With careful management, any amount of money you make can work hard and increase in usefulness and the ability to create wealth, stability, and comfort for you and your family for generations. Conversely, even with an incredibly generous income, if not strategically managed, you can end up with cycles of debt, and chronic financial anxiety.
What is Good Money Management?
The simple definition of money management is to record, evaluate and make wise decisions regarding your individual or household finances. The ultimate goal is to stay in financial control with the ability to afford what you need while creating a more comfortable life, no matter how much - or how little - money you start with.
Basic Steps in Managing Your Money
It’s never too early or too late to learn good money management practices. Here are the basic steps:
- Create a budget and follow it – Recording all of your income and all of your expenses is the first step in budget creation. Your income should exceed your fixed costs (e.g., rent/mortgage, insurance, car payment, student loan payment) and allow for flexible expenses that are critical to your life (e.g., food, charitable giving, childcare, pet care, entertainment). If your income doesn't cover these things, notice where you went astray. Make adjustments to your budget to address overspending, create more revenue and savings and pay down debt while living on less money for a time. Account for every dollar that comes in or goes out.
- Reevaluate the budget – Keep checking your progress and adjusting your budget to reflect the paid-down debt, the extra money that can further attack your debt or help build your emergency fund. Don’t forget to allow yourself small indulgences for entertainment or treats once in a while. Just make sure the amounts for these are in the budget.
- Track all spending and additional income – Your budget should have no unaccounted-for income or spending. If you receive unexpected income, determine what to do with it according to your current budget goals. Don’t be carried away by impulse spending that can wait. On the other hand, if an actual unexpected expense comes up, remember, that’s the purpose of your emergency fund. Spend that if you have to, and then replenish it as you are able. Track every dime you spend to avoid reverting to poor spending habits. Adjust your budget if you find you didn’t allow enough for certain reasonable or essential expenses.
- No new debt or expenses – Don’t take on any other obligation or make purchases that can wait. Don’t create more monthly bills.
- Swear off credit cards – No more loans or credit card purchases. Following this rule is key to getting out and staying out of future debt. If you use a card for purchases or travel, or other conveniences, pay it off entirely before being charged interest.
- Save up cash for purchases – Part of your budget should account for necessary future purchases. Put money aside in a savings account and wait to purchase without credit or interest.
- Future planning – Once you’re out of debt and have an emergency fund in reserve, reassess your finances. Budget for investment and retirement savings before you add more extravagant expenses and purchases into your budget.
The Strategic Steps for Wealth-building
All of the above are essential practices when it comes to successful money management. The thing that I want all of my clients to fully appreciate, however, is that careful and responsible money management by itself will not lead to wealth. It will almost certainly eliminate the stress of not being able to pay bills on time, or coming up short in case of an emergency. Those things are good, but for many people, they are not enough.
Asset Development is the Key to Wealth Building
The true key to building wealth is asset development. Asset development - that is, acquiring and building net worth from investments - is not just for those that are already wealthy. It is the path that leads to wealth. The best way to get started down this path is by working with a financial advisor and strategic tax planning specialist to develop a plan that is customized for you in your present financial situation.
It’s best to start your financial profile making good decisions, but learning to manage your money wisely can transform your prospects even once you have debt. Whether you need help addressing economic challenges, evaluating your current money management habits, or creating a plan for future wealth, Myrick CPA has you covered. Contact our office for a free consultation today.