Ever found yourself staring at your bank account asking, “How can I manage money better?” Money management may sound like it’s just for corporate accountants and finance moguls, but it’s incredibly important for individuals to take control of their cash, too.
Whether you feel like you’re living paycheck to paycheck or already have a sizable nest egg, money management can help you make the best use of the funds you have—and grow your wealth for the future. Read on to learn exactly how to manage money.
What Is Money Management?
First, we should answer the question: What is meant by money management? Money management is intentionally and intelligently controlling your finances so that you are using your funds in the most valuable way possible. It can involve budgeting, saving, debt management, investing, and more. Any decision that you’re making about your finances is part of money management—and the better you can get at it, the smarter your decisions will be.
Money Management Goals
Before we get into the nitty gritty, you may be asking why you should even care about managing your money. Smart money management can help you achieve so many financial and personal goals, including:
- Confidently affording your daily needs
- Being able to spend on fun things
- Buying big-ticket items, like a home or dream vacation
- Providing for your children or family members
- Being able to retire comfortably
- Donating to causes you care about
Perhaps more than anything, good money management can help give you peace of mind about the state of your finances.
How to Manage Money: 5 Money Management Principles
There are a lot of opinions out there about how to best manage your moolah, but these basic money management rules are a great way to cut through the noise and focus on what’s most important for your financial health.
1. Understand the State of Your Finances
Understanding the state of your money can feel scary, but it actually gives you power. Skillshare teacher Justin Bridges calls this your “personal snapshot,” and he explains, “The goal of looking at your personal snapshot is not to make a value judgment about yourself—it’s not to beat yourself up over mistakes or things that you’ve done wrong with your finances. It’s just a good chance for you to take a full assessment of everything going on in your situation so that you know where to go.”
So, gather information about your monthly income and expenses, your current savings and investments, any balances on credit cards or other debt, or anything else that affects your financial picture. Doing this once is a great way to identify areas you need to work on—tracking it in an ongoing way through budgeting is even more powerful. (More on that in a minute.)
2. Try Not to Spend Above Your Means
One of the most important money management rules is to not spend more than you make. While this isn’t always possible—major life purchases or emergencies may require leaning on some debt—you want to avoid your day-to-day expenses exceeding your monthly income.
It’s important to note that when you’re calculating this, you should use your net income, or income after taxes are taken out. If you just use your base salary, you’ll end up overspending since you’re not accounting for the tax money that will never actually see the light of your bank account. Again, budgeting can be a powerful tool for understanding how much you have to spend, and staying within those limits.
3. Cut Down on Debt as Much as Possible
As you start to get a handle on your finances, one of the first things you want to do is tackle any debt you have as quickly as possible, since the interest on debt essentially causes you to lose money every month. (Long-term debt for large purchases, like a mortgage or student loans, is a slightly different story and can simply be paid as payments are due.)
Take a look at any debt you have—like unpaid credit cards—and start making a plan for how you’ll pay it off. People generally use one of two methods:
- Snowball method: Rank your debts from smallest to largest balance, and focus on the smaller balances first while only making minimum payments on the others.
- Avalanche method: Rank your debts from highest interest rate (APR) to lowest, and focus on the highest interest first while only making minimum payments on the others.
4. Save for the Future (and for Fun!)
Once you’re making strides toward paying off your debt, you’ll want to start using any extra income you have to save toward future goals. There are a few types of savings you’ll want to start building, in the following order:
- Save for unexpected expenses with an emergency fund: This will help you avoid relying on debt again if accidents, emergencies, or job loss occurs. A good rule of thumb is to have 3-6 months of income set aside.
- Save for the future with a retirement account: Help future you out by starting to save for later in life as early as possible. Put this money into an investment account like a 401(k) (which is available through your employer) or IRA (a.k.a. individual retirement account, which is available to just about anyone).
- Save for fun and personal financial goals: Don’t forget to carve out some space in your savings for you! Whether it’s a dream vacation or dreams of owning a house one day, create savings to work toward major financial goals.
The 70/30 rule suggests it’s ideal to aim for 70% of your income going toward expenses and 30% going toward savings (the 70/20/10 rule breaks that down even further, advising 20% for savings and 10% toward donations or extra debt payment). But really, any amount you can squirrel away each month makes a difference—and can seriously add up over time.
5. Invest to Keep Growing Your Money
Once you have a solid amount of money put away, you may want to invest it to make it work harder for you. Thanks to the interest you earn through investing, invested money can seriously grow over time—without you having to do a thing.
Of course, investing your money comes with risk, so keep enough in savings for your daily spending plus your emergency fund. Then, start creating a solid investment strategy for the rest. Learn more about how to get started here.
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Budgeting 101: How to Manage Your Money
When it comes to how to manage money, budgeting is really the foundation of everything. Budgeting involves intentionally allocating how you want to spend the dollars coming in, planning spending limits in different categories based on your income, needs, and financial goals.
While budgeting can at first feel limiting, it’s actually incredibly empowering: It can help you rein things in if you’re living above your means, reallocate unnecessary spending into more meaningful habits, and know when you have enough to treat yourself without guilt.
How to Make a Budget
When it comes to how to budget your money, there are lots of different approaches, but the gist is this: Figure out your monthly income after tax, then start to divvy that up into different categories. You can stay broad, just dividing into high-level categories like necessities, wants, and savings, or go as granular as you want, creating individual categories for everything from your groceries to your coffee shop spending. Then, track your spending to make sure you stick to your limits.
While you can always create your own budget from scratch using Excel, there are also plenty of budgeting apps to help you easily organize and track all of your income and expenses. Here are a few to try:
The 50/30/20 Rule
As you’re trying to figure out how to allocate your money into your budget, the 50/30/20 rule is a good place to start, suggesting 50% of your after-tax income should go to needs, 30% to wants, and 20% to savings or paying off debt. While this may need to be adjusted depending on the cost of living in your city or what your income looks like, it’s a good way to start to think about a healthy breakdown for your spending.
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