This guest post has been written by our friend Melissa Brock over at Benzinga, where you can find reviews for many financial products that could help you secure your financial future. In the following article, Melissa explains all the steps you should be taking to learn how to manage your money. By the time you finish reading, you’ll know exactly what to do.
What’s your response to the phrase “managing your money?”
Does it feel like a massive, overwhelming task? You might feel that way if you’ve never really spent a lot of time organizing your finances.
But managing your money doesn’t have to be a slog through Jell-O. What if you see yourself as the coach of all your money and you have to tell each player (read: each penny) where to go? You’re the director. The chief financial officer.
You wield amazing power, and in fact, as long as you stick to key principles, it’s possible to manage your money while you sleep. Not ultra-confident in your ability to divert your money to where it should go? Good news: You can always involve a professional.
Check out some key money management tenets to know.
Is Managing Your Money Different During COVID-19?
Hold up. Before we dive into the different money management techniques, should you take a different approach during COVID-19?
If you’ve lost a job or had to furlough, yes! Your cash flow could look completely different, so you’ll need to follow these steps even more closely. It might require a completely new outlook, particularly if you’re not sure where your next paycheck will come from.
Here’s a general step-by-step guide.
Steps to Manage Your Money
How do you traditionally manage your money right now? Do you check your account balance every once in a while? Keep everything stuffed in a savings account?
If you don’t have a clue where it’s all going, it’s time to wrap your head around it now.
Step 1: Understand your finances.
The first step is to make sure you know what’s currently happening with your money. Do you understand where your money goes? Where does it come from and where does it get whisked away every month? Sign up for Mint or EveryDollar if you’re really not interested in tracking it yourself or through your bank app.
Pinpoint where you’re spending money — and whether you have enough coming in per month to fund what’s going out.
Step 2: Develop an action plan.
If you’re spending more than you make, that’s a problem. Make a list of ways you can improve.
- Do you need to better understand needs versus wants?
- Can you spend less on entertainment or hobbies (that expensive hobby of yours!) or in other areas of your life?
- Do you need to get a side hustle?
Or maybe you’re not spending too much at all. Maybe you’re not saving enough — maybe it’s all sitting in a checking account and you know you could leverage it through the stock market or save way more for retirement.
Plan out your goals and write them down.
Step 3: Make it automatic.
What were those goals? What did you just write down? Whatever they are, make them automatic. If you need to allocate more toward your 401(k), automate it by signing up through your human resources office. (By the way, making retirement savings automatic is the key to making sure you have enough saved for retirement. Aim for saving at least 10 percent (or more!) and make sure you invest enough to get the company match. If you don’t, you’re leaving free money on the table.)
Make sure you automate everything. That includes signing up online with your utility company, insurance agency and other services you use. Automating these things also ensures you’re not dinging your credit score — paying late affects your credit score.
Step 4: Delete your debt.
Managing your money means trying to get ahead of your debt, too. If you’re overwhelmed, it’s okay. It’s time to face those fears! Here are a few tips:
- Call your creditors, or the companies you owe money to. Explain how you’re having trouble trying to pay back your debt and ask if it’s possible to work out a new payment plan with lower payments that you can comfortably manage.
- Contact your mortgage lender immediately if you’re behind (or could start getting behind!) on your mortgage. You don’t want a lender to take matters into its own hands and foreclose on your house. Most lenders will work with you if they understand that your situation is temporary.
- Unfortunately, many car financing agreements say a lender can repossess your car any time you’re in default and not making your car payments. They don’t have to give you any notice. If your car is repossessed, you may have to pay the balance due on the loan, towing and storage costs to get it back! Worst case scenario: the lender might sell the car. Again, let your lender know if you’re in hot water.
- What about student loans? If you have federal student loans (government loans), the Department of Education can teach you more about your options at StudentAid.gov. If you’re concerned about private loans, contact your student loan servicer.
You also want to try to get out from under:
- Personal loans
- Home equity loans
- Credit cards
- Payday loans
Ultimately, know this: Your lender might be willing to lower or suspend your payments for a short time and extend your repayment period to lower your monthly payments.
A reputable credit counseling agency can give you advice on managing your money and debts, help you develop a budget, offer you free educational materials and workshops and help you learn how to repay your debt.
This is a common question: Should you pay off debt or invest? Ideally, both. However, if you have high-interest debt like credit cards, you should focus on getting out of debt first.
Step 5: Make sure you’re investing where you should.
This is a little tougher to figure out. After all, you can go in so many different directions. However, there are a few things you must figure out.
- Build your emergency fund. You should have at least six months’ worth of monthly expenses sitting in a liquid account. How much is six months’ worth of expenses? Total up how much you need to live off of during an average month. Every family or individual is different. You might need only $3,000 per month (or less) and a family of four might need $10,000 per month to stay afloat!
- Get your life insurance rigged up. You want to be there for your family. Life insurance ensures that you’ll be there for your family if you die unexpectedly and must cover things like college tuition, the mortgage and more.
- Put a percentage of your paycheck into your retirement fund. (Just do it. You’ll be so glad you did when you get closer to retirement age.)
Step 6: Consider your family’s needs.
What does your family need? Do you need to pay for college? Iron out life insurance (yep, mentioning that again — it’s so important!)? Do you need to figure out how you’ll buy a new house to accommodate your growing family?
Make a list of money-related items you need to tackle. That will help you figure out where you need to funnel your money. It could involve things like:
- Adding a second bathroom (because you have three teenagers!)
- Cutting back on the grocery bill because your expenses seem to increase every week
- Selling your third car because nobody drives it
Whatever your needs, write them down and involve your family to figure out how to tackle it. (Yes, even teenagers! You’d be amazed at how level-headed some teens can be. They can almost write a book about money management for teens and adults!)
Step 7: Consider your future.
What are your plans for the future? Do you plan to retire in the Bahamas at age 60? How much money does it require? Do you want to stay right where you are but open a restaurant in five years? What does that look like?
Don’t ignore that dream basket because it helps you orient your life. (Wouldn’t it be terrible to get to the last 10 years of your life and realize you worked too hard, didn’t pursue your goals, sat around waiting for things to happen to you, etc.?)
Step 8: Involve a professional.
There’s no law that says you have to go it alone. In fact, some of the richest people in the world have a whole team devoted to helping them handle their money.
Even if you’re not rich, that doesn’t mean you can’t hire a money manager. In fact, that’s one of the most misunderstood aspects of money management: You don’t have to be rich to invest.
In fact, you’ll be better off having someone in your corner to put your interests first. (Just make sure the professional you hire is a fiduciary, which means he or she will do just that — put your best interests at the forefront.)
Manage Your Money Like a Pro
Don’t let any of these “steps” make you stumble. If you’ve already tackled one aspect (like getting a financial advisor) but are still hanging around in step four (deleting your debt) you can handle any of them out of order.
The most important thing you can do is set yourself up for future success. However you get there is nobody else’s decision but your own.
About Melissa Brock
Melissa Brock is the Money editor at Benzinga. She enjoys writing about personal finance and higher education. She’s also the founder of collegemoneytips.com.