Some people mistakenly believe that money management is something that only rich people think about. In December 2015, an article published on LifeHealthPro.com revealed a popular misconception among Americans. Based on the survey done by Allianz Life Insurance Company of North America, 1 out of 3 respondents said that they do not have financial planning resolutions. According to the data, the respondents said that they do not have enough money to worry about it anyway. To them, if you do not have enough money to spare, you do not have to think about managing it.
That is a mistake. Regardless if you have extra money or not, you will always need money management. This is not only for the rich people. Even if there is nothing left from your paycheck, you still need to learn how to manage your finances well. In fact, those who are living from paycheck to paycheck are in dire need of financial management tips. They are the ones who will benefit the most if they know how to manage their money well.
Managing your money encourages you to constantly look at your financial situation. This is the only way that you can figure out what needs to be done in order to improve your financial position.
5 important numbers to pay attention to when managing your money
Money management involves simple concepts. However, most people have trouble with the implementation. After all, when you are managing your finances, you need to make some sacrifices in order to correct the bad practices that you used to do. This is where a lot of people feel the struggle. Some of them succeed while others fail. If you fail, that means you are unable to improve your finances. Without financial management, it is next to impossible to increase your personal net worth.
If you think that the task of managing your money is daunting, there are simple methods that will help. One of them is concentrating on 5 different numbers. While you are encouraged to look at the other aspects of your finances every now and then, these are the important numbers that you really need to monitor on a regular basis.
The first number that you need to monitor is your income. Although you need to consider both your gross and net income, it is the latter that you need to focus on. If you look at your gross income and you base your budget from there, you will always fall short. When it comes to planning your finances, you should only look at your net income. That way, you can base your expenses on the income after taxes and other deductions. You will not fall short as long as you stick to the expenses written in your budget.
Speaking of expenses, that is the other number that you need to focus on during money management. Your income and expenses usually go together. If you have your net income in mind, you can figure out the expenses that you can afford each month. You need to make sure that your expenses is lower than your income. Comparing your income and expenses will allow you to define the type of lifestyle that you can live. If you think that living within your means is enough, that is no longer the case. You need to learn how to live below your means so you have the extra money to spend on the next two important numbers.
Once you have managed your income and expenses properly, the next number that you need to regularly monitor is your debt. This is a part of your finances that is powerful enough to destroy your life in general. It can dictate the job that you need to have and the income you need to earn. It can stop you from spending your money on things that you enjoy. If it gets too high, you need to find a way to pay it off. There are so many options before you. Knowing the debt situation will allow you to choose the right debt relief program. This is the reason why you have to keep your eye on this figure. According to an article published on MoneyManagement.com, consumers have made progress when it comes to managing their debt. At least, this is true for credit card debt. The data came from the 2015 Financial Literacy Survey of the NFCC (National Foundation for Credit Counseling) and NerdWallet. The survey revealed that there is an increase in the number of card holders that carry a balance that is $2,500 and below. People have shown that they no longer carry huge balances in their accounts. That is easier to manage and pay off.
The fourth number that you need to monitor regularly is your savings. There are so many reasons why you need to save and this is why you need to focus on it as well. For one, you have to ensure that your emergency fund is enough to sustain your lifestyle for at least 6 months. Not only that, you have to think about your retirement. The earlier you save for the future, the less you have to contribute each month and the bigger you will get when you retire. There are other saving goals for you to set up and it is important that you set them and monitor your progress.
Finally, you need to monitor your net worth in money management. According to an article published on FinancesOnline.com, keeping track of your net worth is the key to building your wealth. Your net worth includes the different assets that you have. It is not just the cash that you have in your account. It includes even your possessions or properties under your name. Your house, car, furniture and investment are all assets. They add to your financial value. If you want to see if you are improving your finances, you need to monitor this figure. You may think that you are not improving because your income is the same and your savings hardly amount to anything. But if you factor in your home and investments, you may be surprised at the improvements that your finances have gone through.
How financial management can bring you wealth
You may be wondering, how can money management help you build up your finances? After all, most of it is about monitoring your finances. How can that help grow your net worth?
It all boils down to the way financial management skills put your finances in order so you can make better decisions about your money. Here are the 5 effects of managing your money.
You know the current situation of your finances.
This, of course, is thanks to budgeting. One of the basic and probably the most important tool that you will use in money management is a budget plan. This will allow you to monitor most of the numbers mentioned above: income, expenses, debt and savings. Only your net worth will not be included. But if you have this budget plan, you will be aware of your current financial position.
You get to make decisions based on your actual financial position.
Since you are aware of your current financial situation, you get to base your decisions from that. You have a clear idea of how much you can afford when it comes to spending choices. You can also manipulate your expenses so it stays within your monthly cash inflow. Bottom line is, money management allow you to manage your finances like a business. You decisions will not be based on a hunch but actual figures of your financial position.
You have a firm understanding of your financial goals.
People who practice money management are usually in touch with their financial goals. They strive hard to fix their finances so they can improve it and reach more goals. It goes hand in hand. A good financial manager usually has a good grasp of what they want to happen in their future.
You are encouraged to spend less than you earn.
Another effect of managing your money is you are encouraged to live below your means. This gives you the extra money to allocate towards your savings or your debts. Since you live with a budget plan, you can easily identify the expenses that you can let go so you free up funds for your financial targets. The extra money can also be used to invest your money – which is one of the best ways to increase your net worth.
You will strive to educate yourself about your finances.
Finally, money management will instill in you the thirst for financial education. If you really want to manage your finances well, you will research how you can do that. The knowledge that you will get will give you the insight to make smart decisions about your finances.
All of these behavioral changes that money management will instill in you will make wealth building easier.
Of course, these tips are mostly for individuals. If you are looking for tips to help you manage joint finances, here is a video from the Bank of America that will give you money management tips as a couple.