Money management is one of those things that everyone’s got to learn as they approach adulthood. As you start making money and are getting ready to live on your own and pay for your own life, you’ll need to know how to organize your finances so you’re sure you can actually afford everything you’re spending money on. Some people don’t learn how to effectively manage their money until later in life when they’re forced to face the fact that they’re in debt. In any case, it’s always a good time to learn some basic money management tips.
Establish a budget for yourself.
One of the biggest things when it comes to managing your money is creating a budget. Maybe it sounds like a lot of work to sit down and write out all your expenses and shift your money around, and it can definitely take some time to do—but it’s so worth doing. Recording everything you spend in a week or in a month can be eye opening and lets you see exactly where your money is going. Then, when you take into account your take home pay, you can better prevent yourself from unnecessarily going into debt and you’ll know how much money you can afford to put into savings. If you’re not currently in debt, organizing your money will help you to keep a good credit rating so you’re more likely to be approved for a loan or mortgage in the future. Not to mention that it’s comforting to see your money laid out so you know that you’ve organized everything and that you won’t come up short for your regular bills. The time it takes to create a budget is well worth how much the budget will serve you.
Record what you spend now.
So get started by recording how much you spend monthly. You can do this all at once if you have receipts handy, or you can record your spending over the course of the month. You can also record your weekly spending, which can be helpful for costs like groceries that are more frequent and varied. Write out different categories for your expenses—like rent, groceries, phone bill, and so on—and put what you spent next to it. Using a spreadsheet is great for keeping everything orderly and for quick calculations, but doing it on paper works fine too. Add up everything you spent and compare it to your monthly earnings. How’s your spending? Are you spending over your means, or are you spending within them? Now that you know where your money is going, you can make some adjustments if needed. You can see where you’re spending money unnecessarily and where you can allow yourself some more flexibility.
Decide where you want to make changes.
So what changes do you want to make to your budget? Many experts recommend going by the 50/30/20 rule: use 50% of your take-home pay for essentials like rent and food, 30% for discretionary spending like social activities and non-essential purchases, and 20% should be put into your savings. However, these numbers aren’t necessarily right for everyone. If you’re a high-earner, you might put more than 20% of your income into savings each month, and if you’re a low-earner, you may not be able to afford even 10%. If the amount of money you’re spending and the amount you’re making are similar, your focus should be finding areas to make changes so that you might be able to put some away each month or so that you can pay some of your debts if you have them.
What should you change if you’re just getting by?
If right now you’re making just enough to cover your bills and to live on in relative comfort but you run out of money by the end of the month and don’t have anything left to save, you should try to shift the numbers in your budget so that you can contribute to your savings. It’s always smart to have something put away because you never know when an unexpected expense could come up. Your car might break down, your pet might get sick, or you might have a fire in your home. Any of these situations could be expensive and if you don’t have anything in your savings, your only choice will be to rack up debt. So start looking for somewhere you can create a little wiggle room. The best places will be anywhere that your costs are flexible or non-essential. For example, if you’re going out for drinks with friends a couple times a week, cut back; if you buy lunch every weekday, start packing one instead. If you want to save more, you can downgrade your cell phone plan or cable plan. Maybe you can cut back on the data and use wi-fi instead or get rid of your cable entirely and switch to a much cheaper online streaming service. They’re sacrifices, sure, but it doesn’t have to be forever. It can be worth it to be able to have the security of some extra money in your savings account. Even just putting $20 in every month will slowly add up over time. Do what you can.
What should you change if you’re in debt?
If you’re in debt and are only making enough to cover your monthly expenses, your situation is a bit different and you’ve got some decisions to make. First, you should still go through your budget and look for that wiggle room so you have a bit left over from your take-home pay, but where it goes will be something that deserves careful consideration—do you put it in savings or put it toward paying off your debt? It’s really up to you, since both are good options, but there are some details that can determine which is better for you right now. Like interest—what’s the interest rate on your debt? If it’s high, it’s a good idea to focus on paying it off before worrying about your savings. If you keep adding to your savings but your debt is continuously growing—and quickly—the money you’ve put away won’t mean much. On the other hand, if your debt is fairly small and the interest is relatively low, it might be worth your while to work on building your savings for a little while and then switching your focus to your debt later.
Decide how to approach paying off your debts.
And what if you have more than one debt? You can have debt in different places, most commonly from student loans, credit cards, and medical expenses, depending on where you live. If you have a good chunk of money available at the end of each month to put toward debt, one option is to split and pay a bit into each or a few of your debts. But if you only have enough available to make paying into one worth doing, you’ll have to make a choice. Again, consider the interest rates; one way to choose is by going with whichever has the highest interest rate so that you’re not letting it grow substantially while paying off other debts. Handling that one first is a smart way to go. You could also choose to pay off whichever is the smallest debt first, and then the next smallest, and so on. This way you can eliminate one of your debts more quickly and work toward having debts in fewer places. It’s ultimately your choice how you want to tackle your debts, but these suggestions can help you choose the method that you think is best for your particular situation.
Prevent new debt from accumulating.
It’s hard to prevent certain debts; student loans can be inevitable if you want to go to school and medical debts are unavoidable if you get sick or injured and live in a country that requires you to pay for your treatment. But you can avoid credit card debt. When you go through your budget and determine what you have available for non-essential purchases, take that full amount out of your bank account in cash. You might not have it all at once if you get paid weekly or bi-weekly, but you can split it up and take out the amount available then. This way, you can see exactly what you have to spend. Using debit can cause you to lose track of your spending if you’re not careful and there’s the same problem with using a credit card, except that you’re creating debt with it. You don’t have to keep the full amount on you at all times; divide it up and spend only as much as you have with you. It’s much easier to think twice about your purchases when you can physically see how much money you have to spend—and it’s a good way to remind yourself how much you have left.
Money can be a source of stress for many people, but learning how to manage your money can alleviate it and make your life easier. Each person’s finances are unique so you’ll have to look at your personal expenses to figure out what’s right for you, but with these basics in mind, you’re in a good place to start managing your money more effectively.