Are you at peace with your financial life? Given that money and work are major stressors for most adults, your answer may not come as a surprise.
Today, begin incorporating the three basic principles of money management into your life. The principles I discuss below are easy to follow. My instructions are simple.
Let’s honor Financial Planning Month (October) together. Follow these principles and get your financial life in order.
Getting into financial hardship is easy. Getting out is easier than you think. ~ Tywanquila Walker
Three Basic Principles of Money Management
1. Needs vs Wants
Know your priorities. Clearly distinguish between your needs and your wants.
Needs are life’s essentials that you cannot live without – think food, water, and shelter.
Wants are things you wish for, or desire to have, but they are not essential for survival – think the latest phone, a luxury vehicle, or 200 pairs of shoes.
Yes, you need clothes. But do you need designer clothes? Yes, you need food. But do you need the most expensive steak on the menu?
There is nothing wrong with getting the things you want, as long as you have already thoroughly taken care of the things you need. Once you know the difference between your needs vs your wants, you can move on to basic money management principle number two.
Always have a budget. People who follow a budget are less likely to overspend.
If you often wonder where your money went, you find you don’t have enough money to pay your bills, or your credit card balance is through the roof, you need a budget.
A budget is the key to your financial plan. It helps you keep track of your finances and your financial goals.
Begin your budget by writing down your total monthly income. What is your monthly salary? Do you have other income such as child support, alimony, a side hustle, or a part-time job?
Next, write out your total expenses. For example, how much do you pay for rent, mortgage, groceries, health insurance, or child care?
Finally, take your total income and subtract your total expenses (i.e., total income – total expenses) to find out how well you are doing with budgeting your income.
+ : If you get a positive number, good job! Your income is more than your expenses. You have money left to save (or spend on one of your wants).
- : If you get a negative number, get to work. Your expenses are more than your income. Look at your budget and find ways to cut your expenses or increase your income. Regularly evaluate your budget to ensure you are living within your means.
Screenshot of Yearly Budget
3. Savings and Emergency Funds
Always have an emergency fund. Life is full of unexpected events. You never know when you might need a major car repair, lose your job, have a medical emergency, or experience a death in the family. During these stressful times, your savings may be your savior.
If you do not have a savings account or an emergency fund, start one.
Build your fund by paying yourself first. In your budget, incorporate saving as a recurring expense. Similarly to paying your bills on a schedule, contribute to your savings on a schedule. Know that as soon as you receive income, a portion of it goes to your savings or emergency fund.
I mention savings and emergency funds together because you can choose to have one fund (e.g., an emergency fund) or you can have two funds (i.e., one for savings and one for emergencies).
If you are just starting out, begin with one fund. Put whatever you can in your emergency fund and do not touch the money unless you have a major emergency.
If you are more advanced, and your needs are thoroughly taken care of, consider having two funds. Build your emergency fund and use it for emergencies only. Build your savings fund and use it to save up for your wants (e.g., a vacation). If you decide to have two funds, make sure you contribute to them both; only use each fund for its designated purpose. For instance, if you do not have enough money in your savings fund, do not use your emergency fund to make up the difference so you can go on vacation. That is not what your emergency fund is for.
If you lack the discipline to have two funds, have one designated emergency fund. Only use the fund when you have an emergency.
You Can Do This
Achieving financial peace is easier than you think. When you know your needs, you are in a better position to develop a budget and save for your future. Once you master the three basic principles of money management, you will be better able to cope with a financial crisis.
Take your time. Learn as you go. Share your knowledge. You can do this!
In Case You Missed It
In case you missed it, I have written many other posts about financial management. Click here to view all of my money and finances posts.
Become economically savvy. Read Economically Savvy: Your Personal Guide to Wealth and Financial Wellness.