Money is like a kid. It’s incapable of managing itself – think of how your kids would’ve turned out if they were allowed to make their own decisions, without any guidance or discipline from you. Money is managed the same way. You have to apply structure and discipline to how it is managed, and you have to tend to it on a regular basis.
Money management goes beyond just knowledge and skills, it involves good practices which incorporate the right attitude towards money. In order to manage money properly, it is necessary to understand the basic principles of management.
Spend less than you earn
This principle is at the core of good money management. It can make or break you financially. It’s how people who do not get a fat pay check at the end of every month can achieve their life goals. Spending less than you earn enables you to save, and what you save can be invested. This makes you not to worry about money, because you have enough savings to pay the bills every month and handle any emergencies. Persons who spend more than they earn go further into debt and thus increase their stress level when it is time to pay the bills.
This principle also applies to the wealthy, because if they live beyond their means, they will eventually end up losing their riches.
If you’re currently spending more than you earn, you are asking for trouble. Rather than building wealth, you’re digging yourself deeper into debt.
You need to do more than simply earn money if you want to stand a chance at becoming wealthy. Most importantly, you need to hold onto the money you earn and then grow it. You grow it by buying assets (things that generate money for you) and not liabilities (things that take away money from your pocket).
You need to invest your money in things that offer the potential for profitable returns through interests and dividends from stocks, bonds, real estate, or other assets.
It is also important that you stay away from get rich quick schemes, as they are very risky.
Budgeting your expenditures
You can’t manage your money properly if you don’t have a basic understanding of how you spend it. It is necessary that you track your spending and see where your money is currently going. There are some tools that can help you with this.
Once you are able to track how you spend your money, then you can set a realistic budget. Remember whenever you create a budget, that it can change to align itself with your monthly income, expenses and goals.
Plan for retirement
The biggest financial challenge for many persons is saving for retirement, as this is the largest amount of money they will have to save in their lifetime. Saving periodically over a long period of time is the only way to achieve this. But if you start saving early in your career, the task becomes less daunting and more achievable. Also, saving early in one’s career allows you to take full advantage of the power of compound interest.
You have to start now if you want to make saving for retirement a whole lot easier. You are probably coming up with millions of excuses as to why you shouldn’t start now—but the truth is, there will always be an excuse. There will never be a “best time” to start saving for retirement. You will always have to do it against competing priorities.
Earn more money
Earning more money solves a lot of issues. Adding a part-time freelance work to your day job can help bring in some money, which could be used to meet your everyday needs. This allows you to be able to save more money from your day job.
Always Pay in Cash
A mantra I love with regard to money management is “If you can’t pay for it in cash, you can’t afford it”. Living by the mantra is the best way to avoid drowning yourself in credit card debt. Do not make large purchases until you have the money, this will benefit you more in the long run rather than spending the money you don’t have.
Use credit cards with caution
It is always important to remember that credit cards are not the same as cash. Because of their high interest rates and fees, people can easily get into trouble with credit card debt. Endeavour to use credit cards only when necessary, and make sure you always pay the balance every month.
If it ever gets to the point where you can only afford to pay the minimum monthly payment on a credit card, you are in financial trouble and should re-evaluate your situation. If you are not able to pay off your cards every month, then any extra money you have should be paid to the highest interest rate card first.
Be Properly Insured
Insurance is an essential part of money management as it helps curtail unbudgeted expenses from unexpected events, such as: car accident, fire outbreak, burglary, and even death.