Society’s ability to manage their money is becoming more and more of an issue as time goes on. With constant production in industries like retail and technology it has become what seems to be impossible to save that extra dollar.
Having a plan to manage your money can work towards saving you thousands and truly achieving your goals in life such as buying a home, a new car, travelling, paying school debts etc.
Through this blog we will go through 8 easy steps to not only efficiently but fairly manage your money.
Rules to Saving Money
Before we go into the main steps involved with managing your money, here are some simple golden rules to begin with.
Firstly, always spend less money than you earn. Now this might seem obvious and almost impossible to not follow for some. However, regular casual use of debt financing has made almost anything buyable at an instant. These days people often ask themselves whether they actually can ‘afford’ something less than whether they actually ‘can’ buy it.
Secondly, make use of interest rates. These days some banks offer very profitable interest rates on savings accounts. Instead of keeping your savings hidden away under your pillow, tie it up with a bank of your choosing and allow your savings to periodically grow over time.
Westpac offers their Westpac Life Savings account that gives access to quality savings account bonus’ for their members through interest rates. But remember, read all the fine print as well as the terms and conditions before signing up to avoid any issues in the future.
Finally, don’t limit yourself to one source of income. There are many different ways to earn a steady income, learning about these and understanding ways that you can earn a passive income through different platforms is an extremely overlooked yet critical way to increase your net worth.
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01. Set Your Financial Goals
Before you do anything, you should create a plan of what you wish to achieve as a result of managing your finances. This can range from detailed individual goods such as a new car, house, boat etc. to more broad concept based goals such as being financially independent (not relying on anyone), or removing use of debt finance.
02. Create a Budget for Your Money
A budget is an outline of your revenue and expenses that you will incur over time.
It is one of the most essential tools when trying to manage your finances as it allows you to understand your financial position and know if you have the right amount of money to purchase something. Following a budget is an effective way to keep you out of debt or work towards being debt free if you’re already in some.
When creating a budget you may want to set out from 6 months to 12 months of forecasted expenses. This will help you understand your financial standpoint from month to month, allowing you to identify which months you will have to be more conservative with your spending and which you can be a bit more free with. For beginners, even starting with a pen and a calculator can be enough to kick start your new budgeted life but another effective tool once you begin to rack up a few more fixed expenses is excel as it can do a lot of calculations automatically for you and is also handy for categorising your income and expenses.
If you are struggling with creating a budget for your daily, weekly or monthly expenditures, head here for a simple guide to creating a budget.
03. Understand your Expenses
The ability to identify and categorize your expenses is a key factor in being able to manage your money. Start off easy, list all your expenses that are ‘fixed’ within a one month period, this will often include items like rent, phone bills, electricity, gas etc. Once you have a detailed outline of your fixed expenses move on to your variable expenses.
Now obviously it might seem a bit hard to know how much you are going to spend in a month on variable costs, however, going through your spendings from previous months within your bank account can help give you a certain budget to work within.
04. Understanding Your Income
A person’s ability to highlight how much they earn a week, month or year is often a lot more common than their ability to outline their expenses. However, just knowing how much you earn doesn’t necessarily help you in actively understanding your income. Understanding your income will enable you to break down your budget into necessities versus luxuries.
Income is defined as ‘income for which a service is performed. This can mean wages, salaries, commission, tips etc. However there are different types of income that can be incorporated into managing your money, the three types of income are passive, portfolio and active.
In step 3 we asked you to grasp an understanding of your expenses, both fixed and variable. Once you have reached an appropriate sum for these two you should compare it to the sum of each type Income you earn. The difference between these two numbers will either be your profit if positive or debt if negative.
Now it might seem like the best outcome possible would be to achieve as much ‘profit’ as possible, although it is not necessarily the most effective outcome as a means to grow your wealth over time. You see if you have a lot of ‘profit’ left over it can indicate a lack of opportunities being taken such as investments, property, savings etc. You never know what financial position you may be in in 5 years, putting that extra dollar away now may save you in the long run.
05. Remove Unnecessary Expenses
To minimise the damage to your bank account on a monthly basis, you should attempt to remove unnecessary expenses from your budget. In doing this, you can enable yourself to stray away from living paycheck to paycheck and start achieving your financial goals.
Some simple tips that can help remove unnecessary steps can include:
No more eating out. Buy more used product. Steer towards non-branded products Get the bus for transport more often
Now these are just a few of many but i can’t stress enough, don’t just quit, cancel everything, stop eating entirely, sell the car, sell the house etc. Cut down on one at a time, allow yourself to adapt to the change and assess on the outcome. If you don’t believe that skipping that $15 pad thai once or twice is really worth it as it holds some sort of sentimental value to you, don’t do it!!
06. Cut Down On Debt Financing
Debt is a scary concept, however it seems that more and more Aussies are embracing it as if it were a miracle from god. Don’t get me wrong, responsible use of debt financing can be an effective way to get ahead in life but it seems that more and more people these days are viewing debt in a more casual light. Recent studies have shown that more than three quarters of Australians held some form of debt with more than 50% of that being tied up in credit card debt.
Using the above steps up to this stage should have allowed you to see just how much debt you may have racked up. Use this as a sum to base your cutting of expenses down, and how extremely to cut them. Incorporate this debt payment plan into your budget as just another weekly or monthly expense.
07. Build An Emergency Fund
You can never predict what is going to happen in life, and in saying that, you can never predict what will happen to your money. Building an emergency fund is a very important aspect in responsibly managing your money, it allows you to have a safety net to fall back on if all things go pear shaped.
A good rule of thumb when it comes to creating an emergency fund is the 3 month rule. The 3 month rule basically involves accumulating 3 months worth of work in a high interest rate savings account. This is generally a fairly reasonable amount of money for you to fall back on if you lose your job, need unpaid time off etc.
You should really try to avoid withdrawing from this account at all costs. Remember this is not a savings account for a rainy day, it is an EMERGENCY fund. I recommend that you create a separate bank account that is far away from your regular spending account just to avoid any sporadic spending urges
08. Seek Advice
By all means we are not professionls, everybodies circumstances are different, therefore might require unique strategies towards managing your money. Professional financial advisors can allow people to take that step closer to not only managing your money efficiently but also investing. Explain your situation to these advisors and what you wish to achieve, go through the risks involved in the decisions you wish to make and or opportunities you wish to take.
Most financial advisors will offer you the ability to increase your wealth steadily over time through financial returns, however be warned, investments can fluctuate, just as much as they can go up they can go down. Make sure you understand the risks involved and only invest money that you are willing to lose.
In the end the time you put in to manage your money now can see huge benefits in the long run, and if you want to be relaxing by the beach drinking cocktails in retirement then you need to find effective ways to control all those nasty expenditures.
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