Finance management is not only a professional job. Everyone has to do finance management in their own life. So all are finance managers of their own life. That is you need to know how to manage your money. If we fail in this we will be in financial crisis. Here we are going to discuss some factors we should know and to apply when we think about managing our money.
Factors to know in how to manage your money?
The factors you should know when you think to manage your money are 1) Understand your incomes and expenses 2) Plan your incomes and expenses 3) Track your plan 4) Spending money successfully 5) Start savings 6) Make investments. These six steps make you to improve your life in financial success. Now we are going to understand each step separately.
1. Understand your incomes and expenses
Understanding your incomes and expenses is the first step in managing your money. You should know the nature of incomes and expenses. Some incomes and expenses are fixed on every month. It will not change for a fixed duration may be for six months or one year. Some incomes and expenses are varying every month. So you should understand that how much percentage of your incomes and expenses are fixed and how much is varying. If your incomes and expenses are varying, then you should also know how much will be its minimum, how much will be its average and how much maximum it can be. Thus you should clearly understand your incomes and expenses in a proper way.
This can be done by first noting down the expenses and incomes for one month. Categorize it in a way that makes sense to you. Now you can easily identify the nature of your incomes and expenses.
2. Plan your income and expenses
After identifying the nature of your incomes and expenses it is the time to plan for next month. You should plan for your next month incomes and expenses. That is to make a budget for each coming month. For a fixed income and expense it is easy for you to plan for the next month. For a variable income and expenses put the average value or best possible value in the plan.
Plan your short-term as well as long-term goals. Allocate your incomes in each category of your expenses. Budget for the month should be prepared at the beginning of the month. The budget should be change each month according to the requirement of each month. Include savings in your budget in every month. It is advised to be more than 10% of your income. Put space for unexpected expenses like car breakdown, medication etc.
If the budget is not getting close to the realistic figures, rearrange your budget for the next month to make it realistic.
Don’t forget to include your tax payments when you are planning.
3. Track your plan
When you prepare budget, you should add one more column for actual budget. This column helps you to track your budget. Noting down each expense in this column you can track your expenses. A control of the expenses can be made by this way. It also allows you to adjust your spending habits and put the money towards more meaningful areas.
Don’t forget to write down the expenses you made with credit card, or methods other than cash.
4. Spending money successfully
Previous step of tracking the expenses will help you to spend money successfully. It helps you to adjust spending habits and regulate your expenses. One important thing you should remember when spending is that don’t buy if there is an opportunity to borrow/rent, if it is not useful for long time. That is to make a small cost analysis before purchase anything. Check whether you can reduce what you spend.
Pay your monthly bills on time to avoid late charges. Spend what you have, not what you hope to make. Unless it’s emergency, only spend money that you have, not money that you expect to make. This should keep you out of debt and planning well for the future.
You should be very careful when you purchase something by taking loan. Take loan for necessary items only and also if there is no other option. Take only loan for which it is necessary. Sometimes people have a tendency to borrow as much as available, it is not a good finance management. Go for suitable installments and repayment methods as per your income.
Use your credit cards like cash. Some people treat their credit cards like unlimited spending devices, running up balances they know they can’t pay off and only making the minimum monthly payment. Thus makes them to financial crisis.
Withdraw cash only from ATMs that do not charge you a fee. Share your financial status with family and make sure that they also cooperate with your spending habits. Keep correct records of tax. When you spend anything or purchase an insurance search for best option for you.
5. Start savings
Savings is very important in these days. Make sure that minimum 10% of monthly income is separated for saving. Saving a small amount each month for long time will make a big time. So start your savings as early as possible. Teach your kids also the importance of savings.
Savings will be important as it can act as an emergency fund. So the savings will help you to meet the unexpected needs, and protect you from having debt and interest associated with it.
Set aside minimum six months or even nine months expenses to protect you from financial difficulties that can arise. It may be a decrease in income.
It is a common experience as lesser the debt, you can save more. So pay off your debt as early as possible by choosing from higher interest rate to lower interest rate. Pay more than the minimum payment on your credit card bill. If you can, pay them in full every month.
Involve in employer contribution schemes so that you will also be able to set aside some fund even before reaching your hand. Register for some retirement plan also as savings, which will help you to get income after your retirement.
6. Make investments
Make sure to invest some part of your income. The first step in investment is to familiarize you with different investment options. More the knowledge more will be the investment opportunity.
Simple investment method is to join any retirement plans that your company is offering for employees. This is because you make payments before it comes to your hand. Other retirement plans and insurance in some cases will also be a better option in investment.
If you are investing in stock market, don’t gamble with your money. Avoid short-term investment and invest for a long time in stock market. For investing in stock market, concentrate on the basics. Look at company fundamentals like company management, their trustworthy and transparency, cash they have on hand, what their product history is, how they value their employees, and what their strategic alliances etc. These calculations may be difficult to a normal person; another option is to choose a mutual fund. Mutual funds are managed by professionals and they minimize risk by diversifying the investment.
Be sure to compare benefits before deciding on a financial institution. Always read financial documents and agreements before signing them.