Better Money Management in 5 Steps
by: Randall Stewart
Here are 5 positive habits to help you become more effective in managing your money, no matter how much you start with:
1. Start by involving your whole family in the learning process.
Engage your whole family in learning about how to effectively manage money. Don’t keep your financial affairs or investments a secret. Ongoing communication about your financial matters is an absolute must if you would like to establish trust, accountability and a sense of financial peace within your household.
2. Reduce your debt load and expenses while increasing your savings.
Could you decrease your expenditures and be content with getting by with a little less? List three to five areas you could cut back on right away that would allow you to reallocate the money not spent to increase your savings over time.
Reducing your debt load may be a long-term goal, but once you eliminate the heavy burden of bad debt, you can begin accumulating wealth.
3. Gain peace of mind with your emergency fund.
There is nothing like being worry free of knowing how you will pay for the next crisis down the road. Your goal should be to build up enough reserve funds over the course of the next year to cover three to six months of your normal expenses.
Start by opening a savings account or money market account that doesn’t penalize you for deposits and withdrawals. Eventually, you will also be able to set aside additional savings for long-term projects such as vacations, post-secondary education or projects around the home.
4. Create balance in your money management plan.
The following money management plan allows you to build up your savings and rewards you every month for your efforts. Start by setting up separate accounts for each of the following categories and allocate funds in accordance with the recommended amounts:
10% of your net income for investing in your financial freedom
Your goal is to set aside money every month, building up your capital in various investments.
At no point in time should you spend the capital that you have already invested. You may reallocate capital to finance a project that is going to create wealth, but avoid the temptation to pay off any expenses.
10% for your education
Your financial literacy is fundamental to becoming a wise investor. This knowledge may be gained from a variety of sources, such as home self-study courses, workshops, seminars, books, CDs, websites and investment clubs.
10% for giving
Giving not only brings joy to others; it also brings you a sense of gratification in knowing that you are adding value to other people’s lives. Get into the habit of supporting your community and helping those in need.
10% for your emergency fund and future projects
As outlined already outlined, set aside money to cover any unforeseen expenses.
10% for play
Life should be enjoyed now and through retirement. A secret to managing money well is establishing balance between hard work and rewarding yourself. Your play account should be spent each month on ways that rejuvenate your body and spirit such as a weekend getaway for two, a meal in a classy restaurant or a day at a health spa.
50% for necessities
The majority of your monthly financial obligations or expenses fall into this category. Make a concerted effort to reduce your expenses in the early goings by cutting back on certain luxuries or desires. A key factor to getting ahead is coming to an agreement with your spouse about how you will manage your financial affairs, including your long-term financial goals.
Your cash flow analysis
An important aspect of controlling your money and being successful in the world of finances is keeping tabs on your cash flow on a regular basis. Your cash flow analysis is a written plan of how you spend your money. It is a simple cost-breakdown of your expenses, as seen in most budgets, and involves tracking your income and expenses on a monthly basis. Your cash flow analysis should take into account several important factors, such as:
- your budget priorities as a family, based on your passions and dreams
- the impact of your specific family values on your cash flow
- specific short-term budgeting plans, as well as long-term projections over a six-month to one-year period.
One easy way to keep track of your cash flow is to use an electronic spreadsheet.
Your net worth
Besides monitoring your cash flow, it is important to periodically assess your net worth. To calculate your net worth, you need to total up the assets you possess and subtract your liabilities. Assets typically show up in categories such as:
- bank accounts,
- pension plans,
- chattels or
- equity in your personal residence.
- On the other hand, liabilities include such categories as:
- credit card debt,
- long-term loans,
- home mortgage,
- taxes owing or
- unpaid bills.
Calculate your net worth right now and then monitor your net worth every three to four months. The simplest way to keep track of your net worth is with an electronic spreadsheet.
In summary, by implementing these 5 positive money management habits you will begin to realize your dreams for a better future. Keep in mind that what you focus your attention on will increase.
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