10 Basic Rules Of Money Management Everyone Needs to Follow
Money management is a basic life skill that everyone should master or at least continuously strive to improve at throughout their lives. It is a skill that should be groomed and honed since childhood. Adults who are good at money management are able to live comfortably, debt-free lives, even if they don’t earn millions. On the contrary, people who earn a sizeable income may end up broke due to poor money management. You do not want to belong to the latter of those!
Here are 10 basic rules of money management that everyone, regardless of their social or financial status, must follow:
Have a Long-Term Plan
You should have a long-term and short-term plan that you must try to adhere to as much as possible. One cannot arrive at a destination on the other side of the country without a map, and one cannot achieve “financial freedom” without a plan to guide you along. Plan out major and period expenses so your bank account is never left blindsided and in need of life support because it never saw that major expense coming!
Set Financial Goals
Remember how we said that you need a map to get to a destination? Well, a map is useless if you do not know which destination you want to get to. Your financial goals are that destination. These should include your long-term goals as well as short and mid-range goals, stops that you make during your journey to that financial destinations if you will. Nurture and adjust your goals monthly, evaluate your shortcomings, and most importantly, celebrate your achievements!
Save, Save, Save
Savings are one of the most important aspects of money management. You can save to cover periodic expenses such as buying a car or making home improvements, but it is also important to save money “just for the sake of saving”. 5-10% of your net income is a good amount of money to put away every month. Don’t forget that an emergency fund is also very important! Typically, one should aim to have about 3-6 months’ salary stowed away in a rainy-day fund.
Know Your Financial Situation
If you do not have adequate knowledge about your income and expenses, you cannot expect to get good at money management. Determine your monthly expenses such as rent, groceries, debt payments, and period expenses. Compare this to your monthly net income and make sure that you aren’t overspending!
Draw Up a Realistic Budget
Once you have the proper information on how much money is coming in and how much is going out, it’s time to create a -realistic – budget. Once you draw a budget up, you should try to follow it as closely as possible. It is entirely reasonable that you may need to evaluate and make changes to your budget over time, but that does not mean you should ditch it entirely!
Record Daily Expenditure
Once you are aware of how much money you spend every month, you can compare it to your budget and see if they both correlate. One way to determine what areas need to be cut down on is to properly evaluate everything you spend on. Use a spending diary (or a budget app) to record your daily expenses. This makes it easier for you to see the overall picture and make adjustments where needed.
Assess Your Wants and Needs
Your expenses can be categorized into wants and needs. Needs are those things that are essential to your living such as food, rent, education, etc. Sometimes, wants may be misconstrued as needs, but it is important to establish the difference between these because needs must be met first. For instance, you may think you need to get a new bed because you are sleeping on a mattress, but if buying one comes at the cost of not being able to buy groceries – then it is best to forgo that expense for now.
Expenses Should not Exceed Income
This is the number one rule of money management! Your income should always be higher than your expenses, or you’re just spending money that you do not have. You should always avoid buying things that are beyond your means because this will definitely result in financial ruin.
One of the things that people fall trap to is credit cards because it seems like this magical thing that lets you buy things you cannot pay for. If you have a credit card, don’t ever use it to buy something you cannot afford. Remember that debt is a very real thing that can have serious ramifications on your life. Paying the minimum charge on your card every month and letting the rest accumulate is not a sound financial strategy either!
Use Credit Wisely
While credit cards are debt traps, they can be used to make long-term purchases if you have planned it out properly and have the means to repay the owed amount every month. Calculate the amount of money you can comfortably afford to purchase on credit – and never allow credit card payments to exceed 20% of your net income. You should also avoid borrowing from one lender to pay another.
Pay Your Bills on Time
Having a good credit rating is essential to your long-term financial health. One of the ways to keep the rating from slipping is to pay your bills on time because no one likes a borrower who doesn’t pay them back when promised. In case you aren’t able to pay your bills as agreed, make sure to contact your creditors and explain the situation. This will at least make you seem like a reliable person who isn’t trying to scam them but a human who is genuinely facing trying times. Despite what most of us think, lenders can be reasonable and help you work out such issues. Keep in mind that this is only for outlier situations and not meant to be done every single month.
If you are having trouble figuring out any part of your financial situation such as debt, budget, etc. make sure to consult a professional or go online to use services like credit.org for credit counseling or advice on credit and debt.