6 Expert steps to improve your money management skills
Although not often seen as such, the way that you manage your money is more important than how much you earn.
These 6 steps will help you improve your money management skills and ensure your hard earned money isn’t going down the drain!
When we lack even basic money management skills, we will, regardless of whether or not we’re earning a high income, suffer some form of financial hardship or simply struggle to build long lasting wealth.
Developing money management skills and healthy financial habits isn’t easy and does not happen overnight. We need to take the time to improve our financial literacy and learn how to manage money. Whichever theory or money strategy you choose to follow, there are a few things that we can all do and tips we should all follow to help us better manage our money.
Step #1: Change the way you view money
When it comes to money it’s not about how much you have available to spend but rather how much you have available to save and invest. If you view your paycheck as a spending ticket, it’s time to adjust your thinking.
The best way to get started is to watch videos and read books from reputable and successful entrepreneurs and investors from Warren Buffet to Grant Cardone, pick your favourite and study their way of thinking and how they manage their money.
Step #2: Get to know how loans and credit work
Loans are pretty simple to understand. You apply for a loan with a credit provider, they run a credit check and affordability assessment and you get your cash. You then make monthly repayments towards the loan, plus interest and any additional fees.
That being said, all forms of credit have their own advantages and disadvantages as well as their own set of management best practices. Getting to know these and finding out how to best manage a certain form of credit or maximise its use to your benefit is key to improving your finances and better managing your money.
Step #3: Review your debt
One of the first steps to changing your finances is to find out where you’re currently at with regard to your debt. From credit and store cards to personal loans and any other debts you may have, these all need to be reviewed and summed up so that you can develop a strategy to tackle them. You can use the snowball or avalanche method of debt repayment, but more on creating a debt repayment plan later.
If it’s your first time reviewing your debts, this may seem intimidating but that’s perfectly normal and will soon become a healthy financial habit and skill. You need to get a copy of all your loan contracts and list all debts as well as the current outstanding balance, minimum or monthly repayment on each and interest rate charged.
You should also get a copy of your home loan account and find out exactly how much equity you currently have in your home. You should also note how much you still need to pay and for how long. Vehicle loans are also a big one and you need to get a copy statement of your account to see where you’re currently sitting with this debt.
Step #4: Create a debt repayment plan
When it comes to repaying debts and getting ahead there are two commonly employed methods. This is the snowball method and the avalanche method. Let’s take a look at these two methods!
The avalanche method:
This is where you repay minimum amounts on all loans and use any additional cash you have to repay your most expensive debts first, regardless of the balance on the loans. The most expensive debts are generally those with the highest interest rates and are usually credit card and short-term loan debts.
The snowball method:
This method is more about keeping you motivated rather than saving money. It requires you to repay debts which have the lowest balances first and then moving on to those with the bigger balances.
Creating a debt repayment plan involves deciding on which repayment method suits you best and creating a monthly or weekly repayment plan that reflects this method. If you merely intend on making the minimum payments towards debt, not only will it take you longer to repay debt but it will cost you more overall.
Step #5: Create a budget around your debt repayment plan
There are hundreds of free resources available that will assist you in creating a realistic budget that you can stick to for the long run. For the most part, if you are trying to get out of debt, you need to create your budget around your debt repayment plan and then add your needs, wants and, should you have any income left over savings. Which brings us to the next step – savings!
Step #6: Make savings a part of your budget
Being able to make savings a priority is one of the most important ways to begin your journey to financial freedom. Regardless of how much you earn you should be able to put some money towards savings every week or month. Ideally you should automate your savings so that you get used to working with what’s left afterwards.
Types of savings accounts everyone should have:
- A secret/crisis account: this is not an emergency fund, it’s an account that you maintain some cash in to ensure you can cope with any crisis that may come your way.
- An emergency fund: an emergency fund should, at the very least have 3 months worth of complete expenses but, you goal should be to have 6 months worth of expenses. Some people maintain savings that would cover them for a year however, this money may be invested in another manner that can generate better returns.
- Goal orientated savings account: This is the account that you save money for any goals that you have or anything that you want to do. This could be savings for an overseas trip, savings to fund a course or even purchase camera equipment or a car.
- Savings for investments: This is where you put money away specifically for the purposes of investing. Whether you choose to buy stocks and bonds or invest in real estate, this is where it all begins!
These steps each involve a lot of work and commitment but are the best way to ensure that you develop good money management skills and build long lasting wealth after paying down debts.