How To Start Managing Your Money
Updated: Apr 15, 2022
Money management is essential for people of all income levels. Carelessness and overspending can put anyone in financial difficulty.
While there's never a bad moment to make a financial fresh start, the start of a new year is a good opportunity to re-evaluate how you manage your money.
Money cannot purchase happiness, but it can provide a sense of security if it is properly managed. You may always feel like your life is one step away from a financial collapse if you don't get a grasp on money management.
I am going to speak on a strategy that we used, which allowed us the opportunity to be debt free, and the ability to save money every month. Have you heard about the 50 - 30 - 20 Rule? This is a simple financial concept and an excellent strategy when it comes to managing your money.
Now, this formula will be based on our Net Income, which is the money we actually have available to use. It is equal to our total income minus tax payments and pretax contributions. Basically, “at the end of the day, it is the amount of money that actually comes into our household”.
When it comes to our budgeting, let’s imagine a pie and we will be dividing this pie into 3 sections. Half the pie represents 50% of our basic “Needs”; 30% will signify our “Wants”; and 20% will represent paying off debt and saving money.
Let’s break down each of these sections of the pie so that we can gauge our own personal finance based on these metrics. Again, I want to emphasize this will be based on our net income. In terms of the 50% section of our income pie, which is our “Needs”, what are some things that can be included? Let’s consider our regular living expenses, which can be categorized as things that would greatly inconvenience us or something that we literally can not do without. Examples would be groceries, housing, whether we have a mortgage or rent, utilities, and other similar expenses.
Next section in the pie is our 30% “Wants”, which can be categorized as a minor inconvenience but not a necessity of life. Examples could be our monthly Netflix subscription, or purchasing a brand new barbecue, or buying new shoes. Basically, things we don’t need to survive. Since many of us are quite busy we can fall into the habit of randomly buying stuff or if we are bored we will shop to fill an emotional need. Another “Want” may fall within our hobbies, which is one of our joys in life and keeps us happy. Some examples of hobbies could include gardening, playing video games, or playing golf. Hobbies definitely fall within the “Want” category since they are things and activities that are not necessities to live but they do improve our quality of life.
The final category in the pie is our 20%. Now, I know this may sound basic but until we actually write down and understand where all our money is going, our “Wants” can easily creep into our “Needs”, and this can result in both these categories overflowing, which unfortunately results in the short fall in our 20% portion of the pie and keeps us handcuffed to debt.
First things first, it is paramount that we get out of debt prior to considering all of the 20% portion of our net income going into our savings. I am going to suggest we take 15% and concentrate on paying off debt while using the remaining 5% for saving. However, once debt free, I am going to speak about some recommendations for you to consider regarding this portion of the pie, being 20% of your net income.
Regarding debt, it habitually leaves us with less money per month and often times can result in acquiring more debt over time. Debt leads to extra stress, which can lead to some personal challenges such as causing conflict within relationships, emotional stress and adverse affects on our overall health. Being debt free puts us in control of our money. Some tips to pay off debt quickly would be paying off the most expensive loans first. Additionally, we need to ensure we are paying more than the minimum payment on other debts and make payments in shorter periods instead of only once a month. I will do a blog and video on this particular topic in the future.
Once we are debt free, the next recommended step is to build up an Emergency Fund. Let’s look at an example regarding this specific topic. We would calculate what amount we require for our “Needs” and “Wants.” Let’s say the total monthly amount is $2,500 a month, then we simply multiply that amount by 6 and 12, since this would signify the total amount of months for this Emergency Fund. In this particular example would be between $15,000 to $30,000 in our Emergency Fund. I know that sounds like a lot of money but keep in mind that an Emergency Fund is money we stash away that can be accessed and used when there are times of financial distress like income earners losing their jobs. The purpose of this Emergency Fund is to improve financial security by creating a safety net that can be used to meet unanticipated expenses, such as an illness or major home repairs.
Final step of using our 20% portion would be to build up our savings for retirement. In my humble opinion this is one of the things many people don’t really consider when they are 20 to 30 years away from their “Golden Years.” We need to create a mindset that social security is non-existent, which would result in us not completely relying on the government to look after us in retirement. Having these savings would alleviate some possible challenges, such as not becoming a financial burden on our children. In a positive sense, we will have access to a tax-deferred retirement account that will reduce the taxes we currently pay. The compound effect of investing over time can give us a more comfortable and happier retirement.
Again, I know this sounds like common sense. However, utilizing the 50 – 30 – 20 Rule is a financial strategy that will develop our discipline of knowing the amount of net income we should systematically place in these recommended categories. This simple concept will surprisingly result in achieving our desired goal of financial freedom.
I will be creating other blogs and videos on the topic of personal finances and I hope these recommendations will create a better financial lifestyle for you and your loved one.
Take care and God Bless.