Let’s Talk About Managing Your Money…
A huge portion of the population seems to struggle with money. Careerbuilder found that almost 80% of American workers live paycheck to paycheck!
Various macro-level factors beyond our control can be financially devastating, such as
- Government policy (in theory, you could change this as an individual… with enough time, support, and countless dollars)
As well as some micro-level factors, like
- Job loss
- Bad accidents
- Hospital bills
You can’t do much to avoid these, so it’s best to focus on what you can control: how to manage your money!
With proper money management, you could get by during the aforementioned events and come out alive.
Unfortunately, schools seem to avoid (or at best fly by) personal finance education which is one of the reasons we started Money Monarch!
So if you missed the money management class (or if you didn’t ever have one), strap in and keep reading to learn steps you can take towards better personal money management.
Take Note Of Your Current Finances First
Before you can start down the road towards better money management, you need to know exactly where you stand.
To do this, first make a note of your household income. Then, make a list of all your assets. This includes things like
- Bank accounts
Likewise, list all your debts:
- Loans (student loans, personal loans, home equity loans, etc.)
- Credit cards
Once you’ve written all these down, spend a week or two tracking your spending.
Yes, every last penny should be recorded so you have as accurate a starting point as possible.
In addition, gather up credit card/bank statements for a more complete picture of your current spending habits.
Once you’ve done these things, you should have a rough picture of where you stand financially.
To make this easier, we’d recommend you sign up for a budgeting app. Mint is one of our favorites, as it’s one of the most comprehensive budgeting apps we’ve ever seen.
Link all your asset and debt accounts to Mint if you’d like; it’ll track your income and spending for you.
At this stage in the game, you’ve probably noticed multiple spending areas that are eating away at your wallet without your knowledge.
In addition, you’ve probably realized just how deep in debt you are.
With this information in hand, it’s time to learn the way out via proper money management.
1.) Create A Plan
Alright, so you’ve assembled everything:
The first thing you need to do is make a plan. Planning is crucial for better money management because without a detailed plan in place, you’ll be in the dark about your finances and you’ll never make any progress.
To make a plan, you’ll need to create a budget and some goals.
Let’s start with the budget.
How To Create A Budget
This is where the financial information you gathered earlier comes in to play.
To budget, first take stock of your expenses you’ve tracked/gathered from previous bank statements. Sort your expenses by category so you know where each dollar is going. This will make for easier money management.
Then, take stock of all the income sources you have. This doesn’t have to just be your paycheck; if you make decent money from a side business or investments, include that in your income even if it’s not currently part of your spending money.
You can create your income budget first, but starting with expenses could be more helpful as they are the limiting factor; in other words, your expenses are the bare minimum you need to cover each month to survive.
Now, there are a few budgeting models you can follow to guide you depending on your needs:
- 50/30/20 – 50% spending on essentials, 30% spending on fun/lifestyle choices, 20% towards saving, investments, or debt depending on your situation. Extremely simple to track and follow.
- The Envelope System – Create an envelope for each expense, and put the amount of cash budgeted for each expense into the envelope. Great method for holding yourself accountable.
- Reverse Budgeting – Take your goal and work backwards. Works great if you’re focused on aggressively saving. Need to save $30,000? Calculate how much you need to contribute each month given the time frame and stick to it.
Hopefully, your income is far above your expenses; however, as you learned from the previously-mentioned statistic, that might not be the case.
And so, time for the second half of the plan: goals.
We aren’t talking about “save $400,000 for that nice house” goals; rather, we’re more along the lines of “eliminate debt and save enough for a rainy day” goals.
If you’re in the red from month to month (more expenses than income), however, your first goal should be to increase your income or decrease your expenses so that you can survive financially. We’ll talk more about that in a bit.
If you’re in the green/black (more income than expenses), then your options are more open. You have some spare money every month that you can put towards debt or save up.
Now when you’re creating your goals, it’s important to be specific.
Think about it: when was the last time you said something vague like “My goal is to get in great shape” and then you never followed through?
Instead of vagueness, aim for specifics.
Here’s an example of a good debt payoff goal: “I’m going to pay off my $20,000 remaining student loans by May of 2024”.
Here’s an example of a good savings goal: “I’m going to save up 6 months of living expenses by next year today”.
By setting a specific number and date, you do 2 things:
- Create a goal that is measurable
- Create time pressure, incentivizing you to stick to the plan
As a side note, having a sizeable emergency fund is key to surviving unexpected events; as you can guess from our example, we’d recommend striving for at saving least 6 months of living expenses.
So if you spend $3,000 per month, aim to put $18,000 in a savings account before you go investing your money in other things.
2.) Track Your Spending
Now that you’ve got your budget and goals in hand, you’ll need to monitor your spending on a regular basis.
Doing so will help you track your progress towards your goals; it’ll also reduce your mindless spending, since you have to record every transaction that takes money from you.
Tracking spending also helps with the next step…
3.) Slash Expenses
Remember your frightening spending numbers from a few steps back? Well, it’s time to bring those down.
The amount of work you need to put into slashing your expenses varies depending on if you’re “in the red” or “in the black”.
If you’re making enough money to cover all your expenses, you should still cut your expenses where you can. Your expenses are not the difference between poverty and comfort, but it never hurts to have extra cash for other things.
But if you’re spending more than you make, you’ll have to make some sacrifices.
Easy Categories To Cut
For one, take a look at your “dining out” budget. This is an area where people tend to get carried away as there are millions of tempting options for food.
Until you’re making enough to cover your expenses AND put some away for savings, you should cut out all but occasional lunches/dinners/bar nights out.
Another area to look at would be any subscription-based services. While many of these provide great convenience, they are also one of the lowest-effort areas to improve your spending in if you don’t use them often.
First of all, you may have multiple similar subscription services when you’re better off with one. For example, if you pay for Netflix, YouTube Red, and Hulu Plus, you’re paying close to $50 a month! Do you need all those streaming services?
Also, you might have subscriptions to services that you forgot about completely. Many former console gamers might auto-renew their Xbox Live or PSN membership without realizing it, costing them a bunch of money for a simple mistake.
If you can’t live without Netflix, consider downgrading your package. You don’t need the premium one; the basic package looks pretty good to us. If you need to carry some of your other subscription services and refuse to get rid of them but the bill seems to be creeping up on you, consider checking out a service like Bill Shark that will negotiate bills for you.
4.) Consolidate Your Debt
In a perfect world, all your debt would be lumped into one amount with a low-interest rate.
But to the dismay of many, the system doesn’t work like that.
Chances are you have debt from multiple lenders, all with varying balances, high interest rates, due dates, and online payment portals.
Managing 20 different debts is not only stressful financially, but a huge drain on your time since you have to log into multiple sites to make your payments.
Even with autopay’s proliferation, you still have to track all your individual debts for your budget’s sake.
So what to do about it?
Well, you CAN lump all you debt together to a large degree; it’s called debt consolidation.
How does it work? Do you get on a 20-way conference call with your lenders and ask them to mash your debt into one giant debt ball?
Actually, all you do is take out a loan to pay off your other debts (or transfer a credit card balance to a new credit card).
Now, there’s no guaranteeing you’ll land an optimal interest rate just because you’re seeking to consolidate your debt. You may have to do some math to see which debt makes sense to consolidate and which debt you should leave as is.
However, if you’ve been working hard on raising your credit score for a long time, there’s a good chance you’ll get nice offers from 1 or 2 lenders.
One minor downside to debt consolidation is you’re extending your debt terms (since you’re taking out a new loan/credit card). But if you can aggregate your debt and lower your total monthly debt payments enough, you can hopefully save even more money to accelerate your debt payoff.
5.) Adjust Your Budget Based On Life Changes
Great! You’re managing your money pretty well by now (if you’ve taken our advice, of course).
However, you life (and budget) aren’t going to be the exact same forever; eventually, your income and expenses will change as you move through life.
That’s why it’s important to look back to your budget and tweak it when necessary.
Don’t get that confused with creating an unrealistic budget; it can be tempting to make drastic budgetary changes so you can justify irresponsible purposes.
Anyways, let’s look at an example.
Say you finally paid off your student loans. With no student loans to pay, you can drop that from your budget.
Oh look! You now have more disposable income! Perhaps you can pay off some debt fast, stuff your emergency fund, or loosen up your restaurant budget (although we recommend taking care of the former 2 things before the latter).
For a less happy example, let’s say you recently lost your job. Being the responsible saver you are, you put some $24,000 in a savings account (you spend $4,000 to live) to keep yourself afloat if this ever happened.
Luckily, 3 months in, your friend knows a guy who knows a guy who’s now hiring. You slam dunk your interviews and get hired.
However, you spent half your emergency fund while hunting for your next gig. Again, you’re wise with your money so you make sure to readjust your budget to reflect your emergency fund contributions until that account is full again.
Don’t Drop Your New Habits
Anything worth achieving in life can be obtained largely through consistent action; personal money management is no different.
At it’s core, proper money management requires effort and discipline; if it didn’t, we’d have a lot less six-figure earners living paycheck-to-paycheck (back in 2015, Nielsen found that 25% of families earning at least $150,000 per year were living paycheck-to-paycheck)!
However, despite the grit it takes to manage your money properly (especially when you’re surrounded by people who do it poorly or not at all), the peace of mind is well worth it.