This article is a guide to money management. Only 39% of U.S. households have enough cash on hand to cover an emergency. This makes many people afraid of having to pay for something they didn’t plan for. But things like this happen all the time. Your roof gets hit by a tree, your child breaks his arm, and your car stops working.
It’s not magic to become one of those people who can handle these things with ease. All that matters is that you use your money carefully and with thought. That means keeping track of how much you spend, knowing how to save for the future, and making smart investments. This Guide to money management will help you to identify the money needs and then solve problems accordingly.
How to take care of your cash
Think about how you feel about money before you pull out a calculator and start adding up numbers.
- Do you think that caring about money will make you rich?
- Do you think that money causes stress and worry?
- Are you worried that there won’t be enough? Or think there will always be?
- Do you know how much of a chance you’re willing to take?
Once you know money needs, you can take steps to make managing it. Tell the truth to yourself. It’s very common to feel bad, confused, and tumultuous feelings about money. You learned these connections as a child by watching how your family talked about, spent, saved, and used money.
Set some goals
Once you are clear about your feelings, it may be easier to tune out the noise and set some goals with a clear head. How you handle your money depends on what you need it for, which means you need to plan. Each person and family will have a different answer.
If you’ll need all of your money soon, the best thing to do is probably to save. But if you have money that you won’t need for a long time, you can put it in the stock market and make money from it. How you balance these two strategies will depend on what you want to do with your money.
When you set your goals, think about all the things you’ll need money for in your life. Writing down all the things you want to do in life, like buying a house, sending your child to college, or going to Tahiti, is a good idea.
Here are some things you might want to ask yourself:
- You want to buy a home, right?
- Need to go back to school or get more training?
- Do you want to save money so your kids can go to college?
- Do you want to go on vacations every year that are fun?
- Want to start your own business?
- Do you need to set up a fund in case of an emergency?
- When would you like to stop working?
Write down every goal you can think of, no matter how big or small. Try to figure out how much money you’ll need for each of these goals. This will give you an idea of all the things you will need over the course of your life. This will help you figure out how to handle your money better.
Make a budget
In order to save money, you need to spend less than you make. Without making a budget, it’s hard to know how much you can spend safely. Your budget will help you decide how to spend your money every day.
The first step in making a budget is to add up everything you spend money on. Be clear and complete.
- Look at the exact amount on each bill and use that to figure out how much you spend on average each month.
- Estimate things you can’t know for sure, but don’t be too low on yourself.
- Make a spreadsheet with all of your numbers so you can see what you’re up against. Some of the numbers will be fixed, while others may change a lot based on how you act.
- Don’t forget to add line items for different kinds of savings, like retirement and college savings, if those are part of your goals.
Once you have your numbers and know how much you can spend, you need to figure out how to balance your spending with your income. There are different ways to do this. You might find that one of the following methods works best for you.
- With zero-based budgeting, every dollar that comes into your account, even savings, goes into a certain basket. This plan lets you see all of your money and makes sure that every dollar is going toward one of your goals.
- With 50/30/20 budgeting, you set aside certain amounts of your income for a few different things. You will use 50% of your income to pay for your needs, 30% to pay for your wants, and 20% to either pay off debt or save.
- Digital tracking is a way to make a budget in which you keep an eye on how much you spend in each category so you can make changes as you go. There are many apps like Mint that can make this (relatively) easy to do.
- If you tend to spend too much, you can stop yourself by only spending cash. At the beginning of the month, take out as much cash as you think you’ll need for things like groceries, gas, and fun, and put it in its own envelope. When the money in each envelope is gone, it’s time to stop spending until the next month.
Make payments on time.
- Managing your money means making sure you pay your bills on time. If you don’t pay your bills, you’ll have to pay late fees, your expenses will pile up until they’re too much to handle, and some bills, like credit cards, could hurt your credit score.
- Also If you want to know if you can pay your bills on time, you need to keep track of how much you will owe and when each month.
- If you know you won’t be able to pay all of your bills, put the most important ones first and cut back on the rest until you’re in a better place. If you know you won’t be able to pay a bill on a certain month, you should talk to your lender or service provider in advance. They might be willing to give you more time to pay, temporarily stop service, or put you on some kind of payment plan.
Set up a fund for emergencies
- If you save up some money, you won’t be in danger in emergency, if someone in your family loses their job.
- The best emergency fund has enough money to cover living costs for three to six months. But it can be very hard to save up that much money.
- Start with an amount you think you can save over time. It could be enough money to cover your expenses for a certain number of months or a set amount, like $10,000, that would help you get through a personal crisis.
- Slow and steady is the way to save up that big amount of money. Keep putting a small amount each month into your savings. Put any extra money you get, like from a bonus or a side job, into your emergency fund. When you no longer need the money you were using to pay down debt, put it in savings instead. You’ll soon be able to sit on a nice cushion.
Pay off your debts.
- Don’t think that you can’t make a good plan for managing your money until you’ve paid off all your debt. Paying off your debts in a steady way should be a key part of your plan for managing your money.
- Most people with debt pay interest rates that are pretty high. It should be a top priority to pay it off if you want to improve your overall financial health.
- In fact, getting out of debt should likely be one of your top goals. That doesn’t mean you should put all of your attention on it and forget about your other goals, but you must pay off your debts steadily and regularly.
- There are different ways to get out of debt. The “debt snowball” method and the “debt avalanche” method are two of the most well-known.
- The debt snowball method “Pay off your debts from smallest to largest”? This gives you quick wins to keep you motivated, but in the long run, you end up paying more (unless the smallest debt has the smallest interest and so on).
- The debt avalanche method “Pay off the debt with the highest interest rate first and then move on to the debts with the lowest interest rates. This saves you money in the long run, but it doesn’t always give you quick wins.
Learn about and take care of your credit
- Understanding your credit profile, or the information that credit reporting agencies keep track of about you, is a key part of keeping track of your finances. The agencies use this information to figure out your credit score, which is an important number that determines whether or not you can get credit to do things like buy a house or start a business.
- If you’ve had trouble paying off your debts in the past, your credit score will probably be low, which will make it harder for you to manage your money. To set yourself up for a strong financial future, you will need to improve your credit score. To do this, you need to keep paying off your debts and not take on any more until your situation gets better.
- As soon as you start to get a handle on your debt, the first thing you should do is ask for your free credit score. This will give you an idea of how far you need to go to get to a point where your score won’t hold you back from making money in the future.
Audit your current financial institutions
- Most likely, the places that handle your investment accounts, like retirement accounts and mutual funds, will charge you fees for the work they do to keep track of your money. It’s important to know what fees you’re paying and decide if they’re too high for how much help you’re getting from the managers.
- Do you think your fees are too high for the amount of money you’re making? Do you feel like you’re getting good help for the money you’re paying? Do you have smart technology to help you keep track of your accounts? Do your accounts get rebalanced automatically when things change in your life?
- If you think you’re being overcharged and not getting enough for your money, look around. There are lots of options in the field of financial management, which is a competitive one.
Make sure you have enough money saved for retirement.
- Putting money away for retirement is a key part of managing your money, since you will need this money at some point in your life. If you work full-time, you probably have access to a retirement plan offered by your employer. You can also invest in your own retirement plan.
- In the United States, retirement plans set up by employers are called 401(k) plans. They are called Registered Pension Plans in Canada (RPP). Your employer sets up a plan where you can put money that you earned before taxes. In many cases, employers will match the amount that employees put in, up to a certain limit.
- People in the U.S. can invest in IRA plans, including Roth IRAs, which let people invest money that has already been taxed. Registered Retirement Savings Plans are what these kinds of plans are called in Canada (RRSP). Most of these plans have limits on how much you can put in (and no matching).
- The earlier you start saving for retirement, the better, because the power of compound interest will help your money grow over time. Don’t worry if you haven’t started yet. Just sign up for a plan as soon as possible and start saving money regularly.
- If you can, sign up for the plan your employer offers and if you can, put in as much as you can. At least as much as your employer will match, if not more. Employer matches are basically free money for your retirement that you can’t afford to leave on the table.
- You can use a retirement calculator to figure out how much you need to put away each month so that you can retire when you want and have the money you need.
Get enough insurance
At first glance, insurance may seem like a waste of money, but it’s an important part of good money management. There is nothing worse for your carefully built financial stability than a real emergency that you don’t have insurance to cover, like a house fire, a medical crisis, the death of the family’s breadwinner, etc.
Check your insurance coverage in the following areas to make sure it’s enough if the worst happens:
Most people need at least one of these types of insurance. Your employer may give you health insurance, dental insurance, short-term and long-term disability insurance, and maybe even a small amount of life insurance. If they don’t, you can buy them on the open market. You might also want to look into other types, like insurance for your pet or your business, if they apply to you.
Learn more about how to invest and handle money.
You might think that investing and taking care of your money well are very hard and complicated tasks. Investing is a whole business, after all, so you might think that those people know a lot more than you do or can understand things you can’t.
Here are some ideas that will bring you up to date on the latest thinking about smart ways to invest without all the hassle.
In passive investing, the value of your investments goes up and down with the changes in the market. Active investing, on the other hand, is when a human manager buys and sells stocks in your portfolio. They try to “beat the market” and get better returns. In recent years, passive investing has become a lot more popular. This is because data shows that passive funds tend to do better over the long term than actively managed funds. Even though passive funds have much lower fees.
There are many ways to invest, from stocks in new markets to bonds that have been around for a long time. The best way to invest is to buy a mix of these that is well-balanced. Using an exchange-traded fund (ETF) or a mutual fund is one of the best ways to diversify. With a robo-advisor, you can invest in an ETF passively and even have it do it for you.
No matter how you choose to invest, the most important thing to remember is to stick with it. Just like you have to stick to your budget and pay back your loans on time, you have to settle into the investment strategy you choose for the long term. If you manage your money with a steady hand, you’ll eventually come out on top.