What is Money Management – Its Tips and Why is it Important?
Money management is managing your wealth or finances in ways that keep your finances flexible and your family future-ready. It is the just the opposite of paycheque to paycheque living.
Money management is all about financial discipline. It’s not acquired or inherited but developed over time with experience. Having good money management skills can help you sail through difficult situations without much difficulty. Effective management can help you live a financially stress-free life.
Let’s understand the basic differences between the two with a few examples. These plausible scenarios give us insights into how either individual would tackle these situations.
Why is Money Management Important?
Here are a few reasons why managing money is important:
- Provides a Safety Net during Emergency: Financial emergencies can come unannounced. Having a safety net in the form of an emergency fund or RDs can help you deal with such situations.
- Helps Grow Your Wealth: If you have a grasp on your salary and expenditure, this will leave you with wiggle room to explore investment. Money invested has the potential to grow over time, but money in your pocket won’t. Also, diversifying your investment portfolio with effective money management can help you earn better returns in the future.
- Brings Financial Discipline: Personal money management can give you the discipline to curb unnecessary spending and save money for the right occasions.
- Stress-free Retirement: Life-long wealth management will leave you in the right frame of mind to call it quits and embrace retired life.
Now that we know what money management is and why it is important, let’s look at how to manage your money.
7 Effective Money Management Tips
Here are a few money management tips that you should factor in:
- Budgeting: Budgeting essentially has these three components: how much do you earn, how much do you spend, where do you spend. The initial step to managing finances is understanding how much money you earn. This will include everything from your salary to your bonuses, etc.
Once you know how much money you make, you need to find out how much you spend. Once you have factored in all your basic needs like food, electricity, groceries, and lifestyle, now you will be left with a surplus amount. This surplus can then be put to use elsewhere, like savings and investments.
It is time to trim day-to-day costs if you don’t have a surplus amount or if your surplus is meagre. - Discipline: Now that you have a budget, follow it. Managing your wealth requires a certain degree of discipline. You will have to follow the paths that you have set for yourself.
- Saving for Emergency Fund: Building an emergency fund is essential to tackle life’s curve balls. Usually, an emergency fund should be 5x to 10x your monthly income. During a financial crisis, you don’t have to break your FD or RD, if you have an emergency fund.
- Investing and Diversifying: There is a special joy in seeing your money grow. There are so many ways to invest your wealth. Mutual funds, equity, gold; bonds, stocks, there is a whole world out there to explore! All your employed life, you have been working for money. Investing will make your money work for you.
- Start Early: If you are in your 20s when reading this, then you are at the ideal stage to start managing your wealth and investing. If you are not in your 20s, don’t worry, it’s never too late! Certain investing concepts like ‘compound interest‘ take years to deal with fruitful dividends. This is why starting young is a great idea.
- Buy a Comprehensive Health Insurance Policy: In your career, at some point, you must consider an insurance plan. It safeguards your medical future as well as the future of your dependents. Don’t ignore this, as a medical emergency has the potential to wipe out your hard-fought savings.
- Assets Vs. Liabilities: Understanding your income is the first approach to managing your money. This will cover everything, such as your pay, bonuses, etc. So, what are assets? Property, metals, and your entire investment portfolio are part of your assets. Liabilities are things like luxuries, vehicles, things like furniture, etc., that are present or future liabilities to your wealth.
Mitigating liabilities does not mean you don’t buy a car or sleep on the floor. No! The bottom line is whatever your liabilities are, your assets should be worth more.
Also Read
Money Management Tools You Should Know
Money Management in India need not be done on your own. There are numerous resources present online on the internet that can assist you when you travel.
The most common and resourceful is budgeting software. These will help you set goals for your expenses. They will also help you track the inflow and outflow of your income. There are ample applications that can help you to manage your finances and your money.
The market is rife with software that helps you in investment. Everything is available now at the tip of your fingers, from mutual funds to insurances to cryptocurrency.
Key Things to Remember for Money Management
Here are a few things to remember for effective money management:
- Make it a Practice: Practice money management religiously. This would pay you dividends over time.
- Discipline is a Must: Financial discipline is a must if you want to have a financially stress-free life.
- Plan Early: Start early so that by your 30s you are already leading a financially healthy life.
- Set a Goal: Setting a goal is another aspect to get right at the beginning of your journey. To manage your wealth, you need a target. Make sure that all the things you do align with the targets you have set yourself.
Final Word
Money management can be a very rewarding process. A few restraints on your end at the beginning will fruit into rich dividends in the long run. The important thing is, it’s not difficult. Anyone who desires to secure their financial future can take this principled approach.
FAQs
Ans: This is a very common myth. The most math you will be required to do is simple addition and subtraction. And whenever it gets slightly more complicated, you can take the help of myriad apps that make the process easy.
Ans: Absolutely not. The adage goes – you are never too young, and it’s never too late.
Ans: Absolutely not! That isn’t the end goal of financial management. The goal is to manage your money now so you can save up for those expenses without taking an immediate hit to your salary.
Ans: Well, the first step is simply understanding what you want going forward. Do you want to travel the world? Do you want to retire early? Once you’ve decided your goal in mind, make a plan for how you’re going to achieve it.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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