4 Important Pillars of Money Management

To achieve your financial goals, it is crucial to learn how to use money as a tool. Financial management can help you save towards milestones and can also provide security for your household. However, gaining control of your spending and saving habits is the first step to making your money work for you. Here are some important elements of personal financial management.

Budgeting

You can’t control your money without knowing how much you have coming in and how much you have going out. The first thing you need to do is to determine your adjusted gross income (AGI) To estimate AGI, you’ll need to figure out what your gross income is after all adjustments have been deducted. Those adjustments include things like loans, child support and retirement investments. Then, get an idea of what your monthly expenses are. Next, deduct your expenses from your AGI. Whatever you have left over should go towards a specific purpose, so that every dollar has a job. If you don’t know plan where your money is going, you are more likely to spend it on unnecessary, and possibly irresponsible, purchases. By staying on top of your cash flow and disposable income, you can develop long-term healthy money habits centered on saving, avoiding debt and reducing extraneous spending.

Saving

If you have goals in mind, you should make a plan to raise the money needed to meet those goals. Some things you may want to save for are a vacation, a down payment on a car, or new electronics. These items may not be considered necessities, but budgeting is not about limiting your spending to only what you need to survive. Rather, you should know how to set money aside for the things you want as well as the things you need. Instead of charging all of your major expenses on the credit card, it’s wise to put aside a bit of money every month until you have what you need. This way, you can enjoy your purchases without plummeting into debt. Keep in mind that when you pay off a purchase made using credit, you are paying more than the original amount. You are also paying interest, which will increase the overall cost of the purchase. 

Building an Emergency Fund

You never know what life is going to bring your way, and being financially prepared for unexpected expenses is part of being fiscally self-sufficient. One car repair bill or a temporary job loss should not be the difference between you keeping your residence or being homeless. By creating an emergency fund, you are gaining power over an unplanned financial obligation before it even happens. You should try to save 3 to 6 months' worth of income, understanding that it takes time and patience to build your emergency fund. Every month, put as much money as you can towards the fund before you do anything else. In other words, pay yourself first. An emergency fund not only keeps you from fretting about the future but will also prevent you from utilizing credit to stay afloat when an emergency strikes.

Eliminating Debt

Most Americans have some form of debt and struggle with the constant barrage of payments. If you are paying creditors large sums of money every month, you are not benefiting from your income as much as you could be. The more quickly you get out of debt, the better off you will be. If you can free up the money you are sacrificing to debt, you can do things like beef up your emergency fund, invest in retirement, or create several small and long-term savings goals. This will help you have a financially stable future as well as a more comfortable present.

Having a healthy relationship with your finances takes effort, but the results have far-reaching benefits. With ongoing preparation and evaluation, you can create the financial independence needed to live a secure life.