When thinking about money management and personal finances, it’s normal to think that in order to improve your financial future, you need to continue to increase your income. In reality, it’s so much more than that. Investing in your financial future also involves saving, cutting spending when necessary, shopping smarter with a plan, and being aware of your resources. Here are some money management tips to not only improve your habits but also improve your sense of security now and into the future.
1. Understand Your Budget
A fundamental aspect of money management is knowing how much money you have coming in and where your money is being spent. Whether your income is generated from a job in the form of wages, salary, or commission, or other ways such as investments or gifts/allowance, having a tracking system in place for budgeting is key.
After you’ve determined how much money you have coming in after taxes (or net income), it’s important to have a detailed understanding of all of your expenses for the month. While this list can be quite expansive, it will include costs like:
- Auto Payment
- Credit Cards
- Student Loans
- Subscription Services
- Pet Care/Food
- Personal Care
To accurately assess the cost per month, review the amount spent on each expense over the last three months by checking prior statements and bank records. Part of this process is understanding the difference between a fixed payment (something mandatory that doesn’t change over time, like a mortgage payment) and a variable expense (something that can change month-to-month, like groceries). Assign each expense to either category and estimate how much you will be spending per month on the variable expenses.
After this is all determined, total your expenses and your monthly income. If you’re making more than you’re spending, you’re likely in a good financial situation. If you’re spending more than you’re making or just about breaking even to cover your expenses, you need to re-evaluate your spending habits and see where you can make adjustments. As fixed expenses generally can’t be adjusted, focus on your variable expenses and see where you can reduce or eliminate them. For example, if you have subscription services for video streaming, consider eliminating all but one to help cut costs. Or, try meal prepping to cut down on the amount of money you spend on takeout each week. These small adjustments may make a big impact over time and may allow you to be in a better, more secure financial position.
2. Save For the Unexpected
While budgeting the money you have is a great way to put yourself in a better financial position, it’s also important that you plan for the unexpected. Events like unplanned medical expenses, auto repairs, and home repairs can pop up out of the blue, and when they do it’s important to have a plan in place. Building an emergency fund can be especially helpful during times like this. This safety net can help pay the cost of an emergency out of pocket versus having to put it on credit. In turn, this may help you pay for only the cost of the emergency without any extra interest or future bills attached to it.
While saving for an emergency fund, it’s important to remember that this is dedicated to emergencies only, and this is separate from a savings account where you might be saving for other reasons. While there’s no specific amount of money to have in case of emergency, it’s good to aim for three to nine months of expenses saved up. If you took one valuable lesson from 2020, hopefully, you realized that life can take unexpected turns at any time and by preparing early on for the unexpected, you’re investing in yourself and your future.
To make the most of this fund, consider investing in a high-yielding interest rate account with easy access. Furthermore, it’s beneficial to keep this money in a different account than your daily checking and savings account to limit the temptation to spend. To make saving as easy as possible, speak with your employer about splitting your paycheck between accounts to automatically contribute to this fund. If possible, you can put your tax return directly into this account every year and continue to help expedite its growth.
3. Plan for the Future
While taking the time to invest in yourself, it’s also worthwhile to invest in your legacy and family. If you were to pass away suddenly, would your dependents have enough money to take care of major expenses like your funeral or a mortgage? Would they be able to live comfortably with your loss of income? While these aren’t the most pleasant topics to consider, they are an important part of money management and future planning. Reviewing life insurance coverage options now is highly beneficial in the short and long term.
A life insurance payout, or death benefit, is payable to whom you designate, called a beneficiary. Common beneficiaries include parents, spouses, and children, and these can be adjusted at any time. While you might think that spending the extra money on this type of coverage is unnecessary, it can prove valuable for your legacy, especially if you don’t have a large savings account. This a coverage option that you may want to invest in sooner rather than later.
4. Pay Bills on Time
One of the most important ways to manage your money is to pay your bills on time. Not only can this help keep your credit score in good shape, but this also helps you avoid late fees and penalties. One missed payment may not seem like a big deal, but these fees can add up over time, making you spend extra money unnecessarily. If you know that you’ll be making a payment later than the due date, consult the creditor or lender and inquire about their grace period. In some cases, they may be able to waive your first late fee or make arrangements to avoid the penalty.
An easy way to help avoid late fees is to pay the bill ahead of time if possible. This will not only help keep you on track for on-time payments but will also help keep you true to your budget. Furthermore, if you can, try to pay more than the minimum amount due. This can be on bills like credit cards, or on other bills like utilities. For example, if your water bill is $50 and you pay $75, this will help put you ahead of the next bill. Doing this as often as you can will set you up for success later down the road as it can make the overall monthly payment smaller over time.
5. Work a Side Hustle
Another way to invest in yourself is to pick up a side hustle. Side hustles are another way to earn income to supplement your main source of income from your employer and are typically worked at your leisure outside of normal work hours. Because of this, side hustles can be part-time work, contracted work, or freelanced.
Having another source of income can be beneficial to you in many ways, one of which is the ability to help pay off debt faster. If you’re facing endless student loans or just want some extra cash in your pocket, a side hustle can help you reach your goals faster, while providing you with activities that bring you new experiences. Some examples of side hustles include:
- Driving for a rideshare service
- Dog walking/sitting
- Renting out a spare room
- General labor
Because these can be done outside of your traditional work schedule, you have the freedom to work when you want and as often as you want to. Besides earning extra income, a side hustle can give you experience in entrepreneurship, making this beneficial for you in more ways than one.
Invest in Yourself
Investing in yourself is more than just focusing on your current financial situation; it’s about putting yourself in the best possible financial position you can be in. By looking at the bigger picture, both present, and future, you can work to create financial stability that will allow you to live the life you intend with no strings attached. Starting with small incremental changes will have more impact than you realize, so get started today on creating your own plan for financial freedom.