The Basics of Money Management
Do we really know where our money goes? And even worse, do we know how to stop it from slipping out of our hands?
There are countless situations where we stopped to buy something we don’t even need, got out for dinner when we could have made it at home, purchasing clothes that are not currently unnecessary, etc. Stop for a moment and think.
It is basic human nature to spend money on items that keep us satisfied and fulfill our wishes, despite the state of our budget. This is what stands behind the idea of money management techniques.
They are being developed to decrease the amount of individuals, companies or institutions spend on products with no significant value to their living standards and assets.
Since the educational system failed at teaching us most of the life skills, we have to do it ourselves. And handling money is definitely an important one in the modern world we live in today.
This article was inspired by a need for such knowledge.
Keep reading to learn more about the basics of money management and get some useful tips to keep track of your finances.
THE BASICS OF MONEY MANAGEMENT
Money management is a useful process of expense tracking, budgeting, investing and evaluating taxes of one’s money. It is also known as investment management.
It helps in overseeing the capital usage of individuals or bigger groups. These strategic techniques are used for saving and making money yield the highest interest output value for every amount spent.
Money management involves services and solutions within the entire investment industry.
In the market, there are plenty of applications and resources that allow consumers to individually manage almost all aspects of their own finances.
As investors increase the net worth, they have to look for the services of financial advisors for more professional money management.
These experts are commonly associated with brokerage services and private banking, and they offer support for complete money management plans which may involve retirement, estate planning and similar.
Money management is a central feature of the investment industry. Investment company money management can offer consumers investment fund options that cover all investable asset classes in a financial market.
Since the financial technology market is growing fast, personal finance apps are created to help consumers with almost every aspect of their finances.
It deals with risks consumers must take in uncertain situations, more precisely what part of their wealth should be put into the risk to get the best results. Also, money management could give advice for gambling or stock trading.
Basically, money management helps us gain better control over income and expenses, both in business and personal perspective.
This is achieved by analyzing costs and income and establishing budgets.
In stock trading, money management is an important part of the success of a trading system.
In combination with an efficient market strategy, it will enable the trader to make money over the long term.
A successful trader takes risks knowing that it’s not about entering a trade since managing is much more important.
An important reason for having a proper money management technique is to be sure you can remain in the market long enough to make a profit.
What many people fail to understand is the psychology of trading.
This is often the hardest part to control even for experienced traders.
Correct money management techniques can help us distance our emotions, but we will still have available capital for future trading opportunities.
HOW TO MANAGE MONEY BETTER
Since being good with money is not only about being able to pay the bills, some good financial skills are required. It is very important how you spend your money since that impacts the debt you end up carrying.
It’s not complex math; actually, all you need is basic addition and subtraction.
When it comes to purchasing decisions, you can’t just assume that you can afford something; be sure that those funds are not intended for another expense already.
According to your budget and the balance in your savings account, determine that you can afford the purchase. Also, consider all the bills and expenses that must be paid.
Having enough money doesn’t always mean it should be spent.
But you should know that it will take some time to get used to putting off purchases and plan ahead.
Being good with money takes time and practice.
In the text below, we picked some habits you can add to your everyday life to make money management easier.
Let’s start with making a budget. Not having (or not wanting to have) budget determined is a common mistake when it comes to finances.
Sometimes, listing out all expenses might seem a little boring but it is definitely worth it, especially for those who are bad with handling money.
The process of creating a budget is short so the focus should be on the results.
This list should be close to you all the time to guide you while purchasing. It should be updated with each bill paid or money spent.
Also, consider making plans on how to spend the money left after paying all the necessary expenses. Some amount can be left for entertainment, but not whole. Make a reasonable limit.
Obviously, the next step would be tracking spending. Write down all the places you’ve been spending money at, and at the end of the month summarize the costs to see where you were overspending.
There are some useful apps to help you track it better. Find the one that suits you best here.
Along with delaying some purchases, try to look for the lowest prices whenever you spend your money.
Discounts, coupons and cheaper options will help saving up for more important purchases.
Think twice before buying and evaluate whether the purchase is necessary.
And if you simply can’t avoid using a credit card, then set a limit. It is certainly your worst enemy if you’re bad with money.
Most people, when they run out of cash, just take a credit card not considering whether they can afford the purchase and still have for necessary items. Learn to control yourself.
And perhaps the most useful habit to add to your daily routine is adding to savings regularly.
Moving small amounts of money to a savings account often can help you develop better financial skills.
That way, you don’t have to worry about spending too much.
And remember that this takes some time to get used to, so don’t expect to become an expert overnight.
For more advice on how to manage your money better, watch this video:
BEGINNER’S GUIDE TO MANAGING MONEY
Taking some time to manage money can really help to stay on top of the bills, and still save thousands of dollars each year.
These extra savings can be used to pay off debts you may have or spend them on some items from your wishlist.
We have already mentioned some helpful tips on how to save money by tracking spending and keeping the budget updated.
Now, we’ll explain it in detail to make it even simpler.
Read the steps below.
Setting Up a Budget
As already mentioned, the best way to control your finances is by making a budget.
There are plenty of reasons why and here are just some of them:
- You will be able to see where you overspend
- It is more likely that you’ll have a good credit rating
- You probably won’t end up in debt or get caught out by the unexpected cost
- It will be easier to save up for a holiday or anything you’ve always wanted.
When you get started, you will first have to think about how much you spend on household bills and living costs, financial products like insurance, traveling, friends, leisure, etc.
Get as much information as possible for all of these and write them down.
You can make your own budget planner, or use one of the internet planners since there are plenty of them.
Keep writing whenever you spend money or use one of the apps we discussed before.
This will show you where you are spending more than you should and where you can cut back.
Then you’ll know if you should get rid of some unnecessary and unimportant costs (maybe cancel some club membership). Update this diary regularly.
As much as it seems weird, your family can help a lot too. If they get involved in making a budget, they might often remind you of some unusual costs or bills that have to be paid.
It is much easier when the whole family sticks to one plan. Track how much money is available each month and agree between you how it will be shared.
Also, try to cut household bills a little since they make up a huge chunk of our spending.
Save hundreds of dollars by shopping around for a new mortgage, or even better – reviewing the one you have already.
Be a Conscious Consumer
Whenever you go to the grocery store you should have a list of all the items you are looking for.
Maybe you have some coupons lying under the bed totally forgotten.
Examine the prices before buying to make sure you’re paying the best price. It is just a few cents of difference, but if you count all the times you overspent it makes a huge difference.
Paying Off Loans
There is a useful tip on paying off loans and it says: pay off first the debt which charges the highest rate of interest.
This includes credit cards, store cards and personal loans from the bank.
The last one charges a lower rate of interest than the others, while store cards have the highest rates.
Try not to break the terms of your agreements. Pay at least the minimum on any credit card, and monthly required payments on any loan agreements.
You can also seek advice from a free debt advice charity if you’re behind with debts such as rent, mortgage, energy bills, council tax, etc.
Set Goals, Think Like an Investor
Make an emergency fund by paying small amounts into a savings account every month.
Once you’ve done that, you are ready to take a holiday, buy a new car and even have some extra money for unexpected urgent situations.
There is no need to worry about the bills waiting for you home anymore.
As savings start growing, you could make an investment plan based on your goals or even put more money into a pension. That way you will be able to feel more comfortable with your finances.
Everything is easier with determined goals so set a savings goal.
When speaking of goals, commitment is everything. Anything can’t be done half-way. Be consistent and stay on course.
TOP MONEY MANAGERS
It is very common for people to not have a deep understanding of money management and investing, or not have it at all.
This is why when institutions (or individuals) invest money, they mostly seek the help of an asset management company to take control of the investments and make money for everyone who is involved.
These companies offer retail and institutional investment management funds or services which cover all investment asset classes in the industry.
After investing collected funds from clients, they work through different investments including bonds, real estate, stocks, limited partnerships, etc.
They are referred to as money management firms or simply money managers.
The list below presents the top 5 international money managers by assets under management in 2019.
Fidelity Management and research firm was found by Edward Johnson in 1946. With more than 24 million clients and $6.9 trillion in total assets in August of 2018, it is one of the leading companies of today. They offer 386 mutual funds including domestic equity, foreign equity, sector-specific, fixed-income, index, money market, and asset allocation funds.
Black Rock Inc. was launched by the Black Rock Group in 1988, and it was rapidly growing to reach $6.32 trillion in AUM by October of 2018. That makes Black Rock the largest global investment management company with nearly 12 000 employees across 30 countries. Black Rock’s ETF division named iShares has $1.6 trillion in AUM (which amounts to 27% of the group’s total assets).
With more than 20 million clients across 170 countries, The Vanguard Group is definitely one of the most popular investment management companies. It was found in 1975 by John Bogle, in Valley Forge, Pennsylvania. In October 2018, their total assets were over $5 trillion, with 388 funds.
Pacific Investment Management Company (PIMCO) was found in 1971 by Bill Gross, in Newport Beach, California. Since its launch, PIMCO has grown his assets to $1.7 trillion as of October 2018. It is one of the leading money management companies with over 100 funds and 775 investment professionals.
Investco is a global company headquartered in Atlanta, with regional offices in 25 countries. They have been offering their services since the 1940s. In August of 2018, the company had $987 billion in AUM across 100 fund products. Despite some decline in AUM from 2017, Investco remains one of the world’s best asset management companies.
Along with every step in money management, there are mistakes we should be aware of.
They are common among people of all income levels and decrease the ability to manage finances or save on long terms.
Here are some mistakes you might be making or things you’ve been missing all the time.
Not Having an Idea Where the Money Goes
Many people, when being asked how much they spend, list a few bills and expenses that first come to their mind.
Just later they realize how rich they would be if those were the only ones. Most of us don’t really know where does all the money go.
We are almost regularly surprised by an empty wallet or bank account.
But we never really considered saving or at least remembering where did that money go. It is easy to slip from our minds how fast it disappears when being spent regularly on daily products (such as food or cosmetics).
There is so much you can do about this. You know the saying – You can’t manage what you don’t measure. Here, we’ve already offered numerous solutions for this one so go ahead and work on it.
Forgetting Irregular Expenses
Holidays and vacations are surely one of the largest sources of credit card debt, and those we often forget with ease. It’s better to turn them into monthly expenses by dividing the amount you usually spend every year by 12.
Then you can set that money aside each month and be sure you’ll have enough when you need it. It doesn’t seem like much but it will save you from paying high interest on credit card debt.
Getting a Big Tax Refund
If this happens to you, you might be having too much tax withheld from the paychecks. This is not the most efficient way to save, even if it’s better than nothing.
You are losing the ability to earn something on that interest-free loan and also might lose access to your money in case of an emergency. Be sure to have some extra money set aside in this case.
Even if it’s forced saving, it is still better than nothing.
Paying a Little Extra on Your Credit Card Debt
Even if it is better than not paying your bill in full, it is still not the best option you have.
The debt can be paid off faster by putting extra money towards the debt with the highest interest rate and then making just the minimum payments on the rest.
When one balance is paid off, you can put those payments for a remaining card with the highest rate until you become debt-free.
Thinking that Borrowing from Home Equity is Wrong
There is some truth in this but let’s leave it for another time. You are putting your home on the line so this is definitely not a great idea if there is a good chance you won’t be able to make the payments.
However, refinancing high-interest credit card debt with a home equity loan makes sense because your interest rate could be much lower.
Saving Everything Left at the End of the Month
Mostly, there will be nothing left to save if you get used to this method. It is better to have savings automatically set aside instead, so you don’t have a chance to spend it.
The best way to do this is in the employer’s retirement plan because it is deducted right out of your paycheck.
You can use this for medical expenses as well. Also, try having money automatically transferred from checking account to savings account.
Setting Aside Minimum for Your Employer’s Retirement Plan
It is important to know how much to save for your retirement as much as it is important to save for the vacations.
Contributing just enough to get it is good for beginners but perhaps it won’t be enough.
To understand how much you need, take a look at the expenses and think about how each one of them could change in retirement to create a retirement budget. Use a retirement calculator to see how much you have to save.
The Right Timing
Money is necessary to live well in the society of today, but we don’t need a lot to stay successful and independent. All we need is to learn on time how to manage it.
The good financial sense is an important part of money management. But it takes some time and effort.
As you progress in your career, it becomes more and more important to understand how to wisely invest your money. Being a good manager will allow you to accumulate savings and give you security.
You will have resources to deal with unexpected expenses.
Sometimes, not being able to pay the bills and costs on time or being broke now and then can lead to higher stress level and serious health problems. This includes migraines, insomnia, and cardiovascular disease.
Learn how to manage your finances to relieve the pressure and become able to enjoy your life in full. Proper money management can bring a feeling of peace and calm your mind.
It is important to learn all sides of money management from a young age.
Teaching children about finance will help them be better with money later in life and also save them from huge amounts of stress and health problems.
When is the best time to learn about money management?
Although it’s wise to teach them these skills from a young age, it’s even better to start just before they reach high school.
Children then begin to have their own financial responsibilities and some of them even get a part-time job.
Parents also play a big role in shaping their children’s financial habits and they should be aware of it.
They should give them the responsibility, set the right example and help them manage their first wage.
Student financial wellness has become a hot topic in higher education.
Education on student loans and repayment will make students more aware of what they owe and their options for successfully paying it back.
Financial literacy education on topics such as budgeting, credit scores, and debt management will help students manage their money better, making them likely to be able to afford those loan payments.
Whether you’re striving to become a successful entrepreneur or you have something else on your mind, it’s important to manage your resources.
One of the most important resources you need to learn to manage is money.
Having numbers involved doesn’t make it any easier. General economic education is a valuable asset these days so get familiar with the terminology and the ways that you can spend and save money.
One of the main differences between being rich and wealthy is the amount of money you manage to save as opposed to the amount of money you spend.
Even if you’re spiritual and you’re not that into materialism, your time and energy are precious to you and if you don’t manage your money accordingly, you will lose both money and energy to compensate for the loss of income.
Having said that, go through this text one more time just to make sure you got it all right.
“The man who stops advertising to save money is like the man who stops the clock to save time.” - …
Dear fellow entrepreneurs and readers of Cleverism! In autumn of 2015 we went for the second time …