Managing money wisely is not as complicated as you think – but it can be quite tedious. Maintaining a healthy level of finances is the same as keeping yourself physically fit. Just because you achieved your ideal weight, you will cease making an effort to live a healthy lifestyle. It is a continuous endeavor that will never stop. Of course, once you have reached your goal, maintaining it will not be as difficult as the effort you had to exert previously. But the bottom line is, you still need to exert effort.
Some people have used financial management as a way out of debt. Most people have used it to improve their financial situation. The reason for managing money wisely is not really important as long as you are doing it. Regardless of your situation in life, it will help you take your money to the next level.
According to an article from MarketWatch.com, consumers are starting to feel more confident about their money. Data reveal that they are beginning to increase their spending in non-essential expenses like entertainment and travel. While there is nothing wrong with feeling confident about your money, it should be approached with caution. The increase in spending should be done with money management in mind. Although consumers may be more financially abundant, they should increase their spending in accordance with their knowledge of their financial position. Without financial management, this would be hard to determine. The danger lies in spending too much and getting used to it. When your income is suddenly compromised, you might find yourself unable to cope with the changes that you need to implement to keep your finances from sinking.
Three concepts you should know to manage your money well
The key to keeping your finances in top shape is to manage it smartly. According to an article published on USAToday.com, making more money is the key to having a high credit score. A credit score is one of the indications of a strong financial position. Earning more is not the way to improve it. The best way is to start managing money wisely.
Some people feel overwhelmed by this task. However, it is actually not complicated. It can be tedious to maintain a good financial position but it is not a complex concept to understand. In fact, there are only a couple of financial thoughts that you need to master in order to manage your finances well. Here are three of the most important.
Interest. Admittedly, this is one of the most confusing for most consumers. For a beginner, it seems complicated but once you get a general idea, it can help you make smart decisions about your money. The interest is important on two financial fronts. One is your debt. You need to understand how this affects the amount of debt that you owe. If you have a high-interest debt like a credit card, you might end up paying a lot more than what you actually used the credit for – just because of the interest.
The interest is also something that you can use to your advantage – specifically when investing is involved. Investing is the best way to make your money work for you. When you place your money in profitable investments, it earns compound interest. That means the amount you invested earns interest and even the accumulated interest will help you earn more. If you choose the right investments, that can really help you grow your finances – even without doing anything!
Budgeting. The next concept that you need to master is budgeting. This is probably the most direct tool that will help in managing money wisely. In fact, if you want to achieve financial independence, this is one of the first habits that you should learn. A budget plan monitors your income and the various expenses that it funds. It allows you to control and manage where your income will be spent. If you need to add an expense, you can easily see the current categories that you are spending on. A budget plan will allow you to identify what expenses to sacrifice in order to make way for a new one.
Current numbers. Finally, you need to master your own financial position. No matter how sophisticated your budget plan is and even if you perfectly understand the concept of interest rates, it will be for nothing if you do not know your finances. You need to keep your financial knowledge current so you can update your budget plan. Not only that, you can use this knowledge to help you decide if you can afford to get new credit or not. It will also allow you to make the right decisions about your investments. The current numbers involve not just your own financial number but also that of the market. You do not have to be a financial expert but you should at least know when the interest goes up or down. That way, you can take advantage of it. For instance, late last year, it was reported that the Federal Reserve will raise interest rates. That means the rest of the financial institutions will follow. If you have this knowledge, you should start to be aggressive in paying off your high-interest debts.
These three are the important concepts that you need to consider while managing money wisely. There may be other important financial ideas to learn but that would depend on your own financial goals.
Why is it important to manage your finances
It is important to manage your money well because you use it on practically everything. While we do not want to be materialistic, your finances play an important role in this consumerist society. This is the main reason why you need to manage it well. Here are the specific reasons why you need to boost your financial management efforts.
It helps you make smart decisions. Financial management involves a lot of decision-making. The more informed decisions you make, the better the outcome. Having a direct hand in managing your finances makes it easier for you to make informed and smart decisions precisely because you know your financial situation. When you know how much you have in your budget after sending out your monthly payments, you will know how much you can allot for your financial goals. It gives you an idea about the amount that you need to set aside for your retirement fund, reserves and even for your annual vacation.
It allows you to avoid borrowing too much debt. According to the data from ValuePenguin.com, the average American Household Debt is currently as $16,048 – if you only include the households that are in debt. If you include all the households in the country, the average debt is $5,700. The current outstanding debt is $3.4 trillion with $929 billion specifically borrowed through revolving credit – the most common being credit card debt. 38.1% of households have some form of credit card debt and this high-interest debt is what can pull you down. If you fail in managing money wisely, all of these debts might go unnoticed. Not only that, poor financial management usually ends up compromising your savings. When you do not have savings, one emergency can push your finances over the edge and into a lot of debt.
It lowers the risk of living from paycheck to paycheck. If you learn how to manage your money well, you can also avoid living from one paycheck to the other. You can budget your money well so you are not living up to your income limit. It is wise to live below your means because that leaves you with extra money to use on your financial goals or even emergencies.
It keeps financial stress from ruining your life. When you are managing money wisely, that means you are in full control of your money. Being in full control will help eliminate or at least lower financial stress. Sometimes, we are stressed about something because we are uncertain about how it will end up. Having a full knowledge of your finances and being in full control will help you lower this uncertainty.
It builds financial confidence. Apart from lowering stress, you will also feel more confident about your finances. This is a great trait to have when you are investing your money. It allows you to be braver in taking high-risk investments that will get you bigger returns.
All of these make managing money wisely very important. You can significantly increase the opportunities for financial growth because you have a firm understanding of your finances.
Common questions about managing money
Question: What does managing money mean?
Answer: This means you understand your financial position and you are organized in all your financial transactions. This keeps you from falling short on your budget and assures that important expenses are met. You are aware of every transaction and you are making smart financial decisions about it.
Question: How should I manage money while self-employed?
Answer: Managing your finances while self-employed is tougher because of your irregular income. The danger is budgeting for the lean months – which is usually the period when you do not have a high income coming in. To keep your household running, it might be best to base your budget on the income you get from the lean months. It is also best to give your emergency fund a boost to sustain your expenses when the income is quite low.
Question: Why is managing money an important skill?
Answer: This will help you avoid a lot of financial problems like wrong investment or credit decisions. It helps you reach your financial goals. More importantly, it helps you avoid incurring too much debt.
Question: How can I start managing money wisely?
Answer: You need to start by getting the tools that will help you keep track of your finances. A budget plan is a great way to start. Soon, you can add a spending plan, retirement plan, and a portfolio. These should cover the important aspects of your finances that you need to monitor.
Question: Where can I learn to manage money?
Answer: There are actually a lot of articles and self-help books that can give you the basic knowledge of managing money wisely. The challenge is in identifying which of them suits your purposes. It is best to know your financial goals first so you can choose the right advice that will help you reach your goals.