How to manage money - the essentials
"Personal prosperity depends not on how much money you make, but on how much money you keep"
The theory says "one cannot manage what is not measured". Applying this concept to money would suggest that in order to manage money well you need to measure your incomings and outgoing. Which is the basic principle of budgeting. In other words, planning how much will be earned and spent and then ensure you stick to this plan.
It's all well and good, however reality shows that is much easier said than done. We're not as rational and disciplined and life is usually be more complicated and unpredictable than our plans.
Essentials principles to control money
1. Put it in auto pilot
It may sound like a small detail but this is an essential principle to keep on track of your finances, instead of relying on memory or discipline. Put your bills in direct debit, set-up automatic transfers to savings accounts, retirement, investments, etc. Automate your cash flow so that you're only left with a defined amount to be spent monthly. By automating your decisions, you reduce or eliminate the risk of losing control of you spending and saving, as preached by David Bach in is book Automatic Millionaire.
2. Save it before you spend it
One of the benefits of automation is to save before you spend. The traditional thinking says we should spend less than we earn, and save what's left over. But this approach rarely works as it's difficult and time consuming to track spending during the month. And most importantly by having a higher mid month balance, you're more like to incur some extra spending that will impact your allocation to savings at month end. That's why it's critical to simplify and put savings first. Once you money comes in, automatically set aside a portion to your savings and investment. If you're on a monthly paycheck that's even easier, just set-up a direct debit to savings/investment account on the same day. This way you will not be tempted to spend more than you want.
3. Make it easy to review
It's essential to review how much you've earned, spent and saved periodically. However this could be a daunting task if you don't have the appropriate tools. There are some excellent softwares and websites that make it very easy to syncronise or download transactions from your internet banking and label them in comprehensive categories. These systems give you summarised reports of where your money is coming from and going to, and certainly give you better view and control of your financial position over time. Some examples of financial softwares and online tools are listed in the bottom of this article.
If you don't want to track your money transaction by transaction, the alternative is to work on a simple spreadsheet with monthly initial balances, incomings, outgoings and ending balance. A few examples are included below.
4. Make the money work for you
Controlling your money incomings and outgoings is just one of the elements of managing money successfully. To control money effectively is essential but it's not a guarantee to achieve your financial goals. It's an illusion to spend too much time and effort on tracking your finances, where the main focus should be to know what you want, find ways to get there and, as a result make some money. Your money and your assets must work for you and not the opposite, as Robert T. Kiyosaki argues in his book Rich Dad, Poor Dad. Additionally, the whole point of making and managing money is to be able to fund our dreams and spend it on what we love.
Essential money quotes:
"Personal prosperity depends not on how much money you make, but on how much money you keep"
" Allocate 50% to Needs. Needs include housing, transportation, groceries, insurance, and clothes you really need. Spend 30% on Wants. Wants include cable television, clothing beyond the basics, restaurant meals, concert tickets, comic books, knitting supplies, etc. Set aside 20% for Savings, including debt repayment." Elizabeth Warren & Amelia Warren Tyagi, All Your Worth: The Ultimate Lifetime Money Plan
" 1. Destroy all your credit cards.
2. Invest 20% of all that you earn. Never touch it.
3. Live on the remaining 80%, no matter what. " Andrew Tobias, The Only Investment Guide You’ll Ever Need
Essential money management resources
Software:Books:
- Automatic Millionaire by David Bach
- Your Money or Your Life by Vicki Robin, Joe Dominguez, Monique Tilford
- Rich Dad, Poor Dad by Robert Kiyosaki
- Rules of Money by Richard Templar
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