How to Manage Your Money?
Money management refers to the use of money in the right way, which involves creating a budget, understanding cash expenses and incomes along with tracking the money spent, saving some income for investment and future use, removing avoidable costs, and also having a track of all items to understand the cash spending and generation.
Look at these personal finance statistics in the US, which could shock you: –
- 50% of Americans have less than one month’s income saved for a rainy day. So, if you have to believe the financial advisors, you need at least six months’ income protected for it.
- 30% have less than $1,000 in all bank accounts at any time.
- Americans have over $950 billion in credit card debt.
- In total, 1/3rd of Americans confess to having not saved anything for retirement.
In addition, over 50% of mortgage applicants do not realize that their credit score was the main reason for their loan application rejection.
Start your money management now if you recognize yourself in any statisticsStatisticsStatistics is the science behind identifying, collecting, organizing and summarizing, analyzing, interpreting, and finally, presenting such data, either qualitative or quantitative, which helps make better and effective decisions with relevance. and reverse the situation. But, again, it is not rocket science and just keeping a simple rule: “You need to spend less than you earn.”
To start money management, you need to calculate and analyze your net worth and cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. , get your credit reports, know your credit score, and create monthly and yearly budgets. After following these steps, you will gauge where exactly you stand financially.
The next thing you will need to do is set definite targets of where you want to be financial.
To show you how you could do it, we have created this infographic to help you create a budget, pay off debts, and start saving.
Table of contents
- Money management means using the money appropriately. It includes making a budget, knowing cash expenses and incomes by tracking the money spent, preserving some income for investment and future uses, discarding avoidable costs, and keeping track of all items to know the cash spending and production.
- The steps to manage money are: record a balance sheet, calculate net worth, record income statement, calculate cash flow, analyze credit score, set up budgets, and keep budget tracks.
- One must compute and assess one’s net worth and cash flow before one can start managing one’s finances. One also needs to obtain their credit reports, find out their credit score, and make monthly and annual budgets.
- One must organize funds towards financial objectives such as debt reduction, saving for a down payment, and investing for retirement. Hence, it is crucial to start with whichever method one chooses.
8 Simple Steps to Managing Your Money – Infographics
Steps to manage your money are as follows
- Record your Balance Sheet
List and calculate your assets such as bank accounts, homes, vehicles, stocks, etc.
List and calculate all your debts such as home loans, car loans, other loans, credit cards, etc.
- Calculate your Net Worth
Assets – Debts = Net Worth
- Record your Income Statement
List any income such as salary, your income from stocks/bonds, etc.
List expenses such as monthly expenditure (calculate average spending of at least three months).
- Calculate your Cash Flow
Income – Expenses = Monthly Cash Flow
Once the monthly income and expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital. are listed and calculated from step 3, calculate the money that came in and went out. *Do not forget to include your credit card payments.
- Know your Credit Score
Credit reports are free, and you can know your credit score by paying a nominal fee to credit reporting agencies. It is to determine your creditworthiness.
- Analyze Step #2, #4 and #5
Compare these standards to yours, and find out where you stand financially.
- Setup Budgets
Once you know your spending history, you must budget how much you allocate to each category every month. There is also an online budget planner available.
- Keep Track of your Budgets
It is important to know where you stand financially. Again, keeping track of your budget gives you an accurate idea of where you spent your money during a month/year.
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If you are good at managing your money, it can help you stay in control of your financesFinancesFinance is a broad term that essentially refers to money management or channeling money for various purposes.. It can help you reach your targets and pay off any debts. There are several ways you can do this.
- You can use a good online budget planner to work out your budget in minutes. With that, you can see how much spare cash you have left after paying off your most important bills.
- You can maintain a spending diary to help you keep a closer eye on your spending. That would be a good way to track where you spend your money.
- Aim to pay off your debts first, especially those with the highest interest rates.
- Watch out for non-essential expenses that one can avoid in your budget. First, ask yourself whether a particular expenditure is a “want” or a “need.” Then, of course, you need to cut down on what you want.
- The balance number in your checkbook is critical as it would tell you exactly how much money you have currently. Ensure you keep an accurate checkbook that includes all the records, including ATM/Visa check card transactions, checks, and deposits. It will help you review where exactly you spend and save.
- Credit card debts are the easiest of traps to fall into. So, try to minimize credit card usage as much as possible.
- Acquaint yourself with diverse investmentInvestmentInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later. options. The more knowledge you have about financial instrumentsFinancial InstrumentsFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes. and possibilities, the better off you will be when it comes to investing your money. You will need to find out which would be the correct one for you and your needs.
- You never know when you will need a huge sum of money in an emergency. For such situations having good insurance coverage can help overcome those crises.
- Though we mention it last, it is one of the most important points; you need to organize funds towards financial goalsFinancial GoalsFinancial goals are targets set by an individual to achieve financial milestones or plans. In other words, they are financial objectives that an individual wishes to accomplish within a certain time frame. such as debt reduction, saving for a down paymentDown PaymentDown payment is the initial deposit made by the buyer to the seller when purchasing an expensive item, such as residential property or a car. It comprises a portion of the total purchase amount of the asset and takes place via cash, bank check, credit card, or online banking. , and investing for retirement. Therefore, it is most important to start doing it, whichever method you choose.
All this may seem complicated and boring, but you must take the first step and start this process. After which, you need to take care and pay attention to what you are doing with your money.
Frequently Asked Questions (FAQs)
One must follow the following tips to manage money: save a significant part of income, pay to utilize cash, pay off the debt, not waste anything, invest in mutual funds, get a good deal on regular expenditures, bargain wherever it matters, practice financial hygiene, travel smartly, and fixing the budget.
Firstly one must open an emergency cash account even if one cannot fund. As soon as the account is open, make a savings plan according to the budget; then, one can start with whatever one has and stay focused on building habits and consistency. Once the financial situation improves, incline towards saving more emergency money.
If the payment is weekly, one must first know the paydays and each day’s payment amount. Then, add the bills along with the paydays and list all other expenditures. Next, assign the paychecks to cover the bills and expenses. Lastly, since the pay is received weekly, it is also essential to write the weekly budget.
When planning retirement, it is crucial to prepare the budget to manage the money. One must also prioritize spending based on long-term and short-term money use. Moreover, one must also keep health concerns in mind; hence one must ensure financial security with health insurance. Finally, when planning retirement, one must also be tax efficient and regularly analyze the retirement plan effectively.
This article is a guide to steps on how to Manage Your Money. We discuss how knowledge of basic finance can go a long way to improving your financial position. You may have a look at the following articles to learn more about money: –