“It’s not your salary that makes you rich; it’s your spending habits.” Charles A. Jaffe
It takes effective money management skills to keep more of your money working for you.
What are the Basic Principles of Money Management?
The primary components of effective money management are simple:
- Track your money
- Get rid of debt
Inventory your cash flow.
How much money came into your hands from all sources last year?
- salary or self-employment income
- interest on savings accounts; investment dividends
- and other sources such as spousal support and child support
How much money went out last year? Break it down according to expenditure:
- monthly expenses: rent/mortgage, groceries, utilities
- debt payments: loans, credit cards, other
- out-of-pocket expenses: entertainment, fuel, travel, merchandise
Use your bank statements and credit card statements to create an accurate accounting of your expenses.
Out-of-pocket expenses are more challenging to compute. Keep all your receipts for items that you purchase with cash. Put them in an envelope or jar. At the end of the month, total up how much was spent and on what. You might be surprised.
“A budget is telling your money where to go instead of wondering where it went.” John Maxwell
Identify Your Short-term and Long-term Goals
Write out your long-term and short-term life goals. For example:
- Purchase my own home
- Go back to school
- Retire at age 30
- Be debt free
- Start investing
- Travel the world
- Launch a business
- Start a family
How does your cash flow match up with your goals?
Create a Budget and Stick to It
Now that you have a picture of your cash flow and know your financial goals, you are ready to create a budget. Effective money management means that you stick to your budget. Check your budget quarterly to see if it is still relevant. Do you need to change anything?
If you need help with creating a budget, there are many online tools available. A simple excel spreadsheet is good too.
Save for Retirement
Saving for retirement is easy you just need to make it a priority. Take advantage of your employer-sponsored 401(k) and invest as much as you can. If you are self-employed or do not have a 401(k), invest in an IRA. In both cases, contribute the maximum allowed by the IRS.
Pay Off Debt
Debt gets in the way of your financial goals. The sooner you can get rid of it, the sooner you will have the money to invest in your dreams. Debt accrues, and you can easily find yourself burdened with it for years.
- Make a list of all your debt by type, amount owed, and monthly payments.
- Choose a debt reduction plan that works for you.
- Commit to staying debt-free.
Review Your Credit Report
Your credit report influences many spheres in your life, including the kind of terms you get on loans and credit cards. You need to know what is in your credit report. Take advantage of the free reports to which you are entitled. Carefully review all the information and take immediate action on any errors or evidence of fraud.
Become Financially Literate
Knowledge is power. Read articles and books on effective money management. Watch videos or take online classes. Learn financial lingo so you can make informed decisions about how to manage your money.