“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.”
– Dave Ramsey
Before money becomes wealth, money is just money. For money to become your wealth, it is essential to understand how to manage money. Lack of clearly defined money management plan and the discipline to manage your money makes money merely an instrument which is used in the “pursuit of more” and brings no sense of self-fulfilment.
People who don’t keep a check on their expenses and spend lavishly often end up with long credit bills. While on the other hand, people with personal money management skills don’t feel happy spending lavishly, rather they attain fulfilment by having enough savings to enjoy a month of holiday and bringing a meaningful legacy to those they love.
The current unprecedented time brought by COVID-19 has taught us some valuable lessons when it comes to money and planning for such uncertainties in future. In this blog, we are bringing 5 money management steps to take before 2021.
Content of the blog
- What is Money Management?
- What are the Core Elements of Money Management?
- 5 Money Management Steps to Take Before 2021
What is Money Management?
Money management is the process of tracking and balancing your income and expenses. Money management definition covers a broad domain of knowledge including everything relating to whether budgeting, saving or investing, handling money wisely and much more.
Here is how financial organizations and professionals define money management:
Money Management is the process of budgeting, saving, investing, spending or otherwise overseeing the capital usage of an individual or group. (Investopedia)
“Money management refers to how you handle all aspects of your finances, from making a budget for where each paycheck goes to setting long-term goals to picking investments that will help you to reach those goals” (Quicken).
“The good news, though, is that all of us can improve the security of our futures through financial literacy. With a better understanding of the basics of finance—how to save, budget and invest—we can increase both our earning potential and our prospects for a solid financial future.” – Reba Dominski, President of U.S. Bank Foundation
Here is why it is crucial for each one of us to understand personal money management:
- 78% of Americans live paycheck to paycheck.
- Credit card debt is up to a record $1.04 billion.
- Student loan debt is around $1.5 trillion for more than 44 billion borrowers
- 21% of Americans aren’t setting aside for their future goals.
To address these issues and many more issues like this, it is important to understand the best ways to manage money and what personal money management steps you should take before 2021.
Now, let’s understand what are the core elements of Money Management
Core Elements of Money Management:
In the 2019 UK financial wellbeing survey, it was reported that money is the biggest cause of stress in the UK and around 61% of adults state that money is the main reason behind them being stressed. The ever-rising living cost and the country’s economic future becoming unpredictable, the financial wellbeing of the people is suffering. Perkbox conducted a study of 1,139 people to determine how people feel about their finances and what are the main causes of financial stress. Here are the findings of the study:
- Money is the major reason behind stress among employed adults.
- More than a quarter of adults feel stressed about their finances every single day.
- The top factors that cause financial stress are feeling behind “financially compared to those around us” and “feeling unable to reach future goals.”
- Almost 1 in 5 employed adults describes their financial state as “poor” or “very poor”.
- The majority of adults believe that it will take them 1-5 years until they are satisfied with their finances, regardless of their current age.
The top 10 causes of financial stress among these adults
- Not having enough savings for unexpected expenses – 56%
- Feeling that they are financially behind those around them – 41%
- Feeling that they will be unable to reach future financial goals like buying a house – 39%
- Feeling limited when it comes to career or salary progression – 37%
- Struggling to manage expenses during festive seasons- 33%
- Not being able to retire when they feel like – 32%
- Having to miss out on special occasions and events – 28%
- Not being able to meet monthly expenses – 27%
- The fear of losing my job – 24%
- Not being able to keep up with debts -20%
Money management is the best way to overcome financial stress and have enough financial backup for unexpected expenses, festive occasions, retirement when you feel like and keep up with debts.
Here are three M’s of money management that help you keep your finances under control and enjoy the needed peace of mind:
If you want to make most of your income, then you should start managing your money more closely. When it comes to personal financial management, setting a budget and getting sound financial advice are two crucial steps that you can take.
Make a budget:
One of the initial steps to begin with money management is to make a budget. Surprisingly, many of the employed adults don’t give heed to this crucial part of personal financial management. If you want to manage your finances properly, don’t leave your finances to chance instead make a budget which includes income, expenses, savings and long-term financial goals. Having a budget makes you manage your money effectively and helps you accomplish your goals.
You can get help from accountants and financial advisors to mitigate the risks to all the things that are important in life and to protect your valuable assets.
Monitoring all aspects of finances helps in increasing situational awareness, so that you get the opportunity to make the right decisions about your money at all times. Keeping a track on your credit and tracking the expenditures are the best ways to manage your money.
Keep a track on your credit:
When you plan to borrow funds in order to purchase a new home or buy a car, the first thing you will need is good credit rating. It is important to monitor your credit rating and make sure that you have a good credit rating at all times. Many financial institutions offer complimentary credit card score tracking. These days, you also have mobile apps to keep track of your credit score.
Track your expenses:
While budgets are important, they only work if you follow them. One of the best ways to stick to your budget and manage your expenses effectively is to track all the money you spend. Carefully recording your expenses will help you better gauge all your where all your money is getting spent. This gives you a chance to review your expenditure and make adjustments if necessary. Thanks for mobile technology, it has become easier than ever to track your expenditures.
If you want to manage effectively, good maintenance is the key. Money maintenance not only helps you improve the present situation but also aids you to mitigate the threat of unexpected expenses and prepare for retirement. Here are the major aspects of personal money management:
Build an emergency fund:
Are you prepared for unexpected expenses this month, such as emergency car repair or medical expenses? According to a study, only 40% of Americans have $1000 in their accounts to keep up with the unexpected expenses. If you’re one of them, then you should begin building an emergency fund right now so that unexpected financial requirements don’t turn to a disaster.
Become financially literate:
In 2017, over 94% of respondents failed a quiz that covered questions about financial literacy. They were unable to answer general financial questions that covered topics like interest rates, retirement savings and inflation. Read blogs, watch videos on YouTube, be a part of seminars – there are different ways to become financially literate and understand aspects like savings, interest rates, credit and more.
5 Money Management Steps for 2021
Set Savings Percentage and Not Amount:
COVID-19 pandemic is still going and it is sure to cause severe impact on the global economy for several months to come. In order to cope up with a tough time, it is important to set some percentage of your income as savings. Too many people focus on amounts, which is a wrong way to have savings. This can outsize the amount when your paycheck varies. Instead, decide to put aside 5% or 10% of your income as savings. This will help you stick with the plan in the long run.
Make sure to have at least $1000 in emergency fund:
If you don’t have an emergency fund yet, then this should be your first step to begin with the personal financial management process. Though $1000 would not be enough to make up for every unexpected expense, it can be enough to handle unexpected car breakdown or a sudden medical emergency. Make a plan for how you can create an emergency fund before the end of this year.
Consider donating to charity:
With the increased standard deduction available in the recent tax years, not many people itemize their deductions. But if you are the one who itemizes their deductions, then keep in mind that your charitable deduction may be non-deductible.
Thus, donating to a charity will not only benefit your body and brain, but can also save your taxes. If you make a charitable contribution before the end of the year, you will be able to deduct it this year, otherwise you have to wait for an entire year to be able to deduct it.
Look at the companies that are bucking the trend:
If your plan is to invest directly into the stocks or shares, then it is imperative to check the performance of the companies that are so far weathering the storm. The stock market has had a tough year but some companies in certain industries are still performing well. Typically companies in healthcare and pharmaceutical, technology, logistics, cyber security and online learning are ones to watch. These are some of the factors that are growing in the time of pandemics and lockdowns. Other sectors to invest are eCommerce and online grocery as billions of people are turning to online platforms to invest. If you want to invest in stocks and shares in the year 2021, these are the market segments to keep your eye one.
Learn about Forex Trading:
The world’s currencies have been fluctuating wildly in the current unprecedented time. However, this has turned into a boon for investors. There has been an increase in the number of people engaging with forex trading, including beginners. In 2021, the current market condition of uncertainty, rise and fall is set to continue, which will provide investors with really interesting investment options.
A popular way of engaging with the forex market is utilizing trading with forex trading signals. However, if you are planning to trade in the forex trading, then you need to understand forex trading signals.
“Like everything in life, every challenge and every hardship is a lesson to be learned,” says Eric Simonson, certified financial planner and owner of Abundo Wealth.
The past few months created a big impact in the financial situations of many people around the world. But at the same time, people have learned the importance of savings and money management during unprecedented times. Taking steps to ensure that your expenses are fail-proof will put you in the better position in the future.
If you want to improve your financial growth in 2021, you have to take control of the finances and begin creating a budget, setting your financial goals and increasing your income. We hope this article helped you in understanding money management and what are the best ways to manage your money in the coming year and ahead.