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Getting your finances in order will make your life easier in many ways. This is why it’s important to learn how to manage your money the right way. The basics of money management are pretty straightforward. Getting them down will help you make good financial decisions.
According to CNN, 40 percent of Americans can’t come up with $400 to cover an emergency. If you’re one of those people, learning how to manage your money effectively will go a long way toward giving you peace of mind. Take the proper steps to get your finances in order and you’ll be able to handle unexpected emergencies without stressing out.
What Is the Best Way To Manage Your Money?
If you’re having a difficult time figuring out how to manage your money, you’re not alone. Many people struggle with getting a handle on their finances and learning to live beyond a paycheck-to-paycheck existence.
Getting down the basics of personal finance will help you become less overwhelmed. When you’re first starting out, don’t get too bogged down with all the details. Here are the three most important areas to focus on when it comes to managing your money.
Spend Less Than You Earn
This one may seem obvious at first but it’s anything but. With the rise in credit card debt and countless other financial products, it’s easy to get swept up and make bad decisions. The first skill you need to master is to spend less than you earn every paycheck.
The total of all of your bills and monthly spending needs to be less than what gets deposited every paycheck into your account by your employer. If you spend more than you earn, it won’t be long before you start struggling financially.
If you have a hard time keeping your spending on track, consider using cash only for any spending besides your monthly bills such as utilities and rent. Just withdraw money from your bank account every payday and use it to pay for everything else such as groceries, entertainment, and so on. When it’s gone, it’s gone.
You can manage your money a lot easier if you’re only spending what you bring in every month. This means you’re not going into debt to pay for everyday expenses. If you’re struggling to spend only what you make, you’ll need to make some tough decisions and cut out expenses.
Pay Yourself First
Getting into the habit of paying yourself first is one of the most important skills for managing your money. This doesn’t have to be difficult to do. Set up a regular deposit from your checking account into a savings account every payday. You can start with as little as $10 or $25.
The most important part is building a solid habit of saving money. As you learn more about how to manage your money, you can increase the amount. Save that money before you spend anything on bills, utilities, necessities, and so on.
Start an Emergency Fund
Having an emergency fund can be a life-saver. This acts as a safety net in case the unexpected hits and you’re faced with unpredicted expenses. Don’t put off starting an emergency fund or think you don’t need one.
Using a credit card as an emergency fund is a recipe for disaster. Even if you tell yourself you’ll pay it off next month, something else can always happen to derail you. Having the money ready to cover you in an emergency fund is the best hedge against financial mayhem.
You can start by building a mini emergency fund and adding any extra money to it as you can. Aim to have a baby emergency fund of at least $1,000. Work toward stashing away enough to cover three months of expenses.
How To Manage Your Money Wisely for the Long Term
To manage your money wisely for the long term, you need to establish good financial habits. Working on spending less than you earn, paying yourself first, and starting an emergency fund will set you on the right path.
However, those three steps only scratch the surface of what’s possible. Getting your finances in order will pay dividends in less stress and more money. Learn how to manage your money so you don’t have to worry about unexpected expenses. Here are few key money management tips to get you started.
Crate a Budget
Budgets get a bad rap but they’re really just a spending plan. When you’re first starting to manage your money, putting together a budget will help you spend your money wisely. This doesn’t have to be anything fancy. Start with a basic budget and customize it from there.
To create an effective budget, you need to know where your money is going. Pull up your credit and debit card statements for the last three months. Also, check your checking and savings accounts for any payments or direct debits. This will form the basis for your budget.
For each month of spending, add up all your spending and put it in general categories – mortgage, car payment, utilities, groceries, entertainment, and so on. This will form the basis for your budget. In a separate column, add up all of your income for each month. Now you know how much you make and how much you spend. Make sure you don’t spend more than you earn.
Now that you have your categories, use them to create a budget that divies up your paycheck accordingly. Add a line item for saving (or paying yourself first). Don’t forget to account for irregular expenses such as home or auto insurance.
If your spending more than you earn, this should be a wake up call. Look for ways to cut back and save money. Looking for ideas? Here are six easy ways to save money every month.
Once you have your budget the way you want it, start using it. Track your expenses and compare them against the amount allocated for each budget category. Budgeting takes time so don’t dispair if you don’t get it right the first time. Tweak your budget until it fits your situation.
Separate Your Spending and Savings Accounts
Believe it or not, separating your spending and savings accounts makes a huge difference. Have you heard of the saying, “out of sight, out of mind”? Never is this more true than when it comes to your money.
Putting money aside can be difficult but having it go into a separate account makes it a little easier. This way it’s separate from the money you have earmarked for everyday expenses. If you’re trying to save for a big goal such as a car, open an account in a separate bank. While this may seem extreme, it works really well since you don’t see the money on a daily basis.
This is the way we have our money set up and it has worked well for us. We have a separate account for our emergency fund in the same bank as our checking account. For money earmarked for bigger goals, we have them in a separate bank account. We tend to forget it’s there and just keep adding to it every month.
Another useful trick is to name your accounts based on how you use them. This only takes a minute and can be done by going into the settings section of your bank account. Name your accounts based on usage or goals – spending, emergency fund, going to Hawaii, honeymoon, etc. This way, you’re reminded of their purpose every time you log in to your bank.
H3 Save for Retirement
The earlier you start saving for retirement, the better. And yet, this is something many people postpone until it’s too late. Even if you start putting away just 5 percent of your paycheck for retirement, it’s a step in the right direction.
Bump this up by at least 1 percent annually. If you get an employer match, make sure to contribute at last enough to get the match. Dont miss out on free money!
Studies show that once you start saving money for retirement, you’ll continue doing so by inertia. This is why some retirement plans are automatically enrolling people when they start a new job. The earlier you start saving for retirement, the better. It’ll allow your money to grow thanks to the magic of compound interest.
Pay Off Debt
Paying off your debt may seem like a distant goal on the horizon but don’t despair. There’s no need to commit to lifelong debt. Learning how to manage your money the right way means making a plan to pay off debt.
There are many different ways to tackle your loans so do what works best for you. However, there’s something to be said about the psyschological effect of paying off your lowest balance first. This will give you a boost and let you celebrate a small win.
Use a visual debt tracker to help you celebrate each debt payment milstone. You can write out a list of all of your debts and cross them off as you go. Or you can create a graph of your total debt and fill in a square every time you pay off $500 or $1,000 in debt. If you’re working to pay off your mortgage, you can draw a picture of your house and fill in a piece every time you make a large payment.
When it comes to paying off debt, staying motivated is key. The first few weeks are going to be exciting as you tackle your debt head on. However, with time, your excitement will wear down as you settle in to the reality of debt payoff. Find ways to motivate yourself and keep going until all of your debt is gone. You’ll be so glad you did!
Cut Out Unnecessary Expenses
An easy way to find extra money in your budget to put toward paying off debt is by cutting unnecessary expenses. Look at your budget and identify two to three categories where you can reduce your spending.
Usually, your grocery bill offers prime opportunity for cutbacks without sacraficing quality or healthy eating. If you’re looking for some tips on how to save money on groceries, check out this post on how we eat organic as a family of four on $125/week.
Other great areas for cutting back include cutting cable, saving on your cell phone service, lowering your home and auto insurance, and much more. The important thing to remember is that there are very few fixed expenses. There’s usually a cheaper alternative to most line items in your budget.
Learning to manage your money effectively means spending on what matters to you and cutting back on everything else. By focusing on the areas that truly bring you joy, you’ll get the most bang for your buck. For example, we love traveling so we make it a priority. Here’s how we stretch our money and make the most of our traveling budget.
The Importance of Money Management
When it comes to being effective at how you manage your money, making choices is key. You have to make some tough decisions on what you can and can’t afford. Focus your spending on what truly brings you joy and cut out the rest.
Don’t fritter away your hard-earned dollars on daily lattes at Starbucks or lunches out if your goal is to travel the world. Put your money where you priorities lie and cut back on everything else. This will ensure you manage your money in a way that makes you happy and gives you peace of mind.
How do you focus your spending? What are some important spending priorities to you? Share in the comments.
