(This article was updated on February 21, 2020.)
One of the hardest things about improving your finances is knowing where to begin. There are a million articles online that purport to answer money management questions, only to create confusion for people in need of help.
More often than not, learning to manage your past, present, and future finances responsibility comes down to asking the right questions. That’s why we’ve put together a list of the nine questions you should look to answer as part of your money management journey. Not every answer will a perfect fit for your financial situation. Still, together they can get you moving in the right direction.
What is Money Management?
For many people, money management is synonymous with budgeting. If you are spending less money than you are saving, the logic goes, then your net worth must be on the rise. Budgeting is essential, but it’s also just the starting point.
Here are a few of the things that fall under the umbrella of money management:
- Budgeting. Deciding how to spend your money based on your income and expenses.
- Saving. Reserving money for future plans, upcoming expenses, or potential emergencies.
- Investing. Choosing where to place your money in the hope of high future returns.
- Goal-Setting. Prioritizing future events in your life, such as college, travel, or providing for loved ones who need financial assistance.
When a consumer meets with a money manager, they will review their debts and spending habits to determine where their paycheck goes. Therefore, money management takes a more holistic look at your personal finances. It isn’t enough to know what you’re currently earning and spending; in order to offer you practical financial advice, money managers will also want to discuss your future goals and how best to achieve them.
How Do I Start Managing My Money Better?
Much like Ebenezer Scrooge, sitting down with a money management expert means being visited by the ghosts of your past, present, and future. This three-pronged approach to your finances allows your manager to understand opportunities for change in your life.
Your Financial Past
The first place to look when addressing money management challenges is your previous financial behavior. How did you come to be in your present financial situation (good or bad)? What are your old spending habits, and are there opportunities to change them if they prove to be detrimental to the money management process? The goal should be to identify and eliminate non-essential monthly debts as quickly as possible and start saving money.
Your Financial Present
Once you have a handle on your past activity, your next step will involve tracking your spending in the here and now. Are there are any that are wasteful or unnecessary? Taking the time to review your spending habits can uncover monthly expenses – such as a subscription for a magazine you never read or a video streaming service you haven’t watched in ages – that you will not miss.
Your Financial Future
The inherent goal of any money management program is to create the starting point for a happier, more stress-free financial future. Part of that is figuring out what amounts need to be set aside monthly to save for retirement, vacations, tuition, and, just in case, an emergency fund. The amount you set aside may be small at first, but as you pay off debt and reduce expenses, you can slowly re-allocate that money to your savings.
Who Can Help Me Learn How to Manage My Money?
There are many different types of money managers and financial advisors who can guide you as you learn how to handle your money. Some are associated with non-profits; others are related to financial institutions and investment brokerages. The non-profits typically have very nominal fees (if any at all).
While the other entities may also not charge, there may be costs incorporated in any investments they make on your behalf. It’s a good idea not to enter into any agreement with a money manager until you feel you have a transparent view of potential costs.
How Do I Balance My Budget with Self-Reward?
It’s essential to find ways to reward yourself, especially if you’re putting in the hard work to manage your finances in other parts of your life. Being fiscally responsible does not mean giving up your creature comforts; it just means being smart about how you spend your recreational dollars.
Add It to Your Budget
One mistake many people make is thinking that rewards are separate from your budget. Part of keeping a detailed budget is trying to account for all your expenses, including recreational activities.
Having your rewards in your budget allows you to enjoy your experience twice-over. Not only will you enjoy your activities – such as drinks with friends, new art from South Congress, etc. – you will also be secure in the knowledge that you won’t have to sweat paying for that experience somewhere down the road.
Not every reward needs to be treated as a spur-of-the-moment expense. If there’s something that you just have to have, saving up over several paychecks can allow you to snag the object of your desire without taking on credit card debt. When it comes to to the practice of money management, patience outweighs splurging. Nothing is more guilt-free than an all-cash transaction.
Find Low-Cost Alternatives
Just because you’re permitting yourself to indulge doesn’t mean you have to choose the most expensive option. Sometimes, the difference between rewarding yourself and spending irresponsibly is finding cheaper alternatives for what you already plan to do.
For example, consider moving that end-of-the-week happy hour to someone’s condo. Bringing your beverages ensures that you will still have your drink of choice while spending a fraction of what you might on a three-hour bar crawl. Likewise, staying in and renting a movie will often be much cheaper than paying menu prices at your local dine-in movie theater.
How Should Investments Play into My Money Management Plan?
Plenty of financial gurus suggest that you should never invest your money until you’re debt-free. Admittedly, this approach can work for some consumers. If you are diligent in your spending and have a concrete time frame for completing your car or student loan payments, you may consider holding off investing your money until then.
However, if your money management plan means paying down debt over the years - or even decades - this plan also means putting off your investment for the future indefinitely. Then you run the risk of waking up one day realizing it’s too late to get any kind of investment program up and running. Remember that any amount put aside for investments to pay for college or retirement will make a difference over time.
What Are the Benefits of Automatic Paycheck Deductions?
When it comes to money management, you will never miss what you did not see in the first place. When funds go directly to the desired accounts and bill-pays, there is no chance they can be spent on unbudgeted items. That is why it is crucial to include savings when setting up automatic deductions - that way, the funds go directly into your financial reserves without offering the temptation to spend them along the way.
When it comes to budgeting, consumers should pay themselves first before paying for discretionary items. Some people even find it useful to maintain a savings account or checking account at a separate financial institution or credit union. This can add an extra level of protection for your savings or rainy day funds.
How Can I Best Manage Bonuses, Tax Returns, and Other Financial Windfalls?
As you learn how to manage your money, you’ll also learn about delayed gratification. You should never spend your windfall funds before receiving them. Remember that some windfalls also come with a tax bill, and the gross amount you’re due will be much higher than its net.
When the extra money is in hand, and you have a definite knowledge of how much of it is yours to keep, take care of items you may have been putting off. This means things like medical procedures, new tires for the car, or air conditioning maintenance for your home. If your money management plan is working well, this may also be an excellent time for a pre-budgeted treat such as dinner out, movie night, or a road trip.
Do I Need to Get My Partner Involved With My Budget?
For many people, the temptation with money management might be to go it alone, especially if you and your partner keep separate finances. After all, why should someone have to adjust to your new spending habits?
In reality, it’s crucial to have the support of your partner. If they do not buy into – or at least understand – the financial goals and budgeting strategies you’ve set for yourself, your program is likely doomed to fail.
Make sure to schedule regular check-in points with your partner. You should also make sure to let them in on the discussions as to how the discretionary funds can be spent – the fun part of the money management adventure. By promoting this inclusiveness, everyone knows what the score is and will be less likely to put you in situations where you are tempted to step outside your budget.
What Are the Steps to Building a Budget?
Now that you’ve decided to make your life a budgeted one, here are the first three things you need to do:
- Talk it over with your partner and make sure they understand your financial goals.
- Make a full accounting of your assets, debts, and monthly spending.
- Meet with a money management professional to get valuable, outside input from an impartial expert.
Cutting down your expenses is like breaking any other bad habit: if you try to go “cold turkey” too quickly, you’re doomed to fail. Breaking your money management process into these steps will increase your accountability and give you simple, detailed steps to improve your finances.
Learning to manage your money - from paychecks to bills to long-term expenses - is not an easy process. But whether you follow our steps or find slightly different methods that work for you, these are the questions you will need to answer along the way.