Money does not grow on trees; you have to work like a Trojan to earn money. In this article, we will discuss about 7 money management tips to improve your finances.
Earning money is important undoubtedly but protecting and managing what you have earned is of utmost importance if you want to give it stability and liquidity.
What is Money Management?
How To Manage finances?
Planning a budget is the initial step in managing your money and helps you make the best of your money. A free online budget planner can also help you in managing your finances.
Consumer Financial Protection Bureau (CFPB) states that a budget ensures you have ample money to fulfil your needs besides savings to accomplish future goals.
Budgeting approaches like the 50/30/20 can be used for creating the budget planner. The 50/30/20 rule is a budgeting method that helps manage your finances.
Through this rule, divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings or paying off debt.
20% of your net income should be saved. Having a sufficient amount of savings can help you on rainy days. The goal is to have at least three to six months’ worth of your net income for emergencies.
Savings helps you to be financially prepared for anything unexpected that may come in your life.
When you have sufficient savings, you can generate more income by investing in it.
Needs include essentials inevitable for survival, such as your rent or mortgage repayment, car loan, groceries, takaful (a protection plan), phone bills, utilities, and other must-haves.
You need to downsize your lifestyle if they exceed 50% of your net income.
You can consider moving to a smaller home in a cheaper locality, opting for a smaller car, fewer premium groceries, a more affordable phone plan, etc.
Wants include no essential items such as fancy dinners, countless subscriptions, branded clothing and perfumes, latest electronic gadgets like smartphones, laptops, etc.
No doubt, these ‘wants’ will make your life luxurious and enjoyable, but these are extravagant and non-essential.
Wants should not exceed 30% of your net income.
Components Of Budget:
Creating a budget planner does not mean making a strict budget based on drastic changes; rather, developing a budget compatible with your lifestyle. The goal of the budget is to have money left over for saving.
While making a budget, you estimate how much money is required to spend each month, keeping in mind the lifestyle, needs, and income. This estimate can help you organize your spending and savings accordingly.
The goal of the budget is to have money left over for saving. While making a budget, you estimate how much money is required to spend each month, keeping in mind the lifestyle, needs, and income. There are some useful budgeting tips on how to make a budget planner.
Budgeting involves using budgeting worksheets following general steps like these:
Combining monthly income from various sources. It means adding your monthly income, including your salary and income from other sources like a tax refund, bonuses, rent from property, income from a part-time job, etc.
While adding monthly expenses, consider all the major expenses like loans/other monthly installments, groceries, billing, fees, fuel, or transportation. Monthly expenses can vary according to utilities, but an average from previous months can be used.
Subtracting Expenses From Your Income :
You can start making your budget with the excess amount. It can also be used for building up savings. If you are left with an amount that is too small, you can cut costs for unnecessary/extra things, meaning you can make adjustments in your budget.
2. Track Your Spending:
If you intend to manage finances, you should know what and where you are spending each month.
Tracking your spending is a healthy habit that keeps you within your means when life gets challenging and you avoid being extravagant.
The question arises of how spending can be monitored. There are three options:
It can easily be done by keeping a digital record of your expenses using apps.
With a paper-based or manual option, spending can be tracked in a planner or notebook; for this purpose, all the receipts can be saved.
It can be done by categorising your expenses; this way, you will learn where your money is going and spending more.
To track spending across categories, a money management app, MoneyTrack, can be used.
You can analyse how much is spent on unnecessary things such as dining out, entertainment etc.
3. Building up Savings:
Savings is the most crucial part of money management. By analysing a budget planner, you can decide which areas you can cut your expenses short so that money can be saved for emergencies such as unexpected life events, being jobless, major home repairs etc.
In What Ways Can You Save Money?
Consider these financial tips to help with unexpected expenses:
Interest rates are variable; therefore, shopping around and comparing quotes is better. The extra interest can add up over time by finding a savings account with a better rate.
Put the saved amount and extra income into the savings account. If you get a refund or a bonus at your job, consider depositing it into your bank account. This way, you can grow your savings.
If you buy what is needed (meaning necessary) and avoid buying what is wanted (meaning something extra other than your needs), you can save money effectively and stop spending money.
Fuel is quite expensive these days, and you can save money by reducing fuel costs. Fuel costs can be reduced if you remove excess weight from your car, opening the windows instead of using AC unless necessary.
Walk more or use a bicycle if you want to go nearby and use a car for long distances.
Explore discounted deals and promo codes, and avail discounted offers instead of buying things at full price. This way, you can grow your savings.
401(k) plan allows you to deposit pretax dollars deducted from your pay.Beth Sabin, an executive at Capital One, says:
“If you have a company match through your 401(k), this can be a great place to start by contributing until you have your full match.”
She is of the view that upping your contribution by 1 percentage point to see if that’s doable for you. If it is, the savings can be accelerated by increasing it to another percentage point.
There is a similarity between 401(k) plans and 403(k) plans; both are employer-sponsored. The only difference is that 403(b) plans are offered by public schools and some organisations that are tax exempt.
Contributions to traditional 403(b) plans are tax-deferred—just like they are with traditional 401(k) plans. So, no need to pay taxes on the contributions or earnings until you withdraw funds from the account.
Those accounts are tax-deferred which are self-directed, and non-sponsored by an employer. When you start withdrawing money after retirement, the money will be taxed at your regular income tax rate.
When you make contributions to a Roth IRA, they aren’t tax deductible; you may be able to withdraw your money tax-free during your retirement years.
4. Plan to Pay Off Debt :
Loans are taken to achieve your life goals, but the interest on loans can be problematic; it can eat your savings.
Therefore, minimise your debt if you want to save more, as being dependent on debt and credit cards can be burdensome. You can manage your finances and reduce financial strain by clearing your debt.
Following are the two plans recommended by the CFPB for becoming debt free:
Debt Avalanche Method:
Debt avalanche is also referred to as the highest-interest-rate method. In this method, the debts are listed based on their interest rates, from highest to lowest.
The debt having the highest interest rate is repaid first. The extra funds can be used to pay off the next loan on your list once the debt is paid off. You also continue to make the minimum payments on all your debts.
5. Establish Good Credit Habits:
Finances can be improved with a good credit score. The credit score affects many aspects of your life, such as renting an apartment, being considered for a job, etc.
According to the CFPB, your credit scores reflect your creditworthiness.
To build a good credit score, a personal finance management plan is recommended by the CFPB; it is as under:
6. Cut Back On Recurring Charges:
Subscriptions charge your bank account; therefore, try to minimise them, especially when you are not regularly using these unnecessary services. This way, you can hold onto more money each month.
If you want to generate income, start investing, no matter whether your investment is limited; small contributions can help increase income. The sooner you manage your finances and start saving, the earlier you can invest money and generate income.