How to manage money? Improve financial health today

Introduction

They say that money cannot buy happiness but it certainly has the power to give you a sense of security. Managing your money, therefore, is not just about affording everything you need but it also can save you from emergencies. But the answer to the question of how to manage money effectively is not as complex as it may sound. Of course, you need to have a designated financial plan and learn to budget. Indeed, once you get your hands on proper money management strategies, it can reap wonderful results in the long run. In fact, even when you are not good at math still calculating your finances using basic addition and subtraction keeps you away from going broke because of over expenditure of money.

Therefore, the next section of this article will tell you all the steps and rules of how to manage money in the easiest possible ways. Stay tuned to know more.

How to manage money? 5 Rules for Basic Money Management

Financial health is all about saving and spending money in the right ways. Likewise, managing your finances is one way to make your life easier. Accordingly, money cannot solve all of your problems but when you have enough of it then surely you can focus on problems that are more important than money. Besides, it keeps you away from the financial crisis and unnecessary build-up of debts. Apart from this, when you manage your finances, you free yourself from a lot of future money turbulences that lead to a lot of mental frustration. This is because not knowing how to manage money is directly related to bringing in a lot of worries and tensions during emergencies.

Hence, although there are no trial and tested methods as to how to manage your finances perfectly, there are still some rules to help you get started with the process.

how to manage money
August 17, 2021
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Table of Contents

Calculating the net worth

The first step in the process of managing our finances is to have a clear overview of your earnings and your expenses. The process of calculating your net worth, therefore, starts with first assessing your current financial health. This is the most basic step for you to find out how you can tackle your finances to reach your short-term and long-term financial goals. 

Accordingly, your total net worth is comprised of two components: Assets and liabilities. Assets are the things that you own whereas liabilities are the things that you owe. To calculate the net worth, simply subtract your liabilities from your assets. 

Moreover, it is best advised to calculate your net worth at least once a year to have a clear vision of your current financial standing. Therefore, if you ask me how to manage money then calculating your net worth is no doubt the first and the most important thing in the process.  

After you have completed calculating your net worth, the next thing is to make a budget. A budget is simply a financial plan that you layout regularly to manage your finances. Click here  to know more about the process of budgeting for personal financial planning. 

Manage Lifestyle Inflation

When you got your first salary, what did you do with that? Certainly, you must have brought something for yourself, for your parents and your friends. Maybe you even had a full-on party to celebrate that occasion. Now tell me how much money did you actually save from that first earning? You don’t really remember, right? That’s where we all go wrong.

Whenever we have enough money in our pockets, we end up spending more than half of it resulting in no savings. This is known as Lifestyle inflation. It simply means that the more you earn, the more you end up spending. This is the biggest loophole in the process of financial management and it completely shakes the foundation of your financial plan. That is why accurate money management skills not only contribute to better investments but also help you to accumulate wealth for future causes.

These include the bigger things like:

  •  Your retirement plan
  • Maybe a trip to your favorite destination
  • Paying back your house loans
  • Clearing out debts etc.

In conclusion, by regulating and managing this financial inflation you do not limit your ability to accumulate wealth and secure your future using correct measures.

Spend Mindfully

Many people struggle with money management because they do not have a clear understanding of their “wants” and their “needs”. Essentially, your wants are the things that give you temporary pleasure and happiness. On the other hand, your needs are the things you cannot survive without. Any person who can differentiate between the two masters the art of personal financial planning and wins the game of money management. Spending your money mindfully, therefore, revolves around the proper balancing between these two factors. 

One way to do this is to make a clear list of things that you need and the ones that you want. Some examples of needs include your monthly bills, your home loan, expenses on food and clothes, etc. Wants, on the other hand, include a day out with friends, a foreign trip, a luxury car, etc. Likewise, limiting your wants does not mean living the life of a saint and giving up on everything you desire. Instead, it’s more about how to manage money to fulfill your needs and wants while saving for the future. 

Consequently, when you plan a budget and assign the clear amount of money that you will be spending on both of these keeps you out from financial troubles.

Start Saving Early

It does not matter whether you are earning INR 5000 a month or INR 50,000 a month, ultimately if you are not able to save even 5% of it then it is of no use. Of course, you will be happy in the short term but living from paycheck to paycheck will only add a lot of misery to your future. Planning for your retirement, therefore, right from the moment you start earning is one of the most simple money management tips.

Likewise, the earlier you start, the better it gets to reach your long-term financial goals without toiling much.

For example: Let us say you earn INR 10,000 a month at the age of 20. If you save INR 1000 each month (keeping in mind that there are no changes in your salary) for your retirement then by the time you turn 40, you will accumulate a sum of INR 2,40,000. This is less but it could really help you in future emergencies after your retirement.

Subsequently, as your salary keeps on increasing, you can increase the amount that goes to your retirement fund, thereby, improving your overall financial health.

Emergency Fund

 Technically it is not possible to answer the question of how to manage money with certainty. This is because life is very unpredictable and you never know what is going to happen in the next moment. That is why always being prepared for the worst of results is something that will keep you away from the edge of falling off the cliff of financial hardships. Hence, creating an emergency fund is the most important part of financial planning. So, this fund is kept aside only for the immediate urgent matters in which money needs to be spent right at the moment. Generally, these expenses are not included in your personal budget, they are not even a part of your financial plans but you still have to deal with them when they arise. 

Some examples where you can use emergency funds are:

  • Sudden financial crisis: In case you lose your job due to physical injury. 
  • Medical expenses: When someone in your family suffers from a serious health condition. 
  • Accidents: For Example, A Tree falling on your car due to bad weather. 

Types Of Money Management

Money management skills are important not just for companies but also for individuals. Whether you are handling your own personal finances or managing the finances of a whole company, when you do not know how and where to spend your money then you put yourself at risk of a lot of financial problems. However, your skills are of no use when you don’t know how to use them correctly. Having said that, apart from budgeting and money calculations, you can take the help of technology to get started. Likewise, there are many online applications and software to help you learn the art of financial planning. But before you do that, here are 5 types of money management systems to improve your money management skills.

Capital budgeting

The money you spend is directly proportional to the amount you earn. Making a personal budget, therefore, is the first step towards having a clear view about where and how you are going to spend your money. Budgeting is a simple process but it is the backbone of proper financial planning. A budget is nothing but a plan to spend your money correctly. Likewise, you can either make a budget on paper and pen or use online software for the same. Many online tools can guide you through the process of budgeting if you don’t have enough knowledge about it.

Banking and Saving

It is just not possible to keep all your money at home. That is why deciding what bank you want to save your money in is one important factor that decides how to manage money and save it while earning interest on it. Similarly, different banks charge differently for services like paying bills online, visiting a teller, etc. Henceforth, depending upon the type of services that you want, you can choose your bank. Lastly, there are three types of accounts that you can set up in a bank for securing your financial health.

They are:

  • Checking Account
  • Savings Account
  • Investment Accounts

Insurance

Medical and life insurance are two of the most important components of a good and solid financial plan. They act as an emergency fund when these hardships arise and are a great way to help you get through financial troubles. However, it is important to know that insurance can sometimes be an expensive affair. Additionally, when you go out to buy an insurance policy do not be in a hurry to take whatever the company offers just for the sake of it. Firstly, compare different policies, cross-check the benefits, and only then buy the insurance.

Some basic insurance plans that are a must are:

  • Homeowners Insurance
  • Life Insurance
  • Disability Insurance
  • Healthcare Insurance

Investing

When you save money, you are just making a fixed deposit of what you already have. But when you invest money, you are generating an income from it. As complicated as the process of investing may sound, once you learn the right techniques of investment, you realize that it is one of the most crucial steps in adding more money to your wealth. Thus, mutual funds, stocks, and real estates are some ways to invest. At the same time, it is important to monitor all your investments. Because after all, it’s your money, if you don’t take care of where it goes, no one will. Also, keeping a track of your investments only helps you to make better Investments in the future.

Financial Planning

Financial planning is all about setting out a clear list of financial goals and targets that you need to achieve. After all, you cannot go around searching for answers to how to manage money when you don’t even know where you want to spend that money. So, take out a pen and paper make a list of all your financial goals. Write down everything that you wish to buy and then set timelines and money you are willing to spend on each of those goals. Subsequently, a financial plan comprises a clear picture that contains the following three things:

  • Current finances
  • Financial goals
  • Strategies to use your current finances to achieve your financial goals

Become an Expert on Chegg: How to manage your own money as a Student

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Final thoughts

By now, you must have got your answer to the question of how to manage money? But it’s important to realize that managing your finances takes a lot of time and effort. When on the one hand budgeting, investing, risk management, and emergency funding are great ways to help you manage your money. On the other hand, the risks that come due to the failure of your financial plans are also not less. Simultaneously, correct ways of financial planning not only help to keep you out of debt but also gives you an idea about how to control your money and saves you from the financial crisis. 

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