Effectively managing money can change your life.
Whether you're just starting out on your financial journey, saving for something specific, or wanting to level-up your current financial standing, money management concepts will be key to helping you achieve your goals.
We’re here today to explore what money management involves, discuss why it matters, and offer general tips for beginners. Let's dive in and discover how you can take control of your finances.
What is money management?
Money management can mean a lot of different things to different people. For some, it means creating a monthly budget. For others, it may mean setting a savings goal and putting money away each month for that purpose. Yet, for others, investing will be the first word that comes to mind when they think of managing their money.
The truth is, money management is all of these things— and more.
Here are a few of the things that fall under the umbrella of money management:
- Budgeting: Budgeting helps you decide how to spend your money based on your income and expenses.
- Debt management: Debt management involves understanding your different types of debt like credit cards, student loans, mortgages, and personal loans. This includes strategies for debt repayment, consolidation, and avoiding excessive debt.
- Saving: Saving gives you the money for future plans, upcoming expenses, or potential emergencies.
- Goal-setting: Goal setting allows you to prioritize future events in your life, such as college, travel, retirement, or providing for loved ones who need financial assistance.
- Investing: Investing allows you to grow your money with instruments like stocks, bonds, money market accounts, CDs, and more.
While it can help to have a basic understanding of all of these things, don’t feel like you have to tackle all of them at once. Successful money management is a lifelong pursuit— it never really stops.
Why does managing money matter?
Managing your money well has numerous benefits that can impact everything from your ability to handle emergencies to your overall mental health.
The name of this section could very easily be “Why does money matter?” Managing money isn’t the only aspect that matters here—income flow and expenses matter, too. Not everyone has the income they need to be comfortable or stable, and that’s an important part of this conversation.
If you do have a steady income stream, managing your money is a great way to make sure your financial foundation stays stable. If you don’t have a steady income stream, these “whys” may not be relevant for you.
1. It gives you greater stability and security.
Effective money management provides stability and security during both expected and unexpected situations. Building an emergency fund is a crucial step in managing your money. By setting aside money for emergencies, you can be better prepared to handle unexpected expenses like medical bills or car repairs. This financial safety net can protect you from potential financial setbacks and may give you peace of mind.
2. It helps you achieve your financial goals.
Most people have goals for their life, whether it’s buying a house, enjoying retirement, or taking a dream vacation. Achieving these types of goals requires money. Proper money management helps you allocate funds wisely and stay on track to achieve your goals.
3. It can help reduce stress and anxiety.
For 73% of Americans, finances are the number one cause of stress. Effective money management can significantly reduce stress and anxiety associated with money-related concerns. By taking control of your financial situation, you can focus on other important aspects of your life without constantly worrying about money.
Basic Tips for Money Management
If you're new to money management, here are some practical tips to help you get started:
1. Money management starts with knowing where you stand.
The first step to successfully managing your money doesn’t involve making any big changes. Rather, it’s important to first get an idea of where you stand in terms of income, monthly spending, and debt.
It may seem like a small step, but it’s something that a lot of people don’t do.
- 65% of Americans said they don’t know how much they spent last month.
- 35% of people report missing a credit card bill simply because they forgot about it.
- Only 30% of Americans check their credit report each year.
Sit down with your bank statements, paystubs, credit card bills, and other relevant documents. Take note of:
- How much money you bring in each month
- How much money you spend, on average, each month
- How much debt you have
The information you gather here may tell you a lot about your financial situation and what your next steps should be. For example, if you are spending more than you make each month, you may want to take a closer look at cutting back expenses in your budget. If your income is more than your expenses, but you have a large amount of debt, you may want to consider debt management strategies. If everything looks good, you may want to move on to savings for goals or investing your money.
2. Continuously keep track of your money.
While taking an initial stock of where you stand is important, you can’t just stop there. As we mentioned earlier, money management is a life-long endeavor.
To effectively manage your money, it's important to keep track of your spending habits. Use budgeting apps or spreadsheets to monitor where your money goes each month. Regularly review your expenses and analyze your spending patterns. Identify areas where you can make adjustments and cut back on unnecessary expenses. This will help you stay on track with your budget and make informed decisions about your spending.
3. Start saving for emergencies.
Building savings is crucial for long-term financial stability. Start by establishing an emergency fund. Aim to save three to six months' worth of living expenses in case of unexpected situations. Without an emergency fund, an event like a home repair or stay in the hospital can leave you with debt that can spiral out of control.
4. Minimize and manage debt.
Debt can hinder your financial progress, so it's important to minimize and manage debt whenever possible.
- Avoid unnecessary debt by practicing responsible borrowing.
- Only take on loans or credit cards when absolutely necessary and when you have a clear plan for repayment.
- If you have existing debt, create a repayment plan that fits your budget.
- If you have a large amount of debt, consider strategies like debt consolidation or negotiating lower interest rates to make the burden more manageable.
5. Invest as early as possible.
Consider long-term investments such as retirement accounts or other investment vehicles that align with your financial goals. While you may not be in a position to invest now, keep in mind that the earlier you start saving and investing, the more time your money has to grow and work for you.
6. Seek financial education and resources.
To improve your money management skills, seek out financial education and resources.
This may look like:
- Reading personal finance books and blogs
- Listening to podcasts from financial experts
- Watching videos from reputable sources
- Attending workshops or seminars that focus on financial education.
If needed, you can even consult with financial advisors who can provide personalized guidance based on your specific financial situation. Remember, continuous learning and seeking advice can help you make more informed decisions about your money!
By understanding your income and expenses, creating a budget, monitoring your spending, and prioritizing savings and investments, you can achieve financial stability and work towards your goals. Good money management can reduce stress and anxiety, allowing you to focus on other important aspects of your life.
Remember, it's never too late to start managing your money wisely. Take control of your finances today, and enjoy the long-term benefits of financial well-being!