Mastering Your Finances: A Comprehensive Guide to Effective Money Management

Most people talk about earning more money, however, not many people talk about how to effectively manage it. While creating wealth is essential, it is equally important to protect your funds and use them prudently. Your hard-earned money needs to be saved, invested, and spent judiciously in a systematic manner in order to ensure long-term stability and liquidity. This can be done through effective money management.

Money can evoke a range of difficult emotions for many of us. This anxiety only grows when we’re living through economically fragile times or don’t come from wealth. It can feel awkward, uncomfortable, and even scary to navigate these feelings when they show up. But know that it’s still possible to make smart decisions that will help you become financially stable.

Here are some steps you can take today to build your confidence and help you manage your money more effectively.

1. Make a personal budget

People feeling the impacts of financial stress struggle more with budgeting. They feel less in control and tend to spend their paychecks more impulsively. Creating a budget is a great first step in developing healthier money habits and learning how to get the most from your money.

According to the Consumer Financial Protection Bureau (CFPB), “budgeting helps ensure that you’ll have enough money for the things you need and the things you want, while still building your savings for future goals.”

You could start by using a budgeting worksheet and following general steps like these:

• Add up your monthly income. This includes your salary at your job plus other sources of income like bonuses, tax refunds or income from side work.
• Add up your monthly expenses. These can include expenses in the major “buckets” like paying bills for housing, food, student loans and transportation. For monthly payments that aren’t always the same — food and utilities, for example — you could use an average from previous months.
• Subtract your expenses from your income. This amount will be the starting place for your budget. Anything left over is what you have to work with when you’re paying down debt and building up savings. If what’s left is too small, you may want to consider cutting costs for things like takeout food and subscriptions, if you haven’t already.

It may help to think of your budget as a living document that you look at often. That way, you can make adjustments if you need to, like when you eliminate a monthly expense by paying off a credit card. You might also consider popular budgeting approaches, like the 50/30/20 rule, when creating your budget.

2. Track your spending

Using healthy money habits when you feel confident about your finances can help you when things get more challenging. Tracking your spending could be one of those good habits. After all, it may help you avoid overspending and stay within your budget.

How do you keep track of your spending? It’s simple. You could record your expenses digitally with one of the numerous apps available online or if you prefer a paper-based option, you could simply save your receipts and track everything in a planner or notebook.

One how-to hint: You may want to separate your expenses into categories. That way, you’ll see exactly where your money is going and where you may be spending too much.

3. Build up your savings — even if it takes time

Create an emergency fund that you can dip into when unforeseen circumstances strike. Even if your contributions are small, this fund can save you from risky situations in which you’re forced to borrow money at high-interest rates or possibly find yourself unable to pay your bills on time.

You should also make general savings contributions to strengthen your financial security in the event of a job loss. Use automatic contributions such as FSCB’s pocket change to grow this fund and reinforce the habit of putting away money.

4. Set financial goals

Having a financial goal allows you to stay focused and avoid overspending. So, plan what you want to do with your money in the short as well as long term. In order to achieve your long-term financial goals like your dream house, your child’s education, retirement and much more you must start investing in financial products.

Remember to always set realistic goals with set timelines. This will help you stay motivated and ensure that your money is well-spent.

5. Cut back on recurring charges

Do you subscribe to services you never use? It’s easy to forget about monthly subscriptions to streaming services and mobile apps that charge your bank account even when you don’t regularly use these services.

Review your spending for charges like these, and consider canceling unnecessary subscriptions to hold onto more money each month.

6. Save up cash to afford big purchases

Certain kinds of loans and debt can be helpful when making major purchases, such as a house or even a car that you need right now. But for other big purchases, cash offers the safest and cheapest buying option.

When you buy in cash, you avoid generating interest and creating a debt that requires months — or, often, years — to pay back. In the meantime, that saved money can sit in a bank account and accumulate interest that can be put toward your purchase.

7. Plan to pay off debt

Paying off debt may also help you better manage your finances and reduce money-related anxiety. Here are two plans recommended by the CFPB for becoming debt free:

• Snowball method: This method focuses on paying off your smallest balances first. You still make the minimum payments on all of your debts. At the same time, you use any extra money to pay off your smallest balance. Then you use the money you’ve freed up to pay off your next-smallest balance and so on. This could mean debts with higher interest rates might wind up taking longer to pay off. And that could cost you more in the long run.
• Debt avalanche method: In this method — also called the highest-interest-rate method — you list your debts based on their interest rates, from highest to lowest. You put your money toward the debt with the highest interest rate first. Once that’s paid off, those extra funds can be used to pay off the next loan on your list. You also still continue to make the minimum payments on all your debts.

8. Start an investment strategy

Even if your ability to invest is limited, small contributions to investment accounts can help you use your earned money to generate more income.

Find out if your employer offers 401(k) matching, which essentially serves as free money. Consider opening a retirement account or other investment account.

9. Improve your money mindset

What you do with your money is important. But how you think about it can be important too.

Taking on a more positive financial mindset while managing money could include things like keeping sight of your goals. It could also mean taking a solution-oriented approach and focusing on the things you can control — like repayment of your debts and your spending habits.

Remember, you’re not alone if you’re feeling stressed about how to manage money, handle personal finances or hit your savings goals. But now you know more about strategies for managing your money, setting your monthly budget, repaying debts and building your emergency fund. If you keep working at them, they may eventually become habits. And that could help set you up for financial success at every stage of your life.

The Upshot

The path to better finances starts with changing your own habits. Some of these changes will be easier than others, but if you stay committed to this transformation, you’ll end up with great money management skills that will serve you throughout your life — and in the meantime, you’ll have more money in your pocket.