Money Management 101
Personal finance management can be overwhelming and seem difficult to get a handle on. Every day you hear stories of people falling behind on bills, missing rent or mortgage payments, racking up credit card debt, and having all sorts of issues that makes the money run out before the month is over. There are also people who seem to have found the secret to managing their finances and building a safety net of savings. Is it really a secret though or can we all learn how to manage our money in a way that allows us to cover the necessities and have some left over for tomorrow?
The secret isn’t really a secret, it is a set of skills and habits that some have been taught and practice and others have missed. I want to let you in on the habits that can help you create a successful financial plan, regardless of your income. While earning more money will help, there isn’t any correlation between income and better financial management. There are individuals and families that make more than enough money who still struggle to get through the month. More income without the proper habits can actually lead to bigger problems.
So what are these habits that people who manage their finances well that people who don’t lack? The answer is simple and require that we commit to a building and maintaining a few habits. First, people with sound financial management skills track their spending, they track almost every dollar that comes in and goes out. They plan for where to spend and they rarely deviate from that plan. When there is extra money, it doesn’t go to some luxury purchase, it goes into a planned savings for a specific purpose. This practice of tracking your spending will help you to see where your money is going so that you can see where you might be able to make some changes. Maybe after a month of tracking you realize that you purchased a coffee from the local shop each day and as a result you spent $60-75 that you don’t really have to spend if you decided to make your own coffee at home. This is the type of information that a simple exercise like this can help you uncover. Additionally, I have found that tracking my spending forces me to evaluate what I’m actually about to purchase, and many times I realize that I don’t need that item or I don’t want to have to write it down and admit that I spent so much on something I didn’t need.
Next, they budget, every month to account for every dollar. Now I know what you’re thinking, budget, I can’t budget, I’ll never be able to have any fun. No so my friend, budget is not the dirty “B” word. Budgeting isn’t about what you can’t do, budgeting is about making sure you can do the things you need to so that you can then do the things you want to. The essential point is making sure that the necessary things in your life are paid for before you do anything else. Budgeting will allow you to know in advance what adjustments you might need to make before the month begins. Using this tool will give you a month long view of your cash flow and allow you to better plan for the future.
These two habits, tracking your spending and budgeting are the two most important habits you can form and practice that will help you stay on track and begin to plan for the future. Next month we will look at the impact of setting goals on your current and future financial wellness.