The year is still fresh and it’s a great time to make a plan to manage your money to have a better year financially than you did last year. But figuring out how to make smart decisions about money can be a frustrating experience. In large part it comes from the sense that it should be easy. After all, it should be a simple math equation, something that fits in a spreadsheet, right?
It is really not hard to learn how to manage your money effectively. It may seem difficult but can become simple once you made a commitment to reaching your goals.
You can begin today by following these simple steps:
Step 1. Set your Financial Goal(s) – Once you have determined your goal(s) you can design a plan to manage your money to achieve your goal. I want you to think about your values because these should be reflected in your financial goals. No one can tell you what your lifestyle ought to be€”but every lifestyle does come with a price tag. Only you can decide how to match your money with your lifestyle and goals.
Step 2. Find out how much money you have – Check all of your account balances to determine how much money you presently have. Knowing how much spending money you have will help you determine how much more you need to achieve your goal(s).
Step 3. Create a spending plan – This might sound obvious, but it’s surprising how many people want to get more and more money but do not know what to do with it. If you don’t have a plan you will find yourselves in the same situation at the end of every month. YOU SPEND your money and now feel miserable with your purchases. It is important to create a monthly spending plan that you can stick to with every paycheck.
This can be done by:
A. Estimating your monthly fixed expenses (lists typical fixed expenses). Your financial records of past spending are good sources of information for the budget. You may need to adjust figures to reflect any changes in your situation, such as a rent increase, higher insurance prices, etc.
B. Estimate your regular flexible expenses (Flexible expenses occur each month, but the amounts change so you really have to carefully track expenses for items such as food, clothing, transportation, and entertainment). Monthly Flexible Expenses Budget will help you make realistic estimates to put in your spending plan. Unlike fixed expenses, you generally have more control over these amounts.
C. Estimate your occasional expenses. Don’t let occasional expenses catch you off guard and find yourself without the money to pay them). For your Occasional Expenses, list in your spending plan the amount and month due for expenses that come periodically throughout the year. Consider expenses such as bank holidays, birthdays, home maintenance, school supplies etc.
Finally, set up a Work Sheet so you can see your total expenses both by the month and spending Category. For example, place Occasional, Flexible and Fixed expenses into spending Categories. You can quickly note months with higher expenses, as well as what you spend in the various categories.
Step 4. Compare income and spending and make adjustments to achieve balance. If your income and expenses don’t balance€”which often happens the first time through€”where can you make adjustments? If your income exceeds expenses, consider additional savings or investment goals. However, if your scale tips the other way€”with expenses greater than income€”here are your balancing options:
Increase income – This may mean a new or second job for family member(s). More education or training may increase earning power down the road. Perhaps you can receive rent for storage or apartment space. Brainstorm other ideas.
Reduce expenses – This option often can make the quickest and biggest difference. As you review each expense, consider whether it is a need, want, or desire. A need is something you must have to live your daily life. A want is a way to meet these needs with more style, comfort or ease. A desire is something you wish you had but it does not fulfill any basic need. Cutting back on €desire€ spending can free up money to pay for needs and wants.
Adjust debt payments – Consider negotiating reduced payments with your Creditors. A consolidation loan might also lower monthly payments. However, in the long run, these choices will cost you more. Working with an outside agency in a structured debt management program may reduce late fees and interest charges.
Please note that sometimes a combination of the above three options works best. Small changes in each option may work better for you than trying to make up the difference through a single option.
Finally, how you decide to balance your income with expenses is up to you. Think about where you are now and where you want to be in five or ten years. Your long-term plan should reflect those goals that are most important to you and your family.
Remember, good money management is more than a mathematical formula because it’s tied so closely with life’s ups and downs. Your money plan is likely to change if your life situation changes. The object of a good budget is to make your money help you reach your goals, not to force you to conform to rigid rules. Don’t be discouraged if your first budget plan doesn’t work out right away. You may have to revise it several times until it fits your situation. I hope this has helped you learn how to manage your money.