Money management is a problem that most people face. Research has it that the average saving rate in America is 4%. Saving is hard because most people do not have a grasp of their cash flow.
Having a rough idea of where your money goes is not enough. To understand how to manage your money better, you got to have more than a rough idea of your spending. The process of gaining financial freedom includes acquiring money management skills.
You can avoid the stress that comes with poor financial management by using these seven tips.
1. Understand Your Take-Home Pay
The first step to handling your money well is knowing how much you make. Understand that your gross pay isn’t your take-home pay. There are many deductions that reduce your gross salary significantly.
The net pay is the starting point for all financial plans you will make. It will show your current financial standing. Review your payslip every month. Going through your payslip also helps in ensuring that your deductions are correct.
2. Track Your Spending
Now you know how much you make. Are you asking yourself, where does it all go? You may have a rough idea of what you spend on, but the figures are not adding up. Use a bill tracker to see where your money goes.
The next thing to do is to track your spending to know where exactly your money goes. Record each expense. Whether it is household, transport, coffee, etc., it doesn’t matter. It is still an expense. More so, make sure to record even the expenses you consider insignificant. You could even use an app on your phone to make life easier, it’s easy to find a list of personal financial apps in the app store.
After tracking your finances for a month, you will get a clear picture of what you spend on. It will also help in establishing how to adjust your spending to match your pay.
Once you have a good idea of your spending, it is time to make a budget. A budget will not seem complicated at this point. You will need to match each expense to how much you spend on it in a month.
You will need to adjust the numbers to the point that they match your financial standing. With a budget, you decide how much goes out of your account before actually spending it.
You may think, huh, but I will never stick to the budget either way. Expenses keep shifting based on economic forces. This is the wrong mindset.
Remember that the budget is the guide to your spending. Not economic changes. Just think of how budgeting will add value to your life.
It will teach you to live within your means. This is an important lesson in sound financial management.
4. Start an Emergency Fund
One of the items on your budget should be an emergency fund. Every individual gets an emergency once in a while.
Proper financial management means being prepared for rainy days. Set aside a certain amount of your income to this fund.
Also, in case the amount isn’t enough, you don’t have to panic. You can apply for easy loans to cover the overdraft. Since you already know how much you make in a month, you can apply for an amount that you can easily pay back.
Besides, you already had some money set away so this loan won’t draw you deep into debt. Instead, it will be a way to get your finances back on track.
5. Limit Credit Card Purchases
Credit card debt in America is over $1 trillion. This figure is evidence that a credit card is an enemy to a big spender.
Anytime you use a credit card, that is a debt that you must repay. Having a bad credit history makes getting financing for future projects hard. To avoid this, use cash as much as possible.
Limit the use of credit card to online purchases that cannot take cash. Don’t take out many credit cards. This will only increase the temptation to use them for purchasing things that you don’t need. Resist the credit card excitement, and you will be on your way to sound financial management.
6. Set Saving Goals
Saving without an end goal in mind is a difficult affair. You can easily open a Roth 401k or Roth ira account and can save money. You will think of taking out the money to use every time you run low on cash.
The trick is to save with an end goal in mind. For example, save up for big purchases. Anything that is beyond your spending means to set it up as a goal to save towards.
In the budget, include this item, and you will not view saving as such a difficult task anymore. Once you learn to put that money away and keep it untouched, the saving will only get easier. It takes time, discipline, and practice.
7. How to Manage Your Money Better by Setting Priorities
We prioritize things every day of our life. Our schedule, tasks, etc. Now, you should apply that to money too. Prioritizing is a vital money management skills.
You can’t be spending on everything you desire if you can’t afford it. Your budget should reflect your spending priorities.
Daily necessities and needs should have the highest priority. This means that bills should take the highest priority in budget allocation. Savings and emergency fund should also be on a high up on the list.
Treat your spending priorities like you treat your schedule. Pay those pending bills before going out to treat yourself. Anything that you don’t need should be at the bottom of the list.
Better Financial Management
Handling money properly shouldn’t be a complicated affair. It only requires discipline and attention. To practice discipline in spending, you have to understand how much you make first.
Make financial plans based on what your payslip tells you about your financial standing. Track what you are spending on and adjust accordingly.
Make that budget. It will help to streamline your expenses. It will be your tool towards making better financial choices. To understand how to manage your money better, never stop learning.
Your earning capacity will change over time. This means adjusting all your financial plans. When you are equipped with the knowledge, these changes will not throw you off track.
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