Managing money is an important skill that everyone needs to master in order to obtain financial freedom. Money management is an umbrella term; it encompasses plenty of other skills that jointly contribute to financial success.
Let’s take a look at what these skills are:
Oftentime people make budgets without considering pertinent demographic information. That’s a grave mistake. Budgeting is among the key aspects of money management and when it comes to it, no cookie-cutter formula works.
The budgeting style of a married man in his late 30s has to differ from that of a college goer. The teenager’s priorities are living a frugal life, not maxing out his credit card, maintaining a decent credit score and finds a job as soon as he can. If the teenager has loans, his priorities would change.
A retired person in his mid-60s has a completely different set of priorities. He might want to travel across the country in which he lives or the world and only interested in saving if it’s for medical reasons.
Unless the demographic differences are reflected in the budget preparation, the budget would be incomplete.
Stop the outflow
Stopping the outflow of money is an important money management skills. Sometimes, you fail to prevent the outflow no matter how hard you try. For example, your budgeting techniques may have been flawless and you may have very spent little on fancy items, yet due to some unpredictable turn of events, ended up shelling out more money this month than the previous month.
To handle any unforeseen outflow like this, you need to have an emergency fund handy. A general rule of thumb is never to spend more than what you originally decided before you started drafting the budget. If need be, spend from the emergency fund.
Increase the inflow
Increasing the inflow of money should be your priority. It baffles me that most money management skills center around savings; very few are aimed at increasing the inflow of money.
There are no readily available tips that can help you increase capital inflow. Some common yet effective suggestions include:
- Diversifying your income: You don’t spend all your months earning on just one thing, do you? When you are spending money to fulfil multiple needs, it only makes sense that you have more than one revenue stream.
- Earn from passive income: It’s a new trend. Thanks to the Internet, a lot of people are now making quite a bit of money from passive income. Some have amassed so much money that they aren’t interested in active income anymore. Earning from ads strategically placed on a site, online book/product sales, etc all qualify as passive income.
- Rent/lease your house: Unfortunately, not everybody has this option. You need to have your own house and if it’s a mortgage property and you are still paying the mortgage, the occupant must be committed to pay you more than what you are paying as mortgage premium.
These are just some ways to make money. You can be creative and invent new ways to diversify your earnings.
Many households have an emergency fund that they use prudently, only in time of an emergency-like event. It’s imperative for you to create one if you are serious about honing your money management skills.
Why is it so important?
When faced with an impulse to purchase a random item on an online merchandise collection platform or a trip to the Bahamas, people often fail to resist the temptation and end up squandering their emergency fund. Resisting the temptation is necessary.
One is supposed to exhaust the fund only when it is absolutely necessary. People who manage emergency funds know it, yet many of them succumb to the temptation of spending from the emergency fund. A good money manager doesn’t spend even a dime from the fund. Easier said than done, but practice makes things perfect.
Make smart purchase
This is something that people from all age groups can practice. The idea behind smart purchase is quite innovative. Smart purchase requires one to be 180° opposite to an impulse shopper. Instead of purchasing something just because you fancy it, find something that adds value to your life.
For example, if you purchase jewellery, that’d be a smart purchase because the value of gold and diamond and other precious metals increase over the time. But if you purchase electronic stuff, its value will only go down. So purchase smartly.
I listed some of the essential money management skills here in this article. The list is in no way complete. And perhaps it will never be complete because anyone can come up with their own ideas of managing money. Hence, follow the tips shared here but at the same time, don’t hesitate to tinker with new ideas.