to your checking account and credit cards for loyal customers. Read the terms and conditions carefully and look closely at interest, fees and repayment periods. Always make decisions on using financial services and products based on your budget.
- Prioritizing Saving and Investment
We all know that saving and investment are important, but you need to understand why in order to derive real benefit from them. The answer is simple: they actually bring you greater value in monetary form and make you richer. How much of your income should you put aside? This depends on various factors such as age, family status, lifestyle and so on. Your goal should be to set aside as much money as possible. Don’t think of it as cash which is forbidden to use, but set precise spending goals. You can save for a house down payment or for buying a new car.
You should have a clear idea about the difference between spending and investment. The latter brings high returns, but involves higher risk too. Additionally, since the building and management of a portfolio requires making a bunch of important decisions on a regular basis, you need to learn how to invest in order to maximize returns and minimize risk.
Short case study: Warren Buffett, one of the most successful investors of all times, uses a value investing strategy. He evaluates stocks based on their intrinsic value associated with the earnings and growth potential of companies. He uses twelve key factors divided into four categories, which include management, business, financial measures and current value. If you take the time to learn and to establish your own strategy, you can make lots of money from investing.
- Debt Control
It’s great to stay on the positive side and focus on saving and investing, but to be able to do this, you need to keep your debt under check. If you currently struggle to repay debt, you need to focus on this task first. Limiting your spending is an effective way to pay off debt more quickly. Refinancing is reasonable as long as it actually saves you money in addition to reducing the size of your monthly installments. It pays off to consult an independent financial advisor to choose the best strategy for debt repayment.
In general, controlling debt isn’t a challenging task provided that you take a few simple measures. Keeping an emergency fund as suggested earlier will help you to shield yourself from cash loans and excessive use of credit cards. Choose the most suitable and affordable credit cards for you based on your individual income and spending patterns. Don’t keep more than three or four, but use them regularly. Try to spend no more than a third of the limit on each card and always repay the borrowed sum before interest is charged. When you need to take out a loan, compare all of your options and plan repayment carefully.
- Taking Care of Taxes
You should also start with the basics on this aspect of money management. Plan in advance to ensure that you will file your tax return on time. Keep all related documents safe. It pays off to use tools which will help you to do the calculations and fill out the forms correctly. If you are worried that you may make mistakes or you have several highly specific sources of income, you should consider using the services of a professional accountant. Make sure that you pay your taxes on time.
- Planning for the Future
While monthly budgeting is fundamental, this doesn’t mean that you shouldn’t focus on the big picture. You will have much more stable finances if you plan for major purchases and investments in advance. The list includes buying a house, paying for the education of your children and saving for your retirement. There are various financial instruments designed to help you achieve these long-term financial goals. Do your research, create a plan and choose the most effective strategy.
You are now ready to start managing your money more effectively and to derive multiple benefits from this.