Financial stability is a dream of many people, and with great dreams come great responsibilities. Becoming financially stable doesn't happen overnight.
A large portion of financial stability is rooted in effective money management and implementation.
Learning about financial stability can take days or even weeks, but the result you can reap from this knowledge is priceless.
We're here to help you get started on your journey toward financial stability. This blog aims to help you understand what it means to manage your money, why it is essential, and a few tips to help you become a "master" of your finances.
Money management is an umbrella term encompassing all facets of financial responsibility. Managing your money means effectively spending, investing, saving, and budgeting your personal finances.
Understanding and mastering money management is key to financial stability. According to the National Financial Educators Council, the average American adult lost about $1,389 in 2021 due to a lack of knowledge in money management.
If you multiply this by the number of adults in the country, you will get around $352 billion lost due to the lack of financial literacy.
“If we generalize the results to represent all of the approximately 254 million adults who live in the U.S., lack of financial literacy cost Americans a total of more than $352 billion in 2021.”
You don't need to be a financial geek to become financially stable. Basic knowledge of money management and investment is enough to get you by. Equipping yourself with practical finance knowledge can help you in more ways than you’d think.
Aside from the monetary benefits, money management also teaches different life lessons and helps instill good values and habits.
Here are some of the reasons why money management is critical for everyone:
Learning how to manage your money can help develop self-discipline. When you have an awareness of how to handle your finances properly, you are less likely to make impulsive decisions that can ruin your financial situation.
For instance, if you have the habit of using credit cards to make unnecessary purchases, you are more likely to get into debt. On the other hand, if you know how to stick to a budget and only spend money on stuff that matters, you are less likely to get into financial trouble.
Money management is about setting and achieving goals. When you know how to manage your finances properly, you can easily set aside money to achieve your short-term goals and incrementally invest in your long-term goals.
For instance, if you want to buy a new car or a house, you can start saving up early for a down payment. If you want to retire early, you can start investing in retirement accounts and making passive incomes.
A sample financial goal would look something like this:
Money management is also about taking calculated risks. When you know how to manage your finances, you can effortlessly identify which risks are worth taking and which ones are not.
For instance, if you're considering starting a business, you can use different financial tools to assess the feasibility of your business idea. If the numbers show that your business has a high chance of success, then it might be worth taking the risk.
In contrast, if the numbers show that your business has a low chance of success, it might be best to rethink and restrategize your business idea.
Understanding the basics of money management can help you see your decisions' long-term and short-term effects. This level of risk awareness will be your key to building a financially stable life.
Another aspect of money management is gaining control over your finances. When you know how to manage your money, you can easily take control of your financial situation and make sound decisions that can improve your overall financial health.
If you're struggling with debt, you can develop a debt repayment plan and work on paying off your debts as quickly as possible. If you want to save more money, you can develop a budget or look for side hustles to diversify your income source.
Most people are controlled by their spending habits and debt. Knowing how to manage your money effectively can turn the situation to gain control over your finances and not the other way around.
In a recent survey result released by Capital One, 73% of their participants revealed that finances are the leading cause of their daily stress. This fact is not surprising as most people struggle to make ends meet.
If you're one of those constantly worrying about their finances, learning how to manage your money can help minimize stress and anxiety.
When you know how to manage your finances properly, you take calculated risks and minimize the chances of making financial mistakes.
Moreover, money management can also help you build your emergency fund, so you have a safety net if something unexpected happens. This will give you peace of mind knowing that you're prepared for any financial challenges that might come your way.
Now that you know why financial literacy and money management matters, here are some tips to help you gain "mastery" over your personal finances.
SMART stands for Specific, Measurable, Actionable, Realistic, and Timebound. You can use this widely-known corporate goal-setting framework for setting financial goals.
For instance, if you plan to save up for a down payment for your first house, your first goal is to identify the average down payment of houses in the area you prefer.
Once you have that specific number, you have a measure of how much money you need to save. From there, you can start setting smaller, actionable goals like saving a specific amount of money every month until you reach your goal. Make sure each of these smaller goals are realistic.
Moreover, make sure to set a timeframe for your goal to measure your progress. For instance, if you want to have the down payment saved up in two years, you need to save the "X" amount every month.
Assessing your financial health is key to gaining control over your personal finances. To do this, you need to take a look at your current income, debts, and expenses.
Visualizing your monthly cash flow will give you an idea of where your money is going. Furthermore, it can help you identify areas for improvement.
You can use a personal finance calculator to help you evaluate your financial situation. This tool will show you how much money you're bringing in every month, your current debts, and your monthly expenses.
From this standpoint, you can develop a plan to improve your financial situation. For instance, if you have a lot of debt, you can create a debt repayment plan.
If you're not making enough money every month, you can look for ways to increase your income or reduce your spending.
According to ValuePenguin, a standard American family's average credit card debt is estimated at $6,270 in 2021. Moreover, according to this survey, families of higher income have double the amount of credit card debt.
“Individuals in the highest annual income percentile, 90th to 100th, had an average of $12,600 in credit card debt — more than three times as much as households making the least.”
Setting savings goals while clearing debt is a challenging task. Because of this, we highly encourage that you clear your debt first before working on your savings.
Once you clear any debt under your name, it will be significantly easier to allocate your finances between your savings and necessities.
Moreover, paying off debt also allows you to save on interest payments. The lower your debts are, the less money you will spend on interest payments in the long run.
According to a survey conducted by Banknote, more than 50% of American adults don't have an emergency fund that could cover them for three months. Although there is not an established amount for an emergency fund, it's ideal to have enough to ensure three to six months' worth of expenses.
An emergency fund is crucial because it gives you a safety net in case of any financial challenges. If you lose your job or experience an unforeseen medical expense, you will have the funds to cover these costs without relying on credit cards or loans.
One way to start building your emergency fund is to set aside a specific amount of money every month. You can also set up a high-yield savings account to help you grow your emergency fund quickly.
According to Tony Robbins, a revered financial and life coach, 80% of wealth building is psychology. Robbins believes that self-made wealthy people can turn obstacles into opportunities.
His teachings are rooted in adapting an "abundance mindset." This mindset shift is crucial to building wealth because it allows individuals to see beyond their current circumstances.
When you practice an abundance mindset, you believe that you have enough money and resources. This belief opens up opportunities for you to create more wealth for yourself and your family.
Training your mind to spot opportunities in every situation is vital for building wealth. Adopting this mindset allows you to see a feasible solution to every problem that comes your way.
One of the essential money management tips is to make sure you are paying yourself first. This means setting aside money for your wants and luxuries while saving for necessities, savings, and investments.
When you take your journey towards financial stability, you don't need to deprive yourself of things and experiences that you desire. It would be best to remember that spending money on your wants is not inherently bad for your finances.
Spending on your luxuries is only an issue if you're not allocating enough money for your other financial obligations. If you make sure to set aside money for savings and investments, you can use the remaining money to treat yourself.
Circling back to what we said at the beginning of this blog, financial stability is not an overnight process.
As you proceed with your journey towards financial freedom, you will need to tweak your strategy to match your current circumstances.
This is why it's essential to keep learning about money management and financial planning. The more knowledge you possess, the better equipped you are to handle any financial challenges that come your way.
The internet is an excellent resource for scouring information on money management. You can also sign up for newsletters or take courses offered by financial institutions.
By continuously learning about money management, you can stay updated with modern financial strategies and investments that are worth your money.
Money management is not solely about making more money. It's about allocating your resources in a way that allows you to achieve your financial goals, sustain your needs, and meet your wants.
Managing your finances is a way to optimize your life towards success. With the right mindset and financial knowledge, anyone can achieve financial freedom.
We want to inspire you to start your own journey towards financial freedom. Remember to bookmark this page for future reference or share it with a friend who might need some money management tips.
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Whether it's to manage your finances to buy your dream home, rebuild your credit score, jumpstart your start-up, or secure your savings for retirement or emergency, 121 Financial is here to help you make your dreams a reality.
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