Money can be seen in different ways. Some view it as the source of many problems, while others see it as the answer to nearly everything. Yet, everyone agrees that not having enough money can lead to severe consequences in life. Even though it sounds straightforward, managing money well is a big challenge for most people. Culture and psychology influence how someone handles money, adding layers of complexity. The fact that schools often don’t teach financial skills only widens this gap in what adults need to know.
In this article, we explore the essential money management habits that have stood the test of time and can lead you to a more peaceful and prosperous life.
Keeping track of your expenses
According to a 2021 survey by The Penny Hoarder, a little over 55% of Americans do not budget. Budgeting is absolutely essential, and it is what makes the other items on this list possible. Not paying attention to your spending habits can lead to financial strain and even debt.
Actions such as calling an Uber, buying a latte, and ordering in, for example, can add up to a much bigger chunk of your income than you expect. This does not mean you can’t do any of these things, but you should be aware of where your money is going. It is a good idea to create a budget for activities and items that bring you joy and try to stick to it.
One way to keep track of your expenses is to have a spreadsheet where you register all of your daily transactions. But if you have a penchant for downloading apps to manage just about anything in your life, here are two options you might like:
EveryDollar by Ramsey Solutions
EveryDollar lets you securely connect all your bank accounts to track transactions and balances in real time. It offers paycheck planning to ensure you always know how much you can spend without going over budget. The app also provides a clear financial roadmap, allowing you to set goals, track your net worth, and work toward becoming debt-free. With customizable budget categories, you can easily budget for everything from daily expenses like a cup of coffee on your way to work to larger financial goals.
Mint by Intuit
Mint gathers all your transactions from various accounts into a single platform. It shows your assets, debts, and investments to help you understand your overall net worth. You can easily track your spending and find ways to save money, and you can keep an eye on your cash flow across accounts to avoid missing any expenses. Plus, the Credit Karma app offers personalized suggestions for credit cards and loans, allows you to open checking and savings accounts, manages your credit score, and offers more features.
You Need a Budget
YNAB helps you manage your money by connecting securely to your bank accounts to import transactions automatically. It works smoothly across your devices, whether you’re on a computer, phone, or tablet, even offline. You can share your subscription with family or partners at no extra cost, allowing up to six people to budget together. YNAB lets you set and track spending and savings goals, offers a loan planner to help pay off debts faster, and provides colorful graphs and charts to visualize your financial progress, from daily spending to overall net worth.
Building an emergency fund
Life can be unpredictable, and a generous emergency fund is a very important factor when it comes to financial security. According to the Report on the Economic Well-Being of U.S. Households in 2022, however, 37% of Americans said they would have to borrow money or sell assets to cover a $400-dollar emergency. This is unfortunate because it shows many people are entirely unprepared for the sudden loss of a job when the average monthly cost of living for one person in the United States is $3,693.
A good rule of thumb is that you should have, on average, six months’ worth of savings to cover your living costs. Less conservative financial experts, on the other hand, might argue that three months’ worth of living expenses is enough. Ultimately, it all comes down to how stable you consider your income source. If you are self-employed or own a business, an entire year’s worth of savings might be an idea worth considering.
Here are the two steps you can take to get started:
List all your essential living expenses and consider what you can cut off from your budget.
Estimate how long it will take to reach your target amount of money.
For example, if you make $6,250 and your essential cost of living is $3,500, by putting $875 toward your emergency fund every month, you would have six months’ worth of salary in your savings account in two years.
Making short-term and long-term plans
What is your dream? Where do you see yourself ten months from now or even ten years from now? Whether you want to get married or travel to the Atacama Desert, money can make your dreams a reality.
Once you’ve considered your budget, make two lists: one for short-term goals and one for long-term goals. Estimate the amount needed for each goal and calculate how much you can save monthly. Remember, every amount saved counts — whether it’s $10 or $50, it’s better than saving nothing at all.
Setting part of your income aside for investments
Most experts say 15% of your income should go toward investments. If 15% is too high a number for you, investing 10% or even 5% of your monthly is also a valid endeavor.
After you determine how much you can invest, you need to learn about the different types of investments. These include stocks, bonds, ETFs, and mutual funds. If you haven’t already, you should also take some time to learn more about the different types of investment accounts, such as 401(k) plans, IRAs (individual retirement accounts), and other accounts.
This Forbes article has a great list of educational resources on investments that you might like to look into.
In closing
Mastering essential money management habits is crucial for achieving financial well-being in today’s complex world. These habits not only empower people to make informed financial decisions but also bridge the gap left by educational systems, ensuring that everyone has the tools needed to navigate their financial journey successfully. By adopting these practices, you can build a foundation that supports both your present needs and future aspirations, ultimately leading to a more balanced and happy life.
