When you think about your finances, are you generally happy with them? Or do you wish you could do better?
According to a 2015 NFCS study, only 31% of respondents indicated they were satisfied with their personal financial condition. That tells me there’s PLENTY of room for improvement!
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You Can Learn to Manage Your Money Better!
I was raised with the belief that you either were born rich or born poor or born somewhere in between.
In other words, I was raised to believe that you had no control over how your financial situation looked.
The good news to know here is that you can improve your money management skills. Yes, it will take some time and practice.
And yes, you might fall of the “good money management” wagon and have to get back on again. But learning about and improving your money management skills can be done.
Here are three essential steps you can take in order to learn how to manage your money better.
1. Determine Your Current Financial Situation
The first step to managing your money wisely is to figure out where you stand right now. Before you can make (and more importantly SEE) progress, you need to have a clear picture of your current financial health.
Do you know what you have in savings right now? What about what you owe on your credit card(s)?
OK, even if you know both of those, what about something you probably pay less attention to? Do you know how much you currently owe on your mortgage or car loan?
Do you know what your net worth is?
Not knowing the answers to these questions is “normal” in today’s world. However, your plan is to be different. According to this article from Comet, roughly 80 percent of Americans are in debt.
If you’re one of them, you have a chance to begin changing that with better money management. And a great place to start is to begin by knowing your current financial situation.
You wouldn’t start a diet or begin an exercise routine without knowing your starting weight, right? You want to have a way to measure your progress!
The same thing is true with your money.
You’ll want to get a good idea of where you stand now. Write down the balances of every debt you owe. And write down how much money you have in checking and savings. Write down any savings and investment balances as well.
Don’t let yourself be embarrassed or self-condemning over what you find. Everyone has to start somewhere and being honest about your current situation is the first step on your climb to financial success.
Now that you have your list of what you owe and how much you currently have in checking, savings and investments, let’s cover some other important questions.
Important points to consider:
Do you currently use a budget or track your spending in any way? I firmly believe that tracking your spending can change your financial life in a big way.
If you’re not tracking your spending, now is a great time to start!
If you do track your spending, how having you been doing?
Do you find that your spending is in line with what you’ve budgeted? Are financial goals a part of your monthly budget? Start making a monthly plan for your money. Your monthly budget will tell you how much you expect to spend during the month.
Your spend-tracking worksheet (I use a simple Excel worksheet) will help you see if your spending is in line with your projected budget. Write down your expenditures at the end of each day for accurate tracking.
Do you currently have an emergency fund or savings account?
If you do, are you comfortable with the current balance? Would it be enough to cover an emergency like a care repair or vet bill? Would it be enough to pay your bills if you were laid off for six months?
A good game plan is to have three to six months’ worth of expenses in your emergency savings account. If you’re not there yet, don’t panic. Just work an automatic savings deposit into your monthly budget. Treat your savings account like a bill and pay yourself first every single month.
If you don’t have an emergency fund yet, it’s time to start one! The sooner you start, the sooner you will have peace of mind. Don’t worry if you can only add a little bit to your savings account each month. The balance will grow over time.
What are your current debts?
Do you have a clear picture of your debts? What companies do you owe and how much do you owe on each debt? Are you only making the minimum payments?
Even though looking at how much you owe (when you consider everything) might be daunting, it’s an important step to move forward. Knowing is the first step to changing.
2. Define Your Financial Goals
Once you have a clear picture of your finances, you’ll want to take some time to define your financial goals. Figure out what you want to work towards.
Let’s go back to the diet and exercise example. If you are starting an exercise program to lose 20 pounds, you’ll be much more successful when you have the specific end goal of losing 20 pounds in mind.
The same principle applies to your finances.
You need to have a specific end goal in mind. Ideally, you should have both short-term and long-term goals for your money.
Think about what you want to achieve in the next year or two. Some short-term financial goal examples might be building your savings, paying off a credit card, or even funding a vacation.
Then think about the long-term. What do you hope to accomplish that extends past the next 10 years or so? Some examples might be building your retirement fund, funding college for your children, or buying a vacation property.
It can be helpful to have three sets of goals: short-term, medium-term and long-term goals.
- Short-term financial goals are those you can achieve within six to twelve months
- Medium-term goals are those you can achieve within one to five years
- Long-term goals are those you want to achieve in five years or more
Make a list of all of your financial goals, and then put them in each of the three columns mentioned above: short-term, medium-term and long-term.
As an example, your short-term goals might be to get one months’ worth of income in an emergency fund and to pay off one credit card. A medium-term goal might be to get six months’ worth of income in an emergency fund and pay off all student loan debt.
You decide how you want to challenge yourself to achieve your financial goals. Make sure to be realistic about what you can achieve but to also push your limits a bit and challenge yourself.
Determine Your Why
Along with your goals, it’s important to take a step aside and determine your “whys”. Your “whys” are the reasons why managing your money better is important to you.
Your “why” might be because you want to be financially independent. Or because you want to be able to travel freely without money worries. Every person’s “why” will be different.
Writing those whys down – and referring back to them when you’re having trouble sticking with your budget – is a powerful way to keep yourself on track. Those who make goals without knowing why they’re working toward them can have a tough time staying on course.
The world is full of distractions – especially where money is concerned. Clever marketing and a competitive mentality can pull you away from your goals. However, knowing what your goals are and why you want to achieve them will help you stay on track.
Now it’s time for the third step.
3. Manage Your Money Wisely with a Plan
Failing to plan is planning to fail.
— Alan Lakein
Now is the time to make a budget plan that will help you achieve your goals. Sometimes it works to make a plan by dividing the money you need for your goal by the number of months in which you want to reach that goal.
For example, if you want to save $1,000 in your emergency fund in the next five months, you need to save $200 per month. If that’s your goal, you need to work that $200 per month for savings into your monthly budget.
Use the same formula for paying off debt, saving for a house or any other financial goals you have. Using this formula will give you a definitive action plan for reaching your goals. In this way, your budget is your biggest asset.
Some people consider budgets restricting and boring. However, the truth of the matter is that a budget is a powerful tool for reaching your financial goals.
If you want to manage money effectively, you must have a plan to reach your goals! On one final note, I think it’s important to track your success. Use whatever type of chart or graph you need to in order to help motivate yourself to keep going. Refer back to your motivational chart often to stay encouraged.
Summary
With a little planning and a lot of discipline, you can manage your money better. In fact, you can achieve far more financial success than you ever dreamed possible by following the steps above. Don’t believe me? Try it for a year and see.