Debt can be a terrible black cloud over anyone’s head, that is why is vital you learn the fundamentals of money management. We have learned many valuable lessons on how to manage money and this article will help you to do that.
Without an effective plan on how to manage your money, you can never be too sure where your money is going. You might find that every month you are short on $100 to pay your bills but you still have subscriptions/memberships totaling $100 that are coming out of your account.
People all over the world have money management struggles but it seems to more prominent in the USA, where the average American owns 3 credit cards. We won’t even get started on the credit card situation there!
This guide will help you to understand how to manage money effectively and ensure you have the means to cover all your expenses, pay your debts, and enjoy the smaller things in life.
Some of the methods will come across as obvious but some people would never have considered them. When you are in debt or struggling with money, it may seem like there is no way out and the obvious “methods” of money management won’t help, but that is very untrue.
Before we get into things, be sure to check out this blog on the best money management apps/websites to help you out.
How to Manage Money Effectively?
In order to manage money effectively, you must monitor your expenditures, income, and ultimately ensure you have enough to make ends meet. With effective money management, you can enjoy financial security and freedom for yourself and your family.
Let’s take a look at our 12 tips to manage money effectively:
- Write Everything Down
- Use a budgeting app
- Cut out the unnecessary things
- Inspect your expenses
- Make a plan to pay off debt
- Always stash some cash
- Save for healthcare/retirement
- Set yourself goals
- Don’t spend what you don’t have or need
- Use your credit card like a debit card
- Get a 2nd income
- Write Everything Down
Basic money management tips are sometimes the most effective yet they are overlooked by many. Writing something down not only forces you to think about the information you’re writing but it also makes you read it back in your head and see it in plain black & white.
This is not to say that every single day you should write your finances down or even that this method will be most productive for you.
We have found that many people see this as an effective way to manage your money.
One of the most effective methods we can share is to write them down in a table like this:
|Income Per Month (After Tax)||Expenses||Total Left|
|$1,800||Electricity – $120||$1,680|
|Mobile Phone – $65||$1,615|
|Water – $35||$1,580|
|Gas (estimate) – $180||$1,400|
The same type of table can be broken down into weekly or bi-weekly numbers.
|Income Per Week (After Tax)||Expenses||Total Left|
The purpose of this is to see exactly what your income and expenses are to reveal what money you are left with at the end of each month.
By doing this you can assume that if no unexpected expenses occur, you will have X amount of free cash to spend at the end of that month.
We always recommend that you set aside (if possible) an extra $200 from your expenses just in case an emergency occurs.
Another positive aspect of writing it down in a table is that you can discover what your highest expenses are. This enables you to find out ways of reducing those expenses in any way possible.
If you really wanted to be specific, you could try and work out these numbers on a “per day” basis. There isn’t much point in going that in-depth. However, it would give you an insight into how much you would need to earn extra, to make ends meet.
Use a Budgeting App to Manage Money
Since the recession hit back in 2008, budgeting apps have become increasingly popular. They can provide you with money management tips and also teach you how to budget your money.
If you are not a fan of “writing things down”, then this method will be more useful to you.
We have another blog on the best budgeting apps which you can find here.
A budgeting app is an excellent way of automating your budget and managing your personal finances. You will find that most apps have the functionality to calculate everything for you and inform you where you can try to make savings.
Banks have now even started to categorize expenditures on their statements. This allows people can manage their finances better and this is pretty much what a budgeting app will do. Although, you will have to input the data manually.
The only downside to this is that if you make a mistake on an input, such as the wrong amount or missing something completely, your budget could be completely wrong and you may not notice.
Otherwise, using a budgeting app is very convenient, free, and provides you with better ways to manage money.
Cut Out The Unnecessary Things
Although it seems obvious, people often skip over this method of money management.
One of the best examples we can give you is a client we once had. They used to purchase a Starbucks coffee every morning on the way to work and every afternoon at lunchtime. Both coffees cost the client $7.60 and they worked 5 days out of the week.
Add that up and it equates to the following:
- Weekly Cost – $38
- Monthly Cost – $152
- Yearly Cost – $1,824
When you consider it as $38 a week it doesn’t seem like much. But when it comes to $152 a month it seems a lot more. That can help pay your debts off or cover your bills etc.
The client in this situation told us that they couldn’t live without their coffee and wouldn’t be giving it up. At this point, they were struggling to keep on top of expenses and were heavily in debt.
One of the shocking parts of this is the client had a free coffee machine at work but refused because they didn’t like the taste. There is only so much you can help people.
You have to consider even the most basic money management tips if you want any chance of managing your finances more effectively.
If you spend $200 a month on new clothes you don’t need then re-think if you actually need them. If you spend $500 a month on going to dinner, start eating in, instead. There are so many expenses that people don’t consider because they become too wrapped up in their own routine to see them.
Manage Money by Inspecting Your Expenses
This one kind of links into many of the other methods, but it is important to mention by itself.
Most people will never invest the time or effort to look into their expenses. They will probably spend their lives paying out for things they never realized.
Do you honestly believe that all companies will notify you if you have been overpaying for services for 5 years without realizing it? They are under no obligation to tell you unless they have increased the cost and haven’t informed you with a right to cancel.
When it comes to how to budget your money, expenses are the most fundamental factor you can look at.
How’s that gym membership that you signed up for in January 2002? How come you are paying for premium cable when you watch Netflix one night a week?
We could go on with a list of examples but the title speaks for itself. You need to analyze every expense you have, how much you are paying out, and cross-reference the information with each company website. If it is something you don’t use, just call up and cancel it.
One trick we have always learned is that if you call a company to tell them you are thinking about canceling, they will often offer you a reduced price. They would rather retain you as a customer than lose you.
What’s the harm in trying?
Make a Plan to Pay Off Debt
One of the primary reasons for people wanting better ways to manage money is debt. Global debt is continually increasing but more specifically in the USA.
We stand by our saying that you should always treat a credit card like a debit card. Only spend money on a credit card, if you have the money to pay it off.
Obviously, there are circumstances where this is not possible as other debts force people to use their credit cards, but where possible, it should be followed.
Some debts may include:
- Student Loans
- Car Repayments
- Credit Card Debts
- Mortgage Repayments
An obvious piece of money management advice would be, don’t ever purchase anything that will put you into debt. But again, we understand that there are circumstances where this is not possible.
If you find yourself in debt, do not ever feel like you are alone or stuck with no way out. There is always a way to work towards paying your debts off although it may be hard to see the light at the end of the tunnel.
All money management tips start with a plan and the only way you will pay off your debts are with a plan.
You need to follow some of the steps in this guide and do the following:
- Work out all your expenses/income to find out if there is anything you are spending that can be cut down.
- Call companies and ask for cheaper bills/tell them you will cancel.
- Cut out any expenses you don’t need. (Coffee, clothes, etc.).
- Figure out new ways of saving money, perhaps a carpool to work.
- Work out how much a month you can allocate to your debt repayments.
- If necessary, portion some savings to reduce interest payments.
- Calculate how long it will take to repay your debts.
- Pick up some small part-time work to help (every little counts).
- If all fails, speak to a financial advisor.
Every individual situation will be different. You should be careful about how you approach debt in order to prevent it from becoming worse. Some people choose to pay one credit card off with another, we think that this method is poor money management.
Manage Money by Stashing Some Cash
What’s the first thing most people do on a fresh payday? Spend it.
That, unfortunately, is not effective money management.
The first step of any new payday should be to portion some aside for a rainy day. There are now digital banks and various savings accounts you can use that create a perfect place to do this.
If you make a habit of transferring $50 – $200 to a savings pot or account every time you get paid, you will soon build up a sizeable amount.
This is separate from your long-term savings though. The amount you save should be dependant on your income/expenses for the month.
Unfortunately, a common mistake people make where they end up in debt, is not having any money set aside for emergencies. You can’t predict the future and you never know when you are going to need an emergency fund.
Say for example your washer breaks and you have to spend $400 on a brand new one. Your monthly free cash is only $20. You will then either use a credit card which could lead to further debt or have to borrow off of a friend/family member and be in debt to them.
The point is, when it comes down to how to save money, you would be much better off by having an emergency fund saved up for a rainy day.
Save for Healthcare/Retirement
Anyone that is reading this for genuine money management tips should already be doing this.
If not, head back to the top and start again because you will likely not be a very promising situation with your money management.
This particularly applies to the USA where healthcare is expensive and you need to put away for your retirement. It also applies to everywhere else in the world in some aspects.
You should be allocating a portion of your income every month to a retirement fund. This is a good example of money management. In most countries, your employer may take this out of your paycheck automatically and match the amount. However, this doesn’t apply to all employers and countries.
If your employer does not do this, you should ensure every payday that you automatically move part of your paycheck into a savings account for retirement. We would recommend that if you have an emergency with no way out, then you can dip into those savings, but it’s best to leave them be.
The amount you should be transferring is entirely dependant on your personal preferences and income so we cannot suggest a number there.
You should also ensure you allocate a small amount for healthcare needs. In some parts of the world, especially the USA, if you do not have health insurance, it can be a very expensive cost for you.
An effective money management technique is to allocate a small portion of all your savings for healthcare, retirement, and a rainy day fund.
Set Yourself Goals
Wondering what the best way to manage your money is?
If you have nothing to work towards in life then what is the purpose of what you doing?
This applies to your money management too. Some people choose to work towards saving for retirement only, some towards a boat, and some towards a new sweater.
Whatever goal you are setting will impact the way you manage your money.
Let’s say that you want to buy a new car that costs $12,000 but you don’t actually need it, you just want it.
You can set yourself a goal of working extra hard for 6 months, cutting back on expenses, and saving all $12,000 to purchase your dream car.
You can go out now and get the car on finance which will instantly put you into debt.
We know which one we would choose for better money management.
It’s all up to you how you set your goals and what you want to achieve but we definitely recommend having a goal. It could be daily, monthly, weekly, or even a 50-year goal. Whichever you choose, you will find that your finances make more sense and become easier to manage.
Don’t Spend What You Don’t Have or Need
Don’t spend you don’t have or need – Welcome to how to save money 101.
This is comparable to some of our other points in this guide but we felt that it needed to mentioned separately.
If you don’t have the money to go out and buy a new outfit for the weekend, why would you?
Yeah, it is nice to have new stuff and treat yourself every now and then, but it’s not worth putting yourself in financial peril over.
There is no need for us to spend time discussing this one at length because it should be obvious advice on how to manage your money.
Use Your Credit Card Like a Debit Card
When it comes to ways to better manage money, this is our focus point.
Use your credit card as if it was a debit card = Only spend what you can afford to pay off.
This is similar to our previous point. However, you will be surprised at how many people get into debt by not following this rule.
The only reason you should ever keep using a credit card when you have no money is when you are in debt and are struggling to earn enough income to pay for essentials. That doesn’t make it right though.
Having a credit card is always beneficial if you use it correctly as you can use it to build your credit rating which is important.
Therefore you should use it regularly to make purchases but only if you have the money available to pay it off every month.
We have an article here on the best credit cards in the USA which you should check out.
Get a Second Income
This doesn’t really fall under the category of money management, but more under money tips.
Getting yourself a 2nd income is a great way to boost your finances. Ultimately it can help when it comes to ways to manage your money.
Imagine if you had double the amount of income coming in as you were working a 2nd job or had passive income. You could choose to put all of that money away into savings or use it to pay off your debts in a fraction of the time.
The possibilities are endless when you find more sources of income. However, you have to be willing to put in the hard work and grind to get there.
We all used to put in over 100 hours a week working 7-days just to have enough money. When we look back, it was hard & exhausting, but it got us where we are today and we would never change a thing.
That concludes our money management guide.
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