Keys to Money Management

There are many ways of earning money, via online business, working nine to five at a company, and etc. Earning money can be easy for some people but money management can be hard. You have to put efforts into managing your hard earn money because we are exposed to the risks of losing ours due to inflation, stock / property bubble burst, and poor investments. You have to learn the keys to money management in order to keep yourself protected from all the risks that will turn you into a poor.

Keys to Money Management

Financial planning is basically a process of thinking what you want to distribute your money – savings, investments and expenses. Budget planning is part of this and it can be difficult for some people to handle it.

One can always ask for advice from a financial planner or by trial and error. Of course, there are pros and cons in both as it is not free to ask for a consultation from a financial planner. It requires more time to understand properly how much money you need to put aside for spending, investments and savings if you want to skip engaging a financial planner. Here I listed down some DIY approaches that you can easily practice without complications.

It requires more time to understand properly how much money you need to put aside for spending, investments and savings if you want to skip engaging a financial planner. Here I listed down some DIY approaches that you can easily practice without complications.

1. Set Goals

Everybody dreams, financial planning always starts with dreams and then setting your goals. One should be realistic about your want in life before you can set your goals and outline the strategies to get you there.

It is always advisable to start with short-term goals, such as 1 – 2 years duration. There are a few examples I can give here, paying off credit card debt in a year and saving enough for a down payment on a car in 2 years.

Intermediate goals, such as paying off the debt of the car loan in 5 years time and long-term goals such as buying a landed house in 10 years time and retiring in 50 years.

It is very important to write your goals down by categorizing them in short, intermediate and long-term. To be specific, jot down the dollar amount and the target date.

By writing them down, you indirectly feed this information subconsciously in your brain and it makes them real. Remember to always keep the list with you as it will motivate you as you move forward to achieve your goals.

2. Reality Check

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We set our goals, but we need to have to go through a reality check to understand whether those goals are achievable.

It is almost impossible to set a goal that you want to be the richest man in the world in 1 year time unless you married Bill Gates and inherit his wealth. It is essential to know where you stand now and calculate the net worth (asset values – mortgage /credit card loans).

Then calculate how much you save (money left) every month after deducting the expenses (money out). Don’t be surprised if you find yourself negative net worth as most of us are not rich, and we are mortgage debt owners.

Don’t be demotivated as proper financial planning will turn you into positive net worth if you stick to the financial plans.

3. Pay off Your Debt

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It is very important to know that debt is a negative element that puts you at financial risk and keep you away from achieving your goals.

The most dangerous debt that almost all youngsters has been the credit card debt. Don’t overspend than you earn and become a slave to your credit card.

Budget planning is essential to list down what you spent and what you need in your daily life. Prioritize them in a list and identify their importance. You will be shocked that most of the items listed down are not essential.

First try to identify all your existing debt and try your very best to pay off the debt by having a clear action plan, such as cutting down expenses.

You can use Debt Restructuring Calculator to strategies your way to pay off the debt as soon as possible. It is difficult to live without debts and most of us have medium to long-term debts like house and car loans.

However, you can start paying off with the small ones – credit card debts at the end of every month to avoid outstanding balance. The rule of thumb is never let your debt rolls like a snowball and settle them once you have extra money with you (bonus or tax relief).

4. Protection

If you can’t reply on your saving when you lose your job, then it is time to seriously think about signing up an insurance protection scheme. There are one million workers a year in average cannot work due to serious illness. They are basically on their own when it comes to health and medical expenses.

Life is unpredictable and no one likes to think that something bad will happen to them. We live in the world full of pollution and we are exposed to accidents.

Therefore, we need to protect ourselves and family members when bad things happen. You should consider an income protection insurance when you think it is impossible to survive on saving when you are sick from work. Read my previous post on “Financial Tips for Young Adults“, where I briefly mentioned the importance of insurance.

By securing an insurance, you can minimize the financial burden of your family if (touch wood) something happens to you.

Having an emergency fund allocated for you and the family is essential especially if you have a few dependents. Other than insurance, the rule of thumb to have a short-term emergency fund is to save three to six months of income in your saving account.

5. Early Investment

This is one of the keys to money management, where everyone finds it difficult as an investment is not something that you will receive immediate gain but it requires time and effort.

Due to the power of compounding, it is advisable to start investing as early as possible as it makes a huge difference and it is definitely one of the smart investment tips one should adopt.

I am not a good risk taker and I prefer to invest my money in slow and steady unit trust funds. It is however good to diversify your investment to park some money in high return schemes.

Always remember not to put all your eggs into one basket unless you are confident enough to do it.

One can also diversify his or her investment across stocks, properties, unit trust/bonds, and minerals. We have to remember one thing, investment is not something that you will become rich overnight but it allows you to grow your money organically.

6. Tax Relief

In some countries, you can claim your tax relief if you pay for certain products that are prescribed in the state or national tax guidelines.

There are plenty of resources online to trace for those items – e.g. sports equipment, books, insurance, and private pension fund help you to maximize deductions. If your financial status is complicated, it is advisable to contact your financial planner who can provide advice and assists you in getting the tax relief.

 7. Budget Planning

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Budget planning is one of the most important keys to money management. My wife and I have been tracking our monthly expenses ever since we started to work.

You might find it troublesome tracking every single item you buy, but it does give a very good overview on where your money is going.

At least, you will not be wondering every now and then where the money has disappeared to. Budget planning allows you when you reduce your expenses and when you have extra money for investment.

It is also essential for you to set aside some budget for unnecessary expenditure, for example, toilet repairs, car maintenance, fire insurance (normally paid annually) and etc,

It is also advisable to do some preventive maintenance whenever you have extra money. Cost spent on preventive measures is far less than repair works. So, start budget planning today and keep it as a habit. I hope you now know better the keys to money management.




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