3 Ways to Improve Your Money Management Habits
Why should you build better money management habits?
We live in unprecedented times, where the threat of economic recession looms large over us. Apart from that, our spending habits and our tendency to get into debt may choke us financially. We need a ‘virtual assistant’ that not only takes care of all future possibilities, but also allows you to adjust your two greatest resources – time, and money.
Developing the skill to manage time and money to your advantage saves you from eternally panting on the treadmill, and helps you carve a path that leads to better financial success, from what you already possess.
The formula for effective money management is to know your needs and your wants, aligning them with your goals, using your talents, time, and money. The secret is – begin immediately!
Good money management habits are very crucial as they can have a significant impact on our other habits. Good habits can give us control of our money, while bad habits can lead us where we don’t want to go.
Create and manage your budget - daily
The best definition of a budget was given by Dave Ramsey when he said,
“A budget is telling your money where to go, instead of wondering where it went.”
The best part of a budget is that everyone in this world needs to have it, from rich governments to poor people. The sad truth is, very few people create it, and even fewer follow it.
Why should you, or for that matter, anyone, create a budget?
The main reason to create a budget is to fulfill our responsibilities. We need resources to fulfill them and a budget helps us to allocate our resources wisely and efficiently. We all know this basic necessity of creating a budget and we may even begin creating it with a wave of enthusiasm, only to see it die down slowly. How can you overcome it?
Think and write your financial goals: Good habits begin with good goals. What are your short term, medium-term, and long term financial goals? Your short term goals may be meeting your daily expenses, medium-term would be paying for college, and long term would be purchasing a house for your family.
How much money do you need to keep aside every day, week, or month to realize each of your goals?
Set up a dynamic budget: Once you know what your goals are, you can set up a budget for each one of them. The basic format of creating a budget is to list down all your income and expenses. The following formulas will help you evaluate them:
Total Monthly Income: Net Salary income + Rents + Pensions + Family Allowance + Self- Employment Income + Other Income
Total Monthly Expenses: Housing Expenses + Personal Expenses + Living Expenses + Work Expenses
Funds at hand: Total monthly income – Total monthly expenses
How to develop this habit?
- Keep a monthly “Budget Book” with three columns, ‘Date’, ‘Initial’ and ‘Adjusted’ against each category of income and expenses and fill them out daily. This way you can keep room for adjustments, and the date will help you keep track of your responsibilities.
- Keep another savings account and transfer a set amount, say 10%, to that account every month. Otherwise, you may also try the 50-30-20 rule of budgeting or the envelope method of budgeting.
- At the end of each month, on the last day, review your Budget Book and find ways to increase your income, and reduce your expenses.
When you start evaluating your budget daily, you will find that a budget doesn’t limit you, but instead helps to make things possible. To help you achieve this, use budget trackers such as Mint, or YNAB.
Now let’s understand in detail the habit of investing.
Save first, then Invest, Spend later
The basic idea of investing was given by Warren Buffet when he said,
“Investing is laying out money now to get more money back in the future.”
Why are we talking about investing money, and not just saving it?
Saving money means to park your additional cash to keep it primarily safe, without the intention of generating large returns out of it. In other words, capital safety is a priority, while the returns on it are secondary. Savings are necessary to fulfill your small-term goals like going on a vacation, purchasing new clothes for a festival, making a down payment, etc.
On the other hand, investing money means taking a chunk out of your savings to create more money or wealth for your future. While your goal is to keep your money safe, generating returns is your top-most priority. Investments help in fulfilling our long term goals such as purchasing a house, planning for retirement, etc.
As a thumb rule, remember two important things:
- Save out of your income, and invest out of your savings.
- Save enough to cover your expenses, and invest enough to secure your future.
How to develop this habit?
Pay yourself first
Once you have a definite plan of how much you want to save and how much you want to invest, you need to use some funds to spend for your luxuries. One interesting thing to know is that expenditure is flexible, hence you can control what you spend. The basic rule about spending is to remember the “pay-yourself-first philosophy”. What does it entail?
In this article, David Block, the CFP with LearnVest Planning Services said, “Paying yourself first means saving before you do anything else.” In other words, many people save leftovers. Hence the key is to set-up automatic payments that let your money go to a savings account without you pouncing on them first.
Working on this philosophy may mean that you may have to wait to get things that you want. But the wait is worth the effort.
Learn more about investing
Investing is more than just about opening term deposits with banks. To make money work for you, you need to take time and learn about all the options that are available to manage your money.
A few options that you can study are:
- Gold investments
- Real estate investments
- Mutual funds, and other pooled investment products
- Individual securities like bonds, and stocks
Personal Capital provides the best tools you can use to learn about investments, wealth, and cash management.
Since the conditions around us are changing drastically in the twinkle of an eye, no one can guarantee that your money will give you the desired returns. However, the more you educate yourself; you will be able to create an intelligent financial plan that will reduce risks.
Learn to track your financial health
Many people mistakenly feel that a steady monthly income, that increases every year, is an indicator of good financial health. That is surely not the case. An individual's financial health is the overall state of his monetary affairs. You are said to be financially healthy if the following basic indicators are true:
- No matter how meager your income is, your living expenditure is equal to or less than 50% of your income and your other (variable) expenditure is 30%, leaving 20% for personal savings
- No matter how little you have in terms of assets, your overall liabilities are always less (manageable) than your total assets
- You are able to keep a decent amount of cash ready for emergencies and are able to park some savings for future emergencies
Keeping track of your financial health is like checking your physical health. You do a checkup of your health for two reasons – either as a preventive measure or as a diagnostic measure. The best is the preventive measure, wherein you develop the habit of tracking your financial health, day-in, and day-out.
How to develop this habit?
Check if your debt is under control
The best way to assess your debt is to check your debt-to-income ratio. Take your total monthly debt and divide it by your monthly income. You are safe financially if your debt-to-income ratio is less than 0.30 or 30%. If your answer reaches 0.50, then it’s time to revisit your ‘Budget book’ and adjust some categories from your expenditure column.
Check your investment strategy
As we learned in the second habit, investing secures your future. However, you need to assess your investing strategy to check that it is aligned to your current local/economic circumstances. If it is evident that the economy will hit a recession, it is best to have an emergency fund set up for six months’ expenses.
Assess your first two habits
The first two habits that we mentioned in this article are connected to each other. You need to check if your Budget book is becoming your ‘virtual financial assistant’ or your master. Sit down and take an honest look at your financial habits and check where you have gone wrong. You cannot begin a journey without knowing your starting point, and hence going back to reassess your financial goals may be the necessary step.
The best way to cultivate this habit is to understand the concept of “Daily Money Minute”.
This excellent philosophy lets you assess your financial situation in just 60 seconds. To develop this habit, every morning, take your budget book, your bank account statements, and check them thoroughly for a minute. This will help you to know what you need to do on that day. Repeat the same exercise every day and you will be safe from sudden surprises that your financial situation may throw at you.
You can use the Habitify app to set reminders in your day and write notes about your daily money management habits.
All the efforts that you do in this regard, your main motto is to be in control of your money, and not the opposite.
One of the most important things that you’ll ever need in your life is financial security. We all know that money is an influencer and an enabler. It influences how our life and personality and enables the opportunity to afford a better lifestyle.
Money increases the possibility of having more choices in life, but managing your money increases the probability of making the right choices.
Like any other habit, managing your money comes through constant practice and self-discipline. Even though you may have little money, the right steps will open up endless opportunities. As this habit grows, you realize that managing money is not just about working for money, but about making your money work for you. Get started on your habit-building journey with Habitify and live your life 1% better than yesterday every day.
All of what we have discussed doesn’t need any ingenuity to implement. All it needs is a basic plan, a good strategy, and the determination to stick to it. Are you up for it?