10 Simple Ways To Manage Your Money Better
Your top priority each month is to pay for your essentials – worry about costs like shelter, food, and transportation first. After your needs have been met, it’s often advised to try and save at least 10% of your take-home income. However, just because you have the money doesn’t mean you should spend it. If you’re able to save more now, you’ll have greater earning potential in the future.
Rules to Improve Your Financial Health
Jean Folger has 15+ years of experience as a financial writer covering real estate, investing, active trading, the economy, and retirement planning. She is the co-founder of PowerZone Trading, a company that has provided programming, consulting, and strategy development services to active traders and investors since 2004.
Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
The term “personal finance” refers to how you manage your money and plan for your future. All of your financial decisions and activities have an effect on your financial health. It’s always important to consider what we should be doing—in general—to help improve our financial health and habits. Here we discuss five broad personal finance rules that can help get you on track to achieving whatever your financial goals may be.
Do the Math—Net Worth and Personal Budgets
Money comes in, money goes out. For many people this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, a bit of number crunching can help you evaluate your current financial health and determine how to reach your short- and long-term financial goals.
Calculating Net Worth
As a starting point, it is important to calculate your net worth—the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe). Then, subtract the liabilities from the assets to arrive at your net-worth figure.
Your net worth represents where you are financially at that moment, and it is normal for the figure to fluctuate over time. Calculating your net worth one time can be helpful, but the real value comes from making this calculation on a regular basis (at least yearly). Tracking your net worth over time allows you to evaluate your progress, highlight your successes, and identify areas requiring improvement.
Net Worth by Age
Net worth is highly dependent on age. It’s common for younger investors to have low or negative net worth when they start their careers, while older individuals further in their careers have much higher net worth.
Calculating a Personal Budget
Equally important is developing a personal budget or spending plan. Created on a monthly or an annual basis, a personal budget is an important financial tool because it can help you plan for future costs, reduce unnecessary spend, save for future goals, and prioritize where you put your money.
There are numerous approaches to creating a personal budget, but all involve making projections for income and expenses. The income and expense categories you include in your budget will depend on your situation and can change over time. Common income categories include:
- Debt payments (car loan, student loan, credit card)
- Education (tuition, daycare, books, supplies)
- Entertainment and recreation (sports, hobbies, books, movies, DVDs, concerts, streaming services)
- Food (groceries, dining out)
- Giving (birthdays, holidays, charitable contributions)
- Housing (mortgage or rent, maintenance)
- Insurance (health, home/renters, auto, life)
- Medical/Health Care (doctors, dentists, prescription medications, other known expenses)
- Personal (clothing, hair care, gym, professional dues)
- Savings (retirement, education, emergency fund, specific goals such as a vacation)
- Special occasions (weddings, anniversaries, graduation, bar/bat mitzvah)
- Transportation (gas, taxis, subway, tolls, parking)
- Utilities (phone, electric, water, gas, cell, cable, internet)
Track Your Budget!
Once you’ve made the appropriate projections, subtract your expenses from your income. If you have money left over, you have a surplus, and you can decide how to spend, save, or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income (adding more hours at work or picking up a second job) or by reducing your expenses.
10 Simple Ways To Manage Your Money Better
LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She’s been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books.
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Life is much easier when you have good financial skills. How you spend your money impacts your credit score and the amount of debt you end up carrying. If you’re struggling with money management issues such a living paycheck to paycheck despite making more than enough money, then here are some tips to improve your financial habits.
When you’re faced with a spending decision, especially a large purchase decision, don’t just assume you can afford something. Confirm that you can actually afford it and that you haven’t already committed those funds to another expense.
That means using your budget and the balance in your checking and savings accounts to decide whether you can afford a purchase. Remember that just because the money is there doesn’t mean you can make the purchase. You have also to consider the bills and expenses you’ll have to pay before your next payday.
How To Manage Your Money Better
- Have a budget: Many people don’t budget because they don’t want to go through what they think will be a boring process of listing out expenses, adding up numbers, and making sure everything lines up. If you’re bad with money, you don’t have room for excuses with budgeting. If all it takes to get your spending on track is a few hours working a budget each month, why wouldn’t you do it? Instead of focusing on the process of creating a budget, focus on the value that budgeting will bring to your life.
- Use the budget: Your budget is useless if you make it then let it collect dust in a folder tucked away in your bookshelf or file cabinet. Refer to it often throughout the month to help guide your spending decisions. Update it as you pay bills and spend on other monthly expenses. At any given time during the month, you should have an idea of how much money you’re able to spend, considering any expenses you have left to pay.
- Give yourself a limit for unbudgeted spending: A critical part of your budget is the net income or the amount of money left after you subtract your expenses from your income. If you have any money left over, you can use it for fun and entertainment, but only up to a certain amount. You can’t go crazy with this money, especially if it’s not a lot and it has to last the entire month. Before you make any big purchases, make sure it won’t interfere with anything else you have planned.
- Track your spending: Small purchases here and there add up quickly, and before you know it, you’ve overspent your budget. Start tracking your spending to discover places where you may be unknowingly overspending. Save your receipts and write your purchases in a spending journal, categorizing them so you can identify areas where you have a hard time keeping your spending in check.
- Don’t commit to any new recurring monthly bills: Just because your income and credit qualify you for a certain loan, doesn’t mean you should take it. Many people naively think the bank wouldn’t approve them for a credit card or loan they can’t afford. The bank only knows your income, as you’ve reported, and the debt obligations included on your credit report, not any other obligations that could prevent you from making your payments on time. It’s up to you to decide whether a monthly payment is affordable based on your income and other monthly obligations.
- Make sure you’re paying the best prices: You can make the most of your money comparison shopping, ensuring that you’re paying the lowest prices for products and services. Look for discounts, coupons, and cheaper alternatives whenever you can.
- Save up for big purchases: The ability to delay gratification will go a long way in helping you be better with money. When you put off large purchases, rather than sacrificing more important essentials or putting the purchase on a credit card, you give yourself time to evaluate whether the purchase is necessary and even more time to compare prices. By saving up rather than using credit, you avoid paying interest on the purchase. And if you save rather than skipping bills or obligations, well, you don’t have to deal with the many consequences of missing those bills.
- Limit your credit card purchases: Credit cards are a bad spender’s worst enemy. When you run out of cash, you simply turn to your credit cards without considering whether you can afford to pay the balance. Resist the urge to use your credit cards for purchases you can’t afford, especially on items you don’t really need.
- Contribute to savings regularly: Depositing money into a savings account each month can help you build healthy financial habits. You can even set it up so the money is automatically transferred from your checking account to your savings account. That way, you don’t have to remember to make the transfer.
- Being good with money takes practice: In the beginning, you may not be used to planning ahead and putting off purchases until you can afford them. The more you make these habits part of your daily life, the easier it is to manage your money, and the better off your finances will be.
Without money management, personal finances are a bit of a mystery. This can lead to overspending and living paycheck-to-paycheck. Money management can help you have a better handle on your income and spending so you can make decisions that improve your financial status.