7 Basic Principles of Successful Money Management
Many people consider money management something that requires a lot of thought. Indeed, it quite common to find that your money is managing you, rather than the other way around. If you want to take charge of your financial future, you need to be firmly in charge of your money.
The good news, though, is that it doesn’t need to be as complicated as many people seem to want to make it. There are 7 basic principles that you can follow in order to successfully manage your money:
1. Decide What’s Important to You
Before you get started, it’s important to understand what’s important to you. Don’t think about what’s important to your neighbors, or what you “should” have to impress the in-laws. Instead, consider what is important to you. Your entire financial plan should be based on what you want to accomplish with your money. Before you can do that, you have to establish priorities and understand your own wants and needs. Decide what’s important to you before you proceed, and don’t worry that your spending might look different from someone else’s spending.
2. Understand Income and Expenses
Next, you need to understand your income and expenses. Where is your money coming from? Where does it go? Get an idea of your personal cash flow. It’s important to understand your income and expenses. Figure out where your money goes so that you are able to see what is happening. Track your income and your expenses so you have a solid idea of what’s going on. You might be surprised to see that a lot of your money flows out to things that aren’t really important to you. Recognizing this is an important step in successful money management.
3. Determine the Difference Between Needs and Wants
One of the most important aspects of money management is distinction between needs and wants. If you want to get on the right track with your finances, you need to know which items are needs, and which are wants. Needs are things that you require to survive. Food. Clothing. Shelter. A way to get to work. Everything else, however, is a want. Wants are those extra things that you would like to have, but that you won’t die without. You’ll die without food, but your life won’t end if you have to cut the cable. Be able to cut the wants when your budget warrants it. Otherwise, your money is in control of you.
4. Make Purchases With Money that You Already Have
In order to remain firmly in charge of where your money goes, and what you do with it, it’s important to be careful about debt. While there are some things, like homes, college, and cars, that you might have to go into debt for, most other things should not be bought with debt. Indeed, you are better off saving up for what you need. Delayed gratification is an important principle. Only make purchases when you actually have the money.
If you use a credit card, this means that you should pay off the balance each month. Keep track of your spending, and makes sure that you are on budget. Remember that debt is not “your” money. You are borrowing it and have to repay it with interest. Saving up is one of the most important principles of successful money management.
5. Sometimes You Have to Take Calculated Risks
Without taking a few risks, you are likely to wind up without much money to manage. For the most part, taking calculated risks with your money involves investing. You don’t need to have a lot of money to start investing, and you don’t need to be a champion stock picker. Many people find that, to achieve long-term results, it can make sense to employ dollar cost averaging with an index fund. You invest a little at a time, and over the long haul it adds up.
If you don’t invest, you won’t likely receive the returns you need to build wealth. A solid investment plan, created with an eye to the future, is an important part of money management. Be smart about your investments, and keep it relatively simple, and you will have a better chance of growing your wealth.
6. Prepare for the Unexpected
You need to be ready for what’s next. You never know when an emergency will crop up, or when something will go wrong. If a catastrophe strikes, you need to be ready to weather the storm. This means setting aside money for the future. Starting an emergency fund is a big part successful money management. You’ll be less likely to accumulate debt when you are prepared for the unexpected. You’ll have something to draw on if you end up losing your job, or if a natural disaster causes problems for your home. Understand that anything could go wrong at any time. A good emergency fund can help you stave off the worst effects.
7. Take Control of Your Own Financial Destiny
Remember that you are in control of your financial life. You can’t always predict or control what happens, buy you can prepare, and you can control how you respond. One of the principles of successful money management is to take control of your financial destiny so that you aren’t relying on someone else. Instead, look for opportunities to make more money on your own, and consider, once you have improved your knowledge, putting together an income portfolio. That way, you have a diverse income that isn’t reliant on the job someone else gives you.