Having an effective money management strategy in place is the first step towards taking charge of one’s finances. It allows you to live comfortably within your means and also helps you to increase your wealth.
1. Create an Emergency Fund
First thing first – it is recommended that you set aside a cash emergency fund that is equivalent to 6 – 12 months’ worth of your expenses. This fund comes in handy when you are in between jobs or for things like an unexpected car break-down, a much needed home improvement or an emergency medical expense. Cash is king at times so be sure to have this in place before proceeding with other financial goals.
2. Set Goals
Your money management goals could be short term, medium term or even long term ones. However, it is advisable to have S.M.A.R.T financial goals. The acronym stands for:
By making sure that your goals have all of these characteristics, you make them more effective. The more specific you are about your goal, the clearer the path you can take to achieve the target.
3. The Balance Sheet: Assets and Liabilities
Knowing what you own and what you owe is critical to understanding the health of your finances.
Assets are categorised into cash/near cash assets (e.g. bank balances, fixed deposit), invested assets (e.g.stocks, unit trusts) and personal use assets (e.g. residential home, car, art collection). Similarly for liabilities, there are short term liabilities (e.g. car loan, credit card) and long term liabilities (e.g. mortgage). Assets minus your liabilities give you your total net worth.
I suggest doing this on an annual basis or when you are about to make large financial decisions. Your total net worth should increase from year to year. You should be increasing your assets(appreciating assets) and decreasing your liabilities in the longer term.
4. Track your income and your spending
In tracking your income, remember to add in your year end bonus and any other monetary inflow e.g. rental income that you receive.
Taking stock of what you spend on is the first step to gaining clarity of your cash flow. Tracking expenses can prove to be challenging as it requires you to be highly meticulous in recording down every expense. To make it easier, you may choose to track expenses above a certain amount say $10.00. Take 4-6 months and track your spending. You could be surprised by where your money has gone to and the potential for you to cut back on unnecessary expenditure and increase your savings. This should be one of your ultimate goals so that you can invest your savings and be financially free.
5. Use Cash Over Credit
It is easy to overspend when using a credit card. If you find that you swipe away with abandon, retire your credit cards and opt instead to an old-fashioned stack of cash. By visiting the ATM at the start of the week and taking out a set sum of money, you can more easily monitor how much you spend during the week.
A budget has two benefits. The first is to forecast what our planned income and expenditure would be if a certain strategy or plan were implemented and the second is to actually compare what is happening with the strategy or plan.
The hardest thing about creating a budget is to actually sit down and work out your expenditure and income. Doing it in real time is far more effective and will keep you motivated, especially if you can save a little on a regular basis which you should be aiming for.
Budgeting is a very useful money management tip. It is not to ‘imprison’ you so keep it flexible…but not too flexible. Keep it up to date. As your expenditure goes down and your income goes up you need to make the corresponding changes to your budget so you can save more.
The above money management tips will keep you focused and centered and make your life a lot easier. They will enable you to control your money and make wise budgeting choices in the future. The trick is to repeat the exercises until they become a lifetime habit.