In order to develop better money management skills, you have to understand the different ways that money can be used in your life. Since most of us are living with limited resources, this knowledge will help us put the money where it is needed the most. The way you handle your finances will actually vary – depending on your priorities. Your priorities will be defined by the type of lifestyle that you want to live – both at present and in the future.
Money management is an important skill to develop because it helps you avoid a lot of financial mistakes. By being good at managing your money, you can stay away from debt. Not only that, you can plan to use your limited financial resources to grow your net worth.
What you have to realize is that money, in itself, is just a tool that can either make or break your dream lifestyle. Its specific role in your life will depend on how you decide to use money.
4 uses of money and how to do each one smartly
Money can be utilized in many ways but we can sum it up into 4 simple acts: spending, saving, investing and giving. Let us go through them one by one so we can discuss how to be smart with each of these uses.
Spending. Let us start with the real reason why we are earning money – to spend it. We live in a consumerist society. That means whatever we need to survive, we need to pay for. Although there are extremists out there who are trying to live “off the grid,” they still need to spend money somehow. In general, Americans are pretty good at spending. In fact, you can go on to say that we are a nation of spenders. We love to spend even if it means we will use credit just to buy what we need. This, of course, is not the smart way to spend. To be a smart spender means you have to use money that you have. At least, you do not go beyond what you will earn each month. According to an article on Mintel.com, consumer confidence is already high. That means people are more inclined to spend more. The article mentioned that the total sales forecast in the next five years is expected to grow by 21.9%. The greatest increase will be in categories that are deemed to be non-essentials like eating out or going on vacations. There is nothing wrong about enjoying your money but make sure that you will spend only on what you think will improve your life. Try not to be wasteful of your money so you can use it on the other three categories in this list.
Saving. The second way you can use money is by saving it. A lot of people know that this is important but not everyone is actually doing it. People may be restricting themselves from spending a lot but that does not mean they are increasing their savings. An article from USAToday.com has a theory about why this is so. It seems like people are confused about not spending and saving. These two concepts are not the same. Even if you are restricting yourself, that does not mean you are already saving. You need to convert the money you do not spend and save it in an account. For instance, if you bought an item with a $100 discount, that should not be considered actual savings until you put it in a savings account. This should be your mindset if you want to be smart about your savings.
Investing. The third way that you can use money is by investing it. If you are looking for a way to make your money grow, this is it. This is the proactive way that you can make your money earn for you. While saving will help, the interest rate that you will earn is very small compared to what you will earn through an investment account. Some people, however, think that they cannot start investing because they do not have the money If you think that investing is only for those with a lot of money, you are wrong. You can use money to invest even if you only have a little of it. Do not let the amount hinder you from the benefits of investing. Here is a video that will help you find the finances that will help you get started on your investments.
Giving. The final way that you can use money is to give it away. Among the three, this is one use of money that will not benefit you. At least, it will not feel like it is benefiting you financially. Giving is when you share your blessing with people who need it the most. This can be charities, a homeless person that you pass by each day, a relative who is in need – these are the recipients of this money. If you think that with all the financial difficulties today people will be less likely to give away money, think again. According to CNN.com, nearly $360 billion was given to charity by Americans last year. This data was compiled by the Giving USA Foundation for the year 2014. This was noted to be the largest donation in the past 60 years. It was even bigger than the pre-recession period that only amounted to $355.17 billion (2007). Although you may think that giving will not benefit you, that is incorrect. It will be beneficial to you in more ways than money can ever be. The feeling of being able to help someone through their toughest time is something that you can never put a price on. That in itself, makes it a very smart way to spend your money.
Rules that will help you manage money wisely
The way you use money will say a lot about your personality and the type of lifestyle that you want to live. Regardless of how you use it or what you prioritize among the 4 uses, you need to make a commitment to be smart about all your financial decisions. To help you manage your money wisely, here are 4 rules that you should always follow.
- Always have a plan. It is difficult to make a smart decision if you do not have a plan. This is true regardless of the decision that you will make. If you have a financial plan, that means you know your current financial situation and where you want your decision to take you. This will ensure that your decision is aligned with your goals.
- Know the why in every decision. While impulse decisions can sometimes work, this could lead you to make mistakes. If you do not have the answer to your why, it can lead you to make a mistake. The purpose of your decision will help you determine if it is the right one or not.
- Consult your numbers. In any decision to use the money, you should always consult the numbers. This refers to your income and its relationship to your expenses. The rule is to always keep your expenses below your income. This is where budgeting can really help.
- Use your head and your heart. Finally, you need to learn how balance making decisions with your head and your heart. The problem with using only your head is you get to make callous decisions. It may be logical but it is the decisions from the heart that will make you happy with your choice. Merely relying on your heart might make your reckless so it is important to find the middle ground when making financial decisions.
If you want to use money wisely, it is important for you to consider the effect that it has in your life. While the short term effect is the main consideration, you should never ignore the long term effects.