Having money does not always mean having wealth. You must manage money properly for it to become wealthy. Without the concept of wealth, money is merely just an instrument used for the “purchase of more”. It does not provide you an opportunity for self-fulfillment. This is where a clearly defined money management comes into play. If you properly understand the concept of money management, then you can work towards having an income that you can’t outlive while simultaneously using it to fulfill your financial goals and ambitions.
Why is Money Management So Important?
Several factors in the market can eat away a part of your wealth which you have worked so hard to accumulate. Factors such as market volatility, debt, risks, inflation, and taxes have the potential to eat away at your wealth-generating potential. Money management can be described as a bridge between you and wealth accumulation. It consists of the various disciplinary steps you have to take for developing specific strategies that meet your goals, objectives, values, needs, and most importantly your risk tolerance.
Having good money management skills can dictate your credit score, which in turn can affect the degree of debt you’re carrying. However, many individuals struggle to meet bills, expenses, and payment deadlines, even though they earn more than enough money. This is where good money management skills come in handy.
Improving Your Money Management Skills – Some Tips
Preparing a Budget
The process of preparing a budget may appear tedious to say the least, as the process involves listing your expenses and making sure everything is in order. However, you’ll have to prepare a budget if you’re bad at managing money. A good practice of budgeting involves going back to your older bank statements or checkbooks to assess your past expenditure. You’ll then get a clear view of how much money you have wasted on things that you weren’t properly aware of. You should focus on the value that budgeting will provide will add to your money management skills rather than focusing on the process itself.
Track your Spending
Simply preparing a budget and forgetting about it won’t help to advance your money management skills. Instead, you should refer to it frequently throughout the month when you’re making any purchase decision. To properly keep track of your spending habit, you should update your budget as you move along.
You’ll be surprised how small purchases over a considerable period can add up and force you to overspend your budget. Thus, you should always track your spending habits. Maintain a spending journal to write your purchases and save purchase receipts. Identify and categorize those areas where you think you’re struggling to keep your spending habits in check.
Limit your Credit Card Purchasing Habits
Credit cards when used responsibly can help individuals make some important payments and purchases. However, if you have a bad spending habit, you should avoid the use of credit cards as much as possible. The urge of turning to your credit cards when you’re out of funds can be a difficult one to resist. However, resisting this urge will prevent you from making purchases that you won’t be able to afford in the long run. This is especially applicable for items that you don’t necessarily need, such as many luxury items.
Protecting Against Risks
Your risk exposure will increase as you accumulate more wealth. Anyone of these risks can have devastating consequences on the wealth you’ve built up. Luckily a concrete money management plan can help you prepare for the unexpected. For protecting yourself against such risks, you need to prepare a money management plan which includes provisions for dealing with unexpected health issues, accidents, unexpected repairs and maintenance, any upkeep costs of new assets, just to name a few.
Avoid Any New Monthly Bills That Are Recurring
You may be eligible for a loan based on your income level or your credit score. However, it doesn’t mean that you should avail it. There’s a popular misconception among people that banks don’t approve credit cards for individuals who can’t afford them. In actuality, the bank makes this decision based on an individual’s reported income, as well as the debt included in their credit report. This does not take into consideration any other payments that the individual might be making, which can prevent them from making credit card payments on time. You should only use the credit card when you’re sure that you can afford the monthly payments after considering your income level as well as other existing financial obligations.
Preparing an Emergency Fund
Preparing an emergency fund can be considered as a key component of any money management plan and is a necessity in these days and age. It’s a powerful tool that you can use to stay away from adding to your already existing debt. Depending on the country you live in, your emergency fund must contain 3 to 6 months’ worth of your household expenditure. You shouldn’t use your emergency fund for incidental expenses, only accessing it only when you’re in a dire financial situation where you don’t want to run up a credit card balance. Safe liquid options such as high-interest savings accounts or money market funds are good things to include in your emergency fund.
The success of achieving your long term goals depends largely on effective money management. These goals can include milestones in your life such as buying your first home or starting your family. It is seen as a major life skill that one needs to be financially and mentally secure in the long run.