Manage Your Money

geld moet rollen postcard a bt 1900Money is a system of exchange that was created to support living. One of life’s greatest ironies is that our lives now are centred on supporting our income. We use work as an excuse to turn down opportunities to spend time with those we love, to keep ourselves healthy, to contribute to society.

How do you master money instead of being a slave to it? Develop good money attitudes and habits.
Creative Commons License photo credit: janwillemsen

1. Save part of your earned income

Start with 10% if possible, though even 1% is better than nothing. You can increase the percentage once saving becomes a habit and you know how good it feels to see a nest egg growing. Work it up to 20% after a year, 30% after another year and so on. A good target over the long term is to save 50%. This means that your hard-earned money is equally invested in your present and your future.

I’ve found that whether I save 5% or 50%, whatever is left is never enough for what I want to spend on. The more I allow myself to spend, the more I spend. The obvious, though not easy, solution then is to allow yourself to spend less. You’ll suffer just as much whether you save a little or a lot, so you may as well save a lot.

You may be shaking your head now, saying to yourself that it’s easy for me to say, because I don’t have your bills to pay. Trust me, I have bills. And I used to have a mortgage. And I didn’t have a regular income every month. So all this was probably harder for me than it is for you.

2. Reduce your expenses

The fun part about forcing yourself to live on less is that you get really creative. You’ll find hidden costs like credit card subscriptions that you don’t have to pay if you just call your bank and tell them you want to cancel the card since there are so many cards on the market that offer free subscriptions. You’ll explore mobile phone plans that make more sense for your level of usage. You’ll find ways to bond with your children that don’t involve buying toys or going to the movies. This is actually good for you!

Of course, this is only temporary. The whole purpose of living frugally now is so that you’ll have fewer or no money worries in future. Most people will not do this because they cannot understand delayed gratification. This is the single most important attitude you’ll need if you want to get good with handling money.

3. Don’t spend your savings

Many people save, only to dip into their savings when cashflow gets tight. I don’t know how to say this gently. Don’t. Don’t. Don’t.

When I first started freelancing, I often had to borrow from myself. This means that I took out some of my savings to tide me over, but always with a fixed date for paying myself back. And my loan period was usually just a few days. I certainly paid myself back in total by the end of the month. This was necessary because my income fluctuated from month to month, whereas my bills didn’t. If you have a fixed income now, you should not have this problem.

4. Invest

If you have no time of inclination to study how to invest your money, perhaps you should pay a professional do manage your investments for you. I have a friend who does this and she’s very happy with the results. Use a fee-based certified financial planner instead of commission-based agents who also call themselves financial planners.

I’m personally averse to turning my money over to someone else. First of all, I have a bigger vested interest in my wealth than any professional. Secondly, I’m willing to put in time to learn about various investment options. Thirdly, I’m quite good at mathematics and can work rates of return out for myself. And lastly, it’s just more fun doing it myself, as I learn new things all the time.

You’ll have to decide which method works best for you. Just don’t leave your money sitting in your bank account. With inflation factored in, the low interest on savings accounts means you’re actually losing money by doing that. Better to risk losing some in investments with a potential upside, than to definitely lose it by doing nothing, right?

5. Avoid liabilities

Use cash only. No credit cards. No consumer loans with “low, low monthly instalments!” No cash advances. And definitely no borrowing from family or friends. Debt is generally a bad idea. Carelessly taking on consumer debt can undo all the good you’ve done in Steps 1 to 4 above.

The only debt that makes sense is a home mortgage, as it’s actually a form of enforced savings by which you build equity over time. And even then I prefer that someone else, a tenant, pays my mortgages on property. I am allergic to debt, and maybe that’s why I sleep soundly at night.

If you’re already stuck with consumer debt, pay off the debt with the highest interest first, not the one with the largest outstanding amount. Interest rate is effectively the price of money, and you want to get rid of the high-priced items first. Once that is paid off, use the entire amount to pay off the debt with the second highest interest rate and so on. This way you gather momentum and the debts will start disappearing.

6. Monitor your financial health

Put all the above – income, expenses, savings, investments, liabilities – onto a single page. Excel spreadsheets are excellent for this. Update and review this page regularly. I update mine monthly and look at it almost daily. When you are acutely aware of the state of your finances, they will strangely enough start to improve over time. Awareness is the key. Action will follow.

Some experts advocate setting yourself specific financial targets eg how much you want to earn by a certain time. I’ve found that general directions are good enough for me. I want to see my income, savings, and investments go up, and my liabilities and expenses go down. Keep it simple, like I do, or make elaborate plans. It’s up to you, but just know what’s happening with your money.

7. Allow yourself some luxuries

Being financially prudent is meant to make you more wealthy, not more miserable. Within boundaries, spend on nice things for yourself and others. Follow this exact order:

a. Savings for the month have been put aside and remain untouched.
b. Enough is left in your current account for all the bills.
c. Take out whatever cash is left and spend it all if you want.

Get your finances under control. Then you’ll never have to worry about money again, and can spend your life on the things that matter to you. It really is worth the effort.

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