About 37.25 million US residents live below poverty line in year 2020 (source Statistica). The public debt of United States was around 27 trillion US dollars. Yet Americans spend over $80 billion every year on the lottery (source Yotta).
This is the situation of one of the greatest nations in the World. People focus so much on how to make the first one million that they forget – the key to making money is how we handle them. It is not easy to make money, but it is equally, if not more, difficult to keep them.
The key to personal finance is to learn the proper way of handling money. This is the biggest secret of mastering your personal finance. If you don’t know how to manage money wisely, it will not make a difference even if you’re in higher earning bracket.
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Learn how to manage money better
Money management is simple, easy and no specialized knowledge is required. There may be different steps on how to manage money, but they are all based on two basic concepts. These two basic concepts of handling money effectively are:
- Having a good financial plan
- Being intentional with your money
These two are the basic money management skills. If you learn these two basic concepts of managing finance, you’ll know how to handle money. This has a potential to change your financial situation completely. If you’re disciplined to follow these two basic concepts, it will get you ahead on the money game.
1. Having a good financial plan
A good financial planning is essential to manage money wisely. Financial plans are your roadmap to successful financial life. It is inevitable for building wealth and financial independence.
Financial planning is the process of determining your current financial situation. It is a process of setting up short term, mid-range, or long term financial goal. Without a good financial plan, you don’t know what to do with your money. You don’t know when and how to save money and build wealth. You don’t even know why you’re saving money. Once you’ve a financial goal, you will learn how to manage your money.
For a good financial plan, you need the following two items.
a) Determine your current financial position
This is the first step of having a good financial plan. Everybody needs to determine and understand their current financial position. This includes determining your earnings, the major expenses and savings. You also need to determine your cash flow.
Understand your current financial situation, credit card debt, student loans, home loans, car payments and any other monthly payments.
Do you have an emergency funds already setup?
Are you investing? Are you tracking your taxes, and do you have any retirement plans?
How much do you have in your savings account?
You need to ask yourself where you stand financially at present time.
b) Determine your short term and long-term financial goals
Setting up a financial goal is a smart move to effective financial planning. You should have a short-term, mid-range as well as long term goal with your money. Your financial goals will help you manage money easily. They keep you on track to manage your money. They improve your money behavior.
The financial goals can be – saving money, planning expenses, paying off debt or increasing an income. The financial goal is like creating a budget for you planned activities.
2. Being intentional with your money
This is the second aspect of managing your money effectively. When we perform a job on a regular basis and get a consistent paycheck, we, don’t realize our spending habits. Just like our day job, we assume our expenses are automatic too. But it does not have to be that way. In fact, it must not be that way.
Being intentional with your money is the concept of assigning a financial goal to your earned income. You should have a purpose or a financial plan and send money towards that plan intentionally. Collecting and spending money through only one account is a bad money management.
a) Setup your emergency fund
This is the first step of becoming financially responsible and managing money wisely. Everyone needs to setup an emergency fund. It is your sinking fund should things go bad. You’ll setup this fund before moving on with any of the other items in the list. You want to make sure, if things don’t work out as planned, you still have something to fall back on.
The concept of emergency fund is to cover your basic needs. Every literature on the personal finance will have different amount to save in your emergency fund. It all depends on how much you think you’ll need. It can also be built as you progress through your other goals once your basic fund is setup.
b) Open separate accounts for saving and spending
One must have multiple accounts. You need to have separate accounts for saving and spending account. Even within savings account, you can have multiple saving accounts as per your financial goal. These accounts should be funded every month through your income. You can open internet banks to open multiple accounts.
Related post: Internet banks for automatic cash management
The goal of opening multiple accounts according to your financial goal is also to track your progress. This allows you to intentionally save money towards your goal. It’s easy to setup these various accounts, fund them through your income every month and see them grow with time.
c) Set aside money for investing
Investing is the only way to make your money grow with time. If the money just stays in your savings account, there is hardly any growth. The benefits of compound interest can only be achieved through investing. We, all, need to set aside money for investing.
Related post: Index funds investing
Setting aside money for investing by auto deducting directly from your income on a regular basis will help grow your investment portfolio. Investing should be a habit not a one-time thing. Being intentional with your money to invest on any business will help grow your nest egg. You should start investing money early on to receive the compounding effect.
d) Make your health a priority
While everyone is trying make a living and earn money, they forget about their health. Health is not a priority for everyone. Our performance depends our well-being; it must be a priority.
We must follow a healthy habit pertaining to diet and exercise. Beside annual checkup and cure, we must set aside some funds for maintenance of our health. A tax advantaged health accounts like Flexible spending account (FSA) and Health savings account (HSA) are great ways of saving money for health.
e) Don’t forget taxes
One of the most important ways of keeping most of the earned income is by proper tax planning. Everybody must pay taxes. It is the amount you pay as taxes that determine how much you owe to the government and how much you keep. In plain language, tax planning is nothing but finding ways to keep your income. This is done through tax breaks.
Tax deadline is usually April 15 of the year, but the planning should start at the beginning of tax year. Every expense and investment decisions should include tax planning. Tax planning itself is a big topic and everyone on a journey to managing money should familiarize themselves about this topic.
It is essential to learn how to manage money wisely if your long-term goal is to accumulate wealth. Managing money effectively will help build income that will ultimately grow when invested well. You can join DollarforCent family by signing up with you to get pertinent information about money management.