The Simple Steps to Managing Money
You don’t need to be a financial expert to control your personal finances. All it takes is a little common sense and a few money management tips to enable you to live within your means and to increase your wealth.
You simply need to develop a budget that reduces your debt, enables you to save money, and puts you in control of your personal finances.
However, before you start it’s helpful to be familiar with a few money management terms.
- Money is any common medium of exchange.
- Wealth is the total of everything you own that has value. Your wealth is essentially your money.
- Debt is an obligation to pay or do something.
- Net Worth is the difference between what you own (your wealth) and what you owe (your debt).
Learning effective money management is not difficult and not only enables you to live comfortably within your means, but also helps you to increase your wealth. Use these money management tips to stay in control of your money!
- Set a Money Management Goal
Money management is a means to an end. However, make your goal practical and be sure the “end” is in clear sight. Although your money management goal may be to have a comfortable home, annual holidays or a successful business, tackle the small things first. Set objectives like paying off a credit card within X number of months or saving £X by the end of the year. Remember, there’s nothing like the satisfaction of success to keep you on track. - Know what you have
Before you can live within your means, you need to know what your means are. Start by taking stock of your money. You’ll probably be surprised at how rich you really are!
- As well as the cash in your pocket or wallet, include piggy bank cash, bank balances, and any other savings and investments you may have.
- Now assess the value of your personal possessions. This can be anything from clothing, jewellery, furniture or cars. It doesn’t matter as long as you own it outright and it has a resale value.
- Although money is an asset and all of our assets are types of money, generally we’re more inclined to think of assets as property.
However although all of our possessions are parts of our wealth that we can turn into cash, usually they are the types of our money that we want to protect. For instance, you probably don’t want to sell your car or cash in a valuable collection to pay a bill. Yet, the ability to convert property to cash is a good concept to remember in identifying and effectively managing your money.
Some assets like vehicles and appliances depreciate (decrease in value) over time. Yet, while they don’t increase spending power, you can turn them into cash.
Long-term assets like property investments, pension investments, and personal property such as collections, artworks, and antiques appreciate (increase in value) over time and actually enable us to save money and increase our wealth. These are the areas you need to consider in your money management goals.
- Track your income
You have to track your income! If you have at least a month’s worth of pay slips, add them up and divide them to see what your average income is. Better still, if you can add them up for three month’s and divide by 13 (number of weeks in a quarter) you’ll get a more accurate view of your earning power. Add to this any income from other sources. If you haven’t recorded your income do it now! - Track your spending
Once you know what money you have now and what income you can expect to get, it’s time to find out where your money goes. Take a month and track your spending down to the penny. Record all of your spending ‘as it happens’. This might seem a bit of a chore but if you try to add up your spending at the end of each day I can guarantee you will forget something. So carry a note pad and record things as you go. You could even record things on your mobile phone.
Record everything! In addition to tracking the cash you spend, use your notebook to record every bill payment, cheque, debit, and credit card expenditure. Include the amount you paid, who you paid (or where you shopped), and the date you made the purchase.
After a couple of weeks, you’ll find yourself reconsidering if you really need that bar of chocolate or mid-morning cafe latte. However, this money management exercise is designed to show you how you usually spend your money. It’s important during this month not to deny yourself your usual pleasures, no matter how trivial they are.
Setting a realistic goal, knowing what you have, what you expect to earn, and tracking your spending are the basics of money management that enable you to control your money and make wise budgeting choices in the future. This article is one of a series we have created to help you to manage your money. Further helpful articles deal with how to manage your personal budget, some clever ways to save money, how to manage your debt and some helpful tips on investing.
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