Money management is a frightening prospect for many people. Paying the monthly bills is hard enough, and planning for the future can be even harder. However, there is no need to be frightened about managing your personal finances. Everyone needs to have basic money management skills. Like learning how to read, financial literacy isn’t something you are born with; it has to be taught.
That doesn’t mean learning basic money management requires special training or a degree in accounting. Most of personal money management is common sense. You have to start with some basic financial planning and budgeting. From there, it is easier to manage day-to-day expenses and plan for the future.
Here are six basic money management skills that everyone should master:
1. Plan out your finances.
Start with a financial plan. It doesn’t have to be a complex plan that requires spreadsheets. Create a simple plan that considers basic living expenses, the immediate future, and long-term financial dreams such as homeownership or retirement. Start with a basic list of what you have in the bank, what you are earning each month, and what you want for the future.
2. Develop a household budget.
This is the most important aspect of money management, but only two in five households have a budget, according to the Certified Financial Planner Board of Standards. What’s worse, 64% of households are overspending, and 59% are not tracking their spending. Without a budget, you can’t manage your money.
Start by listing all of your sources of income, including paychecks, alimony, dividends, and child support—any income you can count on each month. Then make a comprehensive list of expenses, including fixed expenses such as rent or mortgage and loan payments, and an average of variable expenses such as utilities, food, transportation, and so on. Subtract your expenses from your income, and you should have money left over. Now you can determine how much money you can put toward short-term plans and long-term dreams.
3. Commit to saving.
Every budget should include savings, although there are different thoughts about how much to save. Many financial planners like the 50/30/20 rule, which allocates 50% for essentials, 30% for what you want, and 20% for savings. Others recommend saving at least 10% of your income to start with, and gradually building up to 20%.
However you choose to save, you should have both an emergency fund and retirement savings. An emergency fund should cover the unexpected, such as car repairs or medical bills. Plan to set aside 3-6 months of living expenses in case you lose your job or can’t work. Retirement savings are another matter. How much you should save differs depending on your stage of life, but you should plan to save between 15% and 25% of your income for retirement.
4. Manage your debt.
Your money management strategy should include debt management as well. Your household budget will include debt, such as a mortgage, student loans, car loans, and credit card debt. Naturally, you should work to minimize your debt. Some debt, such as your mortgage or student loans, has to be worked into your monthly budget, but you should try to minimize or eliminate any unnecessary debt.
For example, try to pay off your credit cards each month. Once you have a household budget, you know how much extra cash you have each month, but it is better to save than accumulate more debt. Be sure your debt-to-income ratio is well under 40%. If you are having trouble managing your debt, consider developing a debt consolidation strategy.
5. Make it a team effort.
If you are married or have a partner with whom you share financial responsibilities, then develop a shared money management strategy. Conflicts over money create the greatest stress in any relationship.
Be open in your discussions about money and plan together. Establish common goals. Understand each other’s financial attitude and “money personality.” Make joint decisions about the household budget, who pays the bills, and how to deal with big expenditures.
6. Be adaptable.
Your financial situation will change over time. You will make more money, have more expenses, pay off debt, take on additional responsibilities such as a family, and so on. Your financial needs change, and your money management strategy needs to change as well. Plan to revise your household budget regularly. Track your retirement funds to make sure your savings are on track. Be aware of your spending and debt accumulation. Be mindful, and be flexible.
Your credit union can help. We have a number of tools to help you with financial planning and money management, including checking accounts, savings accounts, retirement accounts, credit cards, and more. We also offer classes and presentations that can help advance your financial education.