Money has an immense impact on your life. You need it to eat, to put a roof over your family’s head, to send your kids to college. But, a sizeable income alone is not a recipe for financial success. While your income is the first input, proper money management is more comprehensive than that, and it maximizes the value of each dollar you earn.
So, what is proper money management?
It starts with understanding and ends with execution. From budgeting and spending to saving and investing, money management is the process by which you know where your money is going, how it’s performing, where it should be going and how to adjust accordingly.
How do you get control?
There are five fundamentals to properly managing your money: goals, tracking, spending, budgeting and investing. The following tips cover each of these important elements of money management.1. Set Goals
Despite the incredible importance of setting financial goals, most people fail to give themselves something clear to accomplish. Whether short term or long term, financial goals are best set with the help of a financial planner or advisor. That said, setting objectives on your own is far better than not setting them at all. Regardless of whether or not you seek professional advice, it’s important to write your goals down, look at them regularly and consider your progress toward them. These steps hold you accountable for what you’ve set out to accomplish.2. Track And Monitor Your Progress
Tracking your financial goals used to be a time-consuming task, requiring a spreadsheet or pen and paper. Today, however, investment tracking software and applications automate the work that was once involved, leaving you with only the responsibility of reviewing your progress.
Think of it this way: Say, for example, that you wanted to lose 10 pounds. If you never weighed yourself, how would you know how much weight you’ve lost or how much more you need to lose to achieve your goal?
Goals – financial and weight-oriented – are only worthwhile if you monitor your progress. Without this important step, they better resemble mere wishes. Thankfully, technology simplifies the potential complexity for people who have several financial accounts and goals. Software aggregates your many accounts to collect your total portfolio and wealth and to track your specific goals.3. Proactively Manage Your Spending
Many Americans plan to save what they don’t spend each month but, at month’s end, have little money left to conserve. Others set an amount they’d like to save each month but wait until the end of the month to determine if they have enough to set aside.
“Paying yourself first” is a far more successful strategy. The money you want to save should be set aside at the beginning of each month. Setting up automatic saving deposits from your paycheck or checking account is a great way to ensure your monthly contribution.
To determine the amount you should save each month, define your financial goals and the timeline by which they must be met. By saving at the beginning of the month, you force your spending habits to adapt – a recipe to quickly grow your savings and achieve your goals.4. Create A Reasonable And Appropriate Budget
There’s a difference between making adjustments and overhauling your saving/spending behavior. Saving shouldn’t be painful – you need to create a reasonable and achievable savings goal.
Like in the analogy above, if you go on a crash diet, you might lose 10 pounds very quickly, but you’re going to gain the weight back in short order. Just like dietary changes, budgetary changes shouldn’t be drastic. You’re tweaking your lifestyle in order to sustain a budget that helps manage your money more intelligently and enables you to reach your financial goals.5. Invest, Invest, Invest
Simply saving your money – setting money aside in a savings account – is not the best or most efficient means of achieving financial goals. If you stick to your budget, your savings will add up over time, but they won’t grow nearly as efficiently as they should.
Invest your money based on the level of risk you’re willing to incur and reap the benefits of compounding growth. The sooner you start, the sooner your money starts working for you. The key to investing is taking on the proper amount of risk and earning a rate of return that’s appropriate for that risk. Investing your money – rather than simply saving it – empowers you to reach your goals faster or, more reasonably, make only minor changes to your lifestyle while still saving enough for retirement, college or whatever your goals may be.
Take the initiative to do more with your money. A sizeable income alone does not ensure that you’ll achieve your goals. Regardless of how much you earn, money management is the key to having not only a more prosperous life, but also a less stressful one.
Be a smarter investor. Click below to learn the fundamentals of saving for your child’s college education.