Personal money management is the act of budgeting, saving, and spending money to reach one’s financial goals.
Without personal money management, a person can repeatedly fall to debt, mismanage credit cards, acquire a ton of loans, and he/she will have a hard time repaying what is due.
This is an important subject when it comes to our finances because this topic allows us to balance money that goes into our account and what goes out.
Stories that hurt me the most would be those people who worked hard and honestly during their youth but still ended up with more debt than they can carry in their 40’s.
There are a lot of factors to consider on how they ended up in those situations but I’m pretty sure one major variable would be the lack of money management.
So in this post, I’ll be talking more about the topic of personal money management – what it is, how to do it, and how to be good at it.
Feel free to get some tips and strategies below and apply them to your life! 🙂
What Is Personal Money Management And How To Ace It
For some History 101, money management has been around for more than a decade already. In fact, the earliest known research in personal finance was done by Hazel Kryk in 1920. (Yep, 100 years ago!?)
Her dissertation at the University of Chicago is now the foundation of consumer economics and family economics.
In the 20th century, those topics along with personal money management now fall under the subject of “financial literacy”.
Financial literacy according to financial books, should be the person’s priority in their journey to financial freedom.
I believe that statement 100%!
It’s nice to dream of a debt-free life, but we need to face reality first before we achieve that vision. And knowing more about personal money management is the first step to achieving that goal.
Personal Money Management Process
A key to a successful money management process is planning. You can’t win at something if you don’t have a plan, right? You can’t just wing it and expect to be in a better financial situation. Have a plan and follow it!
Steps to successful personal money management:
Step 1: Assess Your Situation
In this step, you take a look at your financial situation – are you doing well or are you struggling?
Others suggest looking at your balance sheet and income statements.
A personal balance sheet consists of your personal belongings like your car, house, investment, properties, and bank accounts.
An income statement shows how much money are you making and how much are you spending.
To make it simpler, what I did was to deduct my monthly take-home money (income after taxes) and my monthly expense.
If the difference is positive then I’m on track to achieve step number 2.
If it turns out negative, then I go back to the drawing board and assess my monthly expenditures.
Knowing your financial situation is a difficult process for some people. It’s hard for them to accept the reality that they are in and with that thinking, they do not progress and just stay stagnant.
Step 2: Set Up Goals
List down short and long term goals.
Short term goals help you move forward. It gives you a sense of motivation once you achieve them.
Although you’re working towards your short term goals, it’s important to keep at the back of your mind your long term goal – the bigger picture.
All those short term goals are directed towards achieving your long term goal.
A long term goal could be having a 7-digit bank account. But to get there you need to accomplish short term goals like completely getting rid of debt, setting up a side hustle, applying for a second job, have investments, acquire passive income, or simply save more money than you spend.
Step 3: Device A Plan
To successfully navigate and achieve financial freedom, we should make a strategic plan on how to get there.
In this step, you write in detail how to achieve those short and long term goals.
If you want to be debt-free, make a budget that will allow you to earn more than you expend.
If you want to increase your income, look at the different opportunities online.
If you want to have some investments under your name, start learning about how the stock market works.
If you want to increase your financial literacy and know more about different ways on how to save and earn money, then read more of my blogs.?
Your plan will be your road map to financial success. It will determine how you will overcome adversities and obstacles in your life.
Step 4: Execution
This step is probably the hardest to do since it’s the one that requires a lot of constant effort.
It’s like having a new year’s resolution. Your new year’s resolution consists of both step 2 and step 3. Your resolution is to be in the best shape of your life and your plan is to go to the gym and stick to a diet all year round.
But here comes different occasions – birthdays, night outs, holidays, family gatherings, which makes you forget about your diet and makes you feel lazy going to the gym. This then makes you decide to postpone your new year’s resolution to next year! ?♀️ Seems all too familiar?
You understand now why execution is the hardest? It’s because you need to be committed and disciplined to follow your plan.
We all know it won’t be easy. You’ll be faced with a lot of temptations but the ones who make the sacrifice to stick to their plan are the ones who successfully reach their goals.
Step 5: Try It Out And Reassess
It’s only natural that plans don’t go well at the beginning. But what you need to do is to try it out.
If the result isn’t what you wanted then reassess your plans. Adjust what needs to be adjusted. Tweak it a little bit until you achieve your desired results.
For example, if it’s your first time making a budget, most often than not, you will sometimes go overboard on your allowance- you will overspend. But don’t be discouraged, instead, look at where you could decrease your spending and save more money.
Why Is Personal Finance Important?
Being knowledgeable about personal finance allows the person to be well prepared financially when needed.
Taking out loans, mortgages, credit cards, and investments are just part of life.
But we don’t rush in immediately and take part in those things. Because if we do and we mismanage them, the consequences are heavy and painful – both financially and emotionally.
So it’s always nice to know more about how we can fully utilize them to our advantage rather than hurting ourselves in the process.
This is where topics of personal money management and personal finance come in. These subjects teach you strategies and ideas to successfully handle those money-lending programs above.
According to The Federal Deposit Corporation (FDIC), their Money Smart financial education resulted in a positive effect on people who took up the classes. The significant findings they had was these people now have opened deposit accounts, uses and follow a budget, have retirement savings, and other financial instruments to help them be in a better financial position.
Personal Finance Principles On An Index Card
Before we jump into this in more detail, one thing you need to remember is that several personal finance gurus can have different advice when it comes to handling money.
Harold Pollack who is a social scientist at the University of Chicago believes that if you’re paying for advice then most probably what’s relayed to you is the wrong one since the best advice is straightforward.
As stated in this Forbes article, in one of Harold’s interviews, he believes that the best personal money management advice can fit on a single index card – no bs. and straight to the point.
When he posted the video of the interview, he didn’t have the index card and people were asking him where they could find it. So he borrowed an index card from her daughter and wrote the principles.
The photo of the principles went viral and indeed it fitted on an index card!
9 personal finance advice of Harold Pollack:
1. Max your 401(k) or equivalent employee contribution.
2. Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.
3. Never buy or sell individual security. The person on the other side of the table knows more than you do about this stuff.
4. Save 20% of your money.
5. Pay your credit card balance in full every month.
6. Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.
7. Pay attention to fees. Avoid actively managed funds.
8. Make financial advisors committed to the fiduciary standard.
9. Promote social insurance programs to help people when things go wrong.
Personal Money Management Done Right
There’s a ton of benefits when you’re able to manage your finances correctly. These benefits revolve around you saving a lot more money and improving your credit standing.
1. Maximized Income
If you got your finances straight, then most probably all your money goes to something you use. No money goes to waste.
If you’re able to only spend on essentials, then you get to put more money in your savings and investments.
Most people feel depressed financially because they’re not able to keep much of their income. If that happens, then most probably they’re spending way above their means.
But if they managed their finances right, it would be a whole different story.
2. Living On A Budget
Serious personal money managers have a budget that they follow. They don’t just estimate their monthly cost – doing this will make them go over the allocated monthly allowance.
Others dread of living on a budget. They think that they’re depriving themselves of wonderful things that life has to offer. And with that, I say that their budgeting approach is wrong.
When I started tracking my expenses to make a budget, I made sure that I still have a little bit of allowance for my cravings.
For example, I had been spending $100 per month on bubble teas. I had at least 10 of those tasty drinks per month.
When I decided to create a budget to save more money, I still allocated a bit of my monthly budget to bubble teas. My expense on those drinks went from $100 per month to $40.
Let’s be honest, not only did I spend less, I actually managed to get my sugar intake under control! ?
For some, they are a bit hardcore when it comes to a budget. They want all their money allocated to only their “needs”. They’re fine with not having any “wants” for quite a while. If you’re one of them, I’ve written 20 tips on how to live on a TIGHT budget.
If you’re able to manage your personal money correctly, then for sure you too have a budget that you follow! If you’d like to share what it looks like, comment it down below! ?
3. No More Debts
Being in debt can put a lot of stress on a person. I’ve been there, you’ve been there, we’ve all been there.
It makes you sleepless at night, you lose your appetite and you’re constantly worried about when you’ll be able to pay it back.
The day that I was debt-free was really satisfying. It’s like finally unloading a heavy load of burden on my back.
But hey, if I can do it you can too!
There are many types of debt, others classify them as good debt and bad debt. But to me, even good debts bring stress when you’re not able to pay them.
If you handle your finances properly, you’ll be able to climb out of that debt in no time!
In my previous post, I’ve written 18 ways to get rid of credit card debt. If you really look at the majority of the points listed, you’ll notice that most of them are trying to say that you should control your expenses, and a great way to do that would be having a budget.
Good knowledge of personal money management allows you to avoid having massive debt and paying off those loans without incurring any fees.
4. Better Credit Score
Now that you’re debt-free and manage your credit card well, those actions reflect on your credit score.
Having a good credit score can bring you financial benefits. You’re able to process quicker loans and avail excellent deals.
Having a high credit score tells the banks and creditors that you’re credible. Credible when it comes to paying on time and able to pay off the loan.
To know more about credit scores, you can check out Experian’s article on this.
Credit scores matter because lenders (big or small) consider this as a big factor when you’re applying for a loan. It tells them how likely you are to pay your debts on time.
If you want to learn more on why credit score matters and how to get good at it, you can read my post here.
5. Having A Savings Account
As you learn more on the topic of managing your money, you’ll learn that having a savings account is much better than keeping money in your closets.
A high yield savings account pays way more than the average savings account. These types of accounts help your money grow faster because they have higher interest rates.
To check out the best high yield accounts, check the link below:
6. Emergency Fund
Emergencies happen to everyone. If we’re not prepared for it, one can really be affected financially.
If you’re on the journey of being successful in personal money management, then you would’ve had a separate account for an emergency fund.
Even Dave Ramsey believes that a $1,000 emergency fund should be a person’s priority. In his 7 baby steps to financial freedom, he has two steps dedicated to building an emergency fund.
Can you imagine you’ve saved up a good amount of money and it just gets eaten by a medical bill?
Or worst case, you don’t have an emergency fund and this pandemic happens. You lose your job and your source of income is gone.
This just shows how important an emergency fund is.
So once you set up your budget, make sure that you allocate some of your money to this fund. You might not see its purpose for now but when that emergency happens, you’d be thanking yourself that you put money on that fund every month!
7. Build A Passive Income
Passive income usually comes from investing in real estate, stocks, and businesses.
To some, passive income means not having to work for something and get money from it. But to me, that idea is just too good to be true. I believe that we still need to work on the early stage of a business or other investments.
When you start a business, it doesn’t mean that it will generate you money immediately. You need to work hard on establishing its name and marketing.
When you go on investing stocks, you don’t immediately buy shares of a company, you need to do your due diligence.
In investing in real estate, you need to go deeper into just locations. All the legal works that are tied to having a property should be studied as well.
Although it requires some type of effort, the fact that you’re acting on it means you’re on your way to achieving passive income.
8. Better Interest Rates
Once you get your credit score up, you’ll be offered the best interest rates for your credit card.
Having a good deal of interest-rates will allow you to save more money and you’ll be able to pay your loan faster.
Check out the list of low-interest credit cards here!
Your negotiating power isn’t just limited on credit cards, you can also negotiate with your real estate loan or mortgage.
Having a good credit score really puts you in a position to leverage it to get the best deals.
9. Start A Side Hustle
One way to increase savings is to add another income stream.
Having a side hustle or a second job makes the financial load a bit more lighter. Especially when you’re in debt, having a side hustle will make you pay the loan faster.
I’ve written more 16 blogs on how you can make money. It ranges from investing in the stock market to having a job in the comforts of your own home!
The common mistake that people do is when their income stream rises, their expenses go up as well which is flat out wrong.
If you manage to increase the money that’s coming into your account, you should have a plan on where to put the extra money. In my opinion, this would depend on your financial situation. BUT don’t make my mistake of increasing my expenses whenever I got a pay raise.
10. Lower Expenses
One of the benefits of personal money management would be keeping your expenses small.
Having low expenses allows you to save more money, pay off loans, and most importantly you get to reach your financial goals a lot faster.
When Is The Best Time To Start?
The best time to start is NOW.
Don’t wait for tomorrow. If you can do it now, go for it!
Knowing more about personal money management can be very beneficial for you. It makes you well prepared financially and it saves you a lot of stress and burden.