How To Manage Your Money

How to manage your money?

Good question.

Many people want to improve the status of their financial situation. What this looks like varies from person to person.

But stretching your dollar a little further or saving a little more are things most people want.

If you want to live a more financially liberating life, you first need to implement a strategy to manage your finances.  

People tend to be intimidated by managing their money because they may feel like finances aren’t their “thing”.

The facts are learning how to manage your money does not have to be an overwhelming task.

Your finances are yours. No one else’s. So it is important to be proactive instead of reactive.

Those who are reactive to their finances tend to be surprised at how much they spent in a given week or month. Or they are thrown off guard by a bill when it comes in the mail.

Those who are proactive stay in front of their financial situation, limiting surprises. 

Sometimes being proactive means knowing when to seek a financial advisor to help navigate your personal financial situation.

But how can you be proactive on your own? Where do you start? Here are 7 things you can do to learn how to manage your finances more effectively.

1.Review Your Debt

So maybe you took out some students loans or perhaps a car loan. Or maybe you opened a credit card account or even line of credit at your favorite retail store.

All of these items represents debt. Whether you consider them “good” debt or “bad” debt, debt is still debt and you should have a handle on them sooner than later.

Sometimes, it can be easy to get caught up in the day to day grind of life that you kind of forget about your debt. You make the minimum payments and you believe that’s the best thing to do. Right?

Wrong.

If you want to know how to manage your money, you need to look at all of your credit cards and/or debt statements. Understand what your interest rate is and how they are applied to your payments.

100% of your payments do not go towards paying down your debt. In fact, you could be in a situation where most of your payments are going towards interest.

Let’s take an example. Let’s say Amber has $40,000 in student loan debt. Her effective interest rate is 6%.

She chooses to make the minimum payment every month, which is $220. Student loan debt typically compounds interest daily. Meaning her principal of $40,000 is charged interest every day and adds to the amount she owes.

But how much of her $220 payment goes towards her principal balance of $40,000?

The answer is $22.74.

$40,000 is first multiplied by the 6% interest rate which equals $2,400. Because interest is compounded daily on student loan debt, $2,400 would then be divided by 365 (days in a year) and then multiplied by days in the previous month, which let’s assume is 30 days.

Amber would be charged $197.26 in interest. Leaving only $22.74 going towards her $40,000 of the original debt. (($40,000 x 6%) / 365)) x 30 days = $197.26 in interest.

This exercise is applied month after month, slowly over time until the debt is 100% paid. By the end of her repayment period, it is likely Amber paid close to double the amount she owed!

Solution: Pay more than the minimum on all of your debt. Lenders want to make as much money as possible. So they purposely set minimum payments really low. They also know that people would be willing to borrow more if they see how low their minimum is. Don’t fall victim to this trap. Take control by looking at your statements, knowing your interest rates and paying more than the minimum payment.

2. Save an Emergency Fund

A necessary step to manage your money is saving an emergency fund. Things happen, life happens and you should be financially prepared.

Most Americans live paycheck to paycheck, leaving little wiggle room for emergencies to happen. And when the inevitable emergency does occur, these individuals find themselves using credit cards or other forms of debt to cope. Avoid this!

Solution: Save at least 6 months worth of expenses. This might take a while but very worth it.

Apart of being financially free is having peace of mind. Emergency situations always seem to happen at the most inconvenient time. But it can be made easier with some financial support.

3. Start Budgeting

If you want to effectively know how to manage your money, budgeting is a must! Most people have an idea of what a budget is. A budget is an estimate of earnings and spending for a set period of time. The shorter the period of time, the easier it is to predict income and expenses.

Set a Financial Goal

The first step in budgeting is to set a goal. What are your values and philosophies when it comes to money? What do you want to accomplish with your money? Do you want to save more? Save for a specific thing? Your budget should be aligned with your goals and values.

Review Your Income and Expenses

The next step would be to review your previous months’ income and expenses. How much money are you bringing in and spending out currently?

The money that is deposited in your account is your “take-home” pay. It does not include money withheld for taxes, aka gross pay. Because your gross pay is not 100% paid to you, don’t include any withheld portion of it in your budget.

Account for all of your expenses. Review your bank statements, credit card statements, and receipts. Gain a clear understanding of where your money is going. You’ll be surprised by how much the small expenses add up. A daily cup of coffee can easily total $200 per month!

Create a Budget

Your budget is your plan for your money. It directs your spending and gives you more clarity on what should be left over. Your budget should always be designed for you to spend less than what you earn. You don’t want to plan to put yourself in a spending deficit, where acquiring debt would be necessary.

If you find it difficult to keep your monthly expenses within your income, cut some expenses! Skip out on buying a coffee everything and make your own at home. Bring lunch most days. Cancel that movie subscription or shop around for more affordable car insurance. You know your expenses best. Take control and decide which expenses can be reduced or cut entirely.

Pay Yourself First!

“Pay yourself first” is a popular saying in personal finance that means to automatically route money you earn to your savings account. Saving is an important part in mastering how to manage your money.

Once you have saved enough to cover 6 months of expenses, you can start saving towards other goals you have, like buying a new car or paying off debt.

4. Pay Your Bills On Time

Paying your bills on time allows you to take control of your financial life. A part of managing your money is staying on top of all your financial obligations and adhering to deadlines.

Paying your bills on time reduces your financial stress and increases your credit score. No longer do you have to wonder or worry if your bills are paid because you know.

One way to ensure your bills are paid on time is by signing up for auto pay. Most vendors offer this service free of charge and make it flexible enough for you to choose the amount and date of payment.

If you don’t want your bills auto drafted from your account, you need to schedule time every month to manually pay your bills. Make sure you choose a time respective of all deadlines.

Also, keep in mind the amount of time it might take for a vendor to receive a payment. It’s a good idea to pay bills at least a few days before the due date to give the transaction some time to clear.

Paying your bills on time prevents you from paying unnecessary late fees which can add up quickly over time. Also, vendors will report your good payment habits to the credit bureaus which will boost your credit score.

5. Understand Your Credit Report

Knowing why you should pay your bills on time is the perfect segue to why you should understand your credit report. If you have ever applied for a loan (i.e. credit card, student loan, mortgage, store credit, etc), then you have a credit report.

Your credit report is important because lenders review this to decide if they will extend credit to you for things like a house or car.

Your credit report is not only seen by potential lenders, but also future employers, landlords, and government agencies.

Credit reports show how many loans you currently have and their balances, late payments you’ve made, credit history length and more. All of these factors come together to produce a credit score.

Generally, scores above 750 are considered excellent and scores below 650 are considered poor.

You should be aware of your credit score because it helps you time purchase decisions.

For example, every time you apply for a new line of credit, your credit score drops. So if you were on the market for a house, the bank would offer you a higher interest based on your reduced credit score.

The good news is that your credit score often fluctuates. So a dip in score can quickly bounce back with positive reinforcement. Knowing something like this, you might decide to wait to apply for a new credit card until you have a house loan or wait longer before applying for mortgages.  

6. Plan for the Future

Everyone wants to retire one day or at least have the means to retire. Which is why investing in retirement should be a part of managing your money.

You should dedicate some portion of your income towards retirement. Even if it’s just a little bit. A little now can make a huge difference later.

You don’t have to save towards retirement to invest. You could have other investment accounts that produce returns higher than your average savings accounts. This is how the rich get richer.

By always thinking beyond the current day or month, you set yourself up to be financially free in the future.

7. Monitor Your Money

Ok, so you’ve implemented everything in this list.

Now what?

Well, in order to stay on track you need to periodically “check in” to your finances. Are you staying within budget? Do you need to adjust your budget to reflect higher/lower income? Has your savings account grown? Were you able to make a dent on your loans? How has your credit report changed?

These are all things you want to be mindful of as time goes on. If you see you are on track with your goals, then great! Keep up the good work. If not, maybe you need to tweak some of your spending habits and give yourself more time to accomplish your goals.

What’s Next

Learning how to manage your money is, unfortunately, not a subject they teach in school. For this reason, many people don’t have a plan for their money and instead, haphazardly spend more than what they earn.

The truth is, you don’t need a finance degree to know how to manage your money. With these simple tips, you can take control of your finances today and in the future.