Managing money wisely is not as complicated as you think – but it can be quite tedious. Maintaining a healthy level of finances is the same as keeping yourself physically fit. Just because you achieved your ideal weight, you will cease making an effort to live a healthy lifestyle. It is a continuous endeavor that will never stop. Of course, once you have reached your goal, maintaining it will not be as difficult as the effort you had to exert previously. But the bottom line is, you still need to exert effort.
Some people have used financial management as a way out of debt. Most people have used it to improve their financial situation. The reason for managing money wisely is not really important as long as you are doing it. Regardless of your situation in life, it will help you take your money to the next level.
What is Money Management?
Money Management is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
If you don’t have enough money to do everything you would like to do, then you can use this planning process to prioritize your spending and focus your money on the things that are most important to you.
Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
Once you create your first budget, begin to use it and get a good feel for how it can keep your finances on track, you may want to map out your spending plan or budget for 6 months to a year down the road. By doing this you can easily forecast which months your finances may be tight and which ones you’ll have extra money. You can then look for ways to even out the highs and lows in your finances so that things can be more manageable and pleasant.
Extending your budget out into the future also allows you to forecast how much money you will be able to save for important things like your vacation, a new vehicle, your first home or home renovations, an emergency savings account or your retirement. Using a realistic budget to forecast your spending for the year can really help you with your long term financial planning. You can then make realistic assumptions about your annual income and expense and plan for long term financial goals like starting your own business, buying an investment or recreation property or retiring.
Why is it important to manage your finances
It is important to manage your money well because you use it on practically everything. While we do not want to be materialistic, your finances play an important role in this consumerist society. This is the main reason why you need to manage it well. Here are the specific reasons why you need to boost your financial management efforts.
It helps you make smart decisions. Financial management involves a lot of decision-making. The more informed decisions you make, the better the outcome. Having a direct hand in managing your finances makes it easier for you to make informed and smart decisions precisely because you know your financial situation. When you know how much you have in your budget after sending out your monthly payments, you will know how much you can allot for your financial goals. It gives you an idea about the amount that you need to set aside for your retirement fund, reserves and even for your annual vacation.
The key to keeping your finances in top shape is to manage it smartly. A credit score is one of the indications of a strong financial position. Earning more is not the way to improve it. The best way is to start managing money wisely.
Some people feel overwhelmed by this task. However, it is actually not complicated. It can be tedious to maintain a good financial position but it is not a complex concept to understand. In fact, there are only a couple of financial thoughts that you need to master in order to manage your finances well.
Here is the most important.
Interest. Admittedly, this is one of the most confusing for most consumers. For a beginner, it seems complicated but once you get a general idea, it can help you make smart decisions about your money. The interest is important on two financial fronts. One is your debt. You need to understand how this affects the amount of debt that you owe. If you have a high-interest debt like a credit card, you might end up paying a lot more than what you actually used the credit for – just because of the interest.
The interest is also something that you can use to your advantage – specifically when investing is involved. Investing is the best way to make your money work for you. When you place your money in profitable investments, it earns compound interest. That means the amount you invested earns interest and even the accumulated interest will help you earn more. If you choose the right investments, that can really help you grow your finances – even without doing anything!
1. PLAN YOUR FUTURE – Plan for the future, major purchases and periodic expenses. You will not arrive to “financial freedom” parkway, without a road map to guide you. Follow your plan.
2. SET FINANCIAL GOALS – Determine short, mid and long-range financial goals. Continue to nurture and adjust your goals monthly. Evaluate your shortcomings and celebrate your achievements.
3. SAVE YOUR MONEY – Save for periodic expenses, such as a car and home maintenance. Save 5%-10% of your net income. Accumulate at least 3 to 6 months salary in an emergency fund.
4. KNOW YOUR FINANCIAL SITUATION – Determine monthly living expenses, periodic expenses and monthly debt payments. Compare outgo to monthly net income. Be aware of your total indebtedness.
5. DEVELOP A REALISTIC BUDGET – Learn to budget and follow your spending plan as closely as possible. Evaluate your budget. Compare actual expenses to planned expenses.
6. KEEP A RECORD OF DAILY EXPENDITURES – Be aware of where your money is going. Use a spending diary to assist you in identifying where adjustments need to be made.
7. DISTINGUISHING THE DIFFERENCE BETWEEN WANTS AND NEEDS – Take care of your needs first. Money should be spent for wants only after needs have been met.
8. DON’T ALLOW EXPENSES TO EXCEED INCOME – Avoid paying only the minimum on your charge cards. Don’t charge more every month than you are paying to your creditors.
9. USE CREDIT WISELY – Use credit for safety, convenience and planned purchases. Determine the amount that you can comfortably afford to purchase on credit. Don’t allow your credit payments to exceed 20% of your net income. Avoid borrowing from one creditor to pay another.
10. PAY YOUR BILLS ON TIME – Maintain a good credit rating. If you are unable to pay your bills as agreed, contact your creditors and explain the situation. Contact credit.org for professional credit and debt advice and inquire about our credit counseling service.