Money Management is a process of tracking, balancing and aggregating your income and expenses, in order to help people with wiser spending habit and active personal finance.
Good money management is having a good distribution of income on daily basis. You may don’t have high salary or be wealthy, but you can pay for any living costs without any financial problems at the end of the month. In other words, money management can help you live comfortably on a limited income.
We have just asked people about the definition of “Money Management”, and here we have some responses:
In general, we can see that people care about spending, loans and savings when they manage money. In fact, these are 3 big issues in personal money management:
- How can I spend my income until the last day of the month?
- What can I do to save enough money for the rainy days?
- When can I pay off all the debts?
Process of money management
Money Management is a process. You have to follow the chain to reach the final purpose. Below is 5 factors that makes a successful money management.
- Set goals
- Collect management tools
- Tracking spending
- Build a budget
- Save money
Set realistic goals
Your goals must be realistic and specific. Having $2.000.000 at the age of 60s when you retire is a goal, but wanting to be a millionaire is just a wish. Let’s set a financial goal with enough the amount, the time and the purpose, draw a route to realize the goal, and try your best to achieve it, step by step.
There are 3 types of goal: the short-term will be finished within a year, the mid-term lasts from 1 to 3 years, and the long-term seizes you more than 3 year of life. That’s the theory, but in your real life sometimes you have multiple goals to do. In this circumstance, you can work the goals up one by one, or do them all at the same time, depending on your time period and financial ability.
For the short-term and mid-term goals, you just have to divide them into monthly basis, and do it month by month until you reach the purpose. For instance, you want to buy iPhoneX, which costs $1000 within 1 year, and you have saved $100 by now. So each month you have to set aside: (1000-100)/12=$75.
For the long-term goals, it will be more complicated because of inflation and interest. If you just keep the money in your pocket or in your debit card, the value the money will be drop out, because of inflation (annually rising of living costs). .
Don’t forget to be flexible! Stick to the purpose is good thing; but if problems happen and you can’t finish the term with 100% amount, you still have some.
You may haven’t got $5000 to travel around Europe but you can have $2000 to visit Vietnam with beautiful beaches and ancient culture, is it better than no travelling?
Collect elements and tools to manage money
To have an effective money management process, you must have a suitable environment with enough tools to work with. First of all, it’s better to have a space where you can feel safe and free to access any paper documents relating your money. Be sure that it’s safe because nobody wants their financial information to be disclosed.
Secondly, keep your important paper well-organized: receipts, bank statements, invoice, tax documents, contracts, account directory. Be sure that you can find them quick when you need to review it. Papers are quite complicated. If you have to take time to find an important paper among a mes, you will give money management up soon. You can also keep your papers scanned, and classify into suitable categories on your computer.
Finally, you’ll need tools to manage your money. Basically, you can use a notebook or spreadsheets, or excel on your computer to start tracking your expenses. But in the age of technology, money management apps or softwares can reduce your time and efforts. You can find out some on Apple store, Play store or Google.
Start tracking spending
After setting a goal and collecting all the needed papers and tools, you now can start working with your money, and first of all, start tracking your income and expenses.
Remember this one consistent rule of money management: expenses should never exceed income. Almost financial problems derive from overspending, having credit debts or not able to pay the bills.
Therefore, recording daily expenses is crucially important task you have to do everyday. It’s better to collect enough information of the transactions to analyze it later. This task may take time but the transactions are the core information to understand where your money goes. Here are some tracking techniques:
Write it down right away. Record any income and expenses everyday. It could be done with Excel, note or mobile application like Money Lover.
Keep receipts. Don’t throw your receipts away. Keep it to record your transaction at the end of the day, in case you forget what you have paid.
Use bank cards. After paying by card, you’ll have a bank statement and a sms. Based on this information, you can record the transaction when you come back home after a long day. You also can check the bill online. Some money management apps, like Money Lover, even have connect-to-bank feature which helps you record transactions from bank accounts, credit cards automatically.
After collecting enough daily transactions, you should make report periodically and examine the findings. You can do this task by week or by month, depends on your time. You should count: the total of all income, the total of all expenditures, the total amount you spend on housing, food and beverage, transportation, bills, shopping... Review the transactions one by one and find out what you wasted money on. For example, you have bought a $299 dress on 9th, but haven’t wear it this month. By tracking the purchases, you can sort out your “wants” from your “needs” and cut down expenses in the next month. Remember this one mantra: always spending less than you earn.
In fact, money management apps can automatically create reports after you records daily transactions. You don’t have to play with the numbers anymore.
Build a budgets
Budget is an amount of money you spend on a specific purpose, like housing, food or education. Set up a budget can help limit the expenses and save more money.
Define your budgets. The amount of money you spend on each budget depends on your income. I will give you advices on dividing you income later. But at first, you have to define what budget you’ll need. If you are living with your parents, you don’t have to pay for housing. If you have low income, you don’t have enough to invest. You can study on 6 jars money management system by T. Harv Eker as a reference to build your own budget. This system recommends: necessities, investment, savings, education, play and give.
How to spend money on a budget?
Firstly, you should list total net income. This number is not only the net salary you receive from your company every month, but the average of all extra money, rewards,... The tip is totalize the income by year and divide by 12, you can count the monthly income.
Secondly, you should list total monthly expenses. Based on the daily records and monthly reports you have when tracking money, you can estimate the total expenses for a month, the total expenses for each category in a month.
Now is time to create your own budget. The first one is the budget for your basic demand to live and work: housing, food, transportation and personal usages. With youngster under 30, this budget can occupy 60-70% income. The percentage will be lower when work experiences and salary rise. After that, you should spend at least 10% for saving, as an emergency fund for your life. Divide the leftover for entertainment, education and give budget, based on monthly reports.
If you are fresh graduated, living alone and paid all the expenses yourself, this budget plan can be recommended:
- Housing (25-30%)
- Food and beverage (30%)
- Saving (10%-15%)
- Other basic expenses (10%)
- Education (5%)
- Give (5%)
- Shopping and Entertainment (10%)
After applying a budget plan, you should identify where you want to make budgetary changes periodically. Review and analyze your budget at least once a month.
You can not live without any emergency fund. 78% American are living paycheck-to-paycheck and this is extremely dangerous. You should keep aside at least 10% of your monthly income to save, in order to avoid the burden of debt. Studies indicate that you should spend an amount of 3 months worth expenses for emergency funds. Here is the advice from Learnvest, the 3-6-9 guideline for emergency savings.
Where to put savings? Put the money on a checking accounts is a bad idea, because you may be tempted and use them not for emergent cases. Therefore, you should create a saving account, where you can have higher interest rate if you save longer. You also can invest into funds but generally, investment has it own risks. However, if you have already had enough money in the bank, investment can bring you the second income. In this case, you “do not put all eggs in one basket”.
Money Management Tips
When you have a salary raise, put the extra to save, not to spend. Maintain the old habit and budget of spending instead of overspending.
When you paid off the debt, in the next month you should start adding that amount to saving accounts.
Save even you’re in debt. Even your saving is little, you still have an amount for emergencies.
Review monthly expenses and budgets every 2 weeks to find out unnecessary stuffs.
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