Having a sound money management plan can be the light at the end of the tunnel for people trying to get their financial life in order. It also takes commitment and a solid understanding of your financial situation.
These are the first steps in effective money management.
1. Create a budget
First things first: create a budget if you haven’t already. Creating and sticking to a budget might seem a little tough to achieve at first but it pays off in the end and this is important to manage your money.
It’s the first step to help us pay off debt and start saving for future expenses such as a mortgage, a car, and your retirement. It’s what will bring balance to your financial life and give you peace of mind.
To begin, you will need to understand your expenses and your income to better manage your money. This is addressed in the following 2 steps:
2. Understand your expenses
Ask anyone off the top of their head to tell you how much they spend a month on everything and they might not be able to do so. This isn’t rare.
Many people actually don’t know the total amount of expenses they generate on any given month. This is a problem but there is an easy solution for it. Here it is: for one month, keep track of all your expenses. Easy-peasy. Take all your receipts (groceries, restaurant bills, utilities, etc.) and look at your bank statements and add up all of your expenses. Remember to keep track of expenses paid by cash as well as credit cards.
The idea is to have all your expenses (both variable and fixed) accounted for to get a total amount. This will allow you to see the whole picture and know how to manage your expenses going forward. You will also want to compare your historical performance over time.
3. Understand your income
Ask anyone off the top of their head to tell you how much they make a month and although they probably won’t tell you, internally they know. This is the difference between income and expenses, most people know their full monthly income but have less knowledge of their full monthly expenses.
Nonetheless, the point is to figure out your total expenses and subtract that from your total income for the month in question. Here is how the results should pan out:
- If you end up with a negative number this means you spent more than you made. Actions to take? Reduce your spending and expenses until the total reaches zero.
- If you end up with a positive number this is good (high five!) and means you spent less you made. Actions to take? You could increase your debt payments or increase your savings.
Once you understand your expenses and income and have a firm understanding of the money coming in and out of your life, it’s time to take some additional steps to best manage your money.
The above listed tips will help you manage your money well