Savvy money management is a learned behavior.
Unfortunately, it doesn’t come naturally for many of us.
Perhaps your parents never taught you how to budget. Maybe your spouse was a reckless spender.
Regardless, it’s not too late to learn effective money management techniques to reach a secure future and peace of mind.
Here are eight things you should know to effectively manage your money:
1. Set smart goals. Consider the amount of time you have to work on your goal. For instance, someone investing in an employer-sponsored 401(k), for 30 years has more time to work with than an individual on the job for five years. The longer you have until you retire, the more aggressive your goals should be. If you only have a few years until retirement, the best thing to do may be to avoid risk.
2. Put a budget together. Find out where your money goes and track expenses for several weeks, or months. Reflecting on where you spend your hard-earned dollars can help you realize the impact of those spending habits.
3. Reduce spending. With a budget in place, you can work on reducing expenses. Look for things you can easily cut, like a daily stop at the coffee shop or your television subscription that you can do without. Comparison shop for services that you may be able to spend less on like cell phones or auto insurance.
4. Create an emergency fund. Emergency situations (like losing your job) often happen, so it’s a good idea to save enough money to cover between three and six months of living expenses. Don’t fear how much money you need for your emergency fund. Even if you start small, all that matters is that you begin.
5. Lower your debt. Private Wealth Advisor John Hughes recommends attacking debt with a two-fold strategy: “First, create a list [of debts] and apply all your extra money to one debt until it is paid. Then, take that money and add it to the amount being paid on the next debt, until the debts are paid down.” The second strategy involves consolidating debt by using “the equity in your home or a signature loan,” advises Hughes. “But keep in mind if your spending habits don’t change, you’ll not only end up with a big consolidated debt, but new debts that start to pile up as well.”
6. Purchase insurance. Other than health insurance that you probably get through the workplace, the big three to focus on include life, disability and long-term care insurance.
7. Work your investments. For long-term money management, your 401 (k) “is an outstanding savings’ vehicle,” says Hughes. “It allows for you to save every paycheck without having to think about it, and you don’t pay taxes on the contributions until you withdraw funds in retirement.” And your taxable income is reduced for the year. Investing in a Roth IRA is another option. “As after-tax contributions, it doesn’t help you with today’s tax bill, but it grows tax-free,” Hughes notes. “At the age of 59 and a half, you can pull all the money out without paying taxes, and you can withdraw your principle at any time without penalty.”
8. Save money. Hughes recommends focusing savings’ efforts on liquidity, such as a savings account.
How you manage, invest and spend your money will have a significant impact on your life – and your family. It might not be easy to change your spending, saving and investment habits, but it’s a worthwhile effort and it’s never too late to start good financial habits.