What is Money Management? How to Manage Your Money Wisely?
How to Manage Your Money Wisely? An Overview
Money management is a life skill that helps you to achieve your financial goal. No matter how much money you earn, if you don't know how to manage the money you will not be able to create wealth over the long term. So, to achieve your financial goals, you need to know how to manage money wisely. There is a wide range of applications available in the market which helps you to manage your money hassle-free or you can consult a financial advisor for professional money management. They will plan your finances based on your income, debt, financial goals, investment horizon, and retirement. In this article, we are going to learn about how to manage money, money management suggestions, and how to manage money in India.
What is money management?
When you start earning, the first thing to know is how to manage your money. Money management is all about budgeting, savings, tracking your spending, tax management, and investing. The main objective of money management is to develop a technique that can reduce unwanted expenses and spend on items that add value to your standard of living and long-term investment.
Money management can differ from person to person as they have different incomes, lifestyles, ages, family structures, and other factors. With the right money management, you can achieve your financial goals.
How to manage your money? Money Management Suggestions
- Prepare a budget: The first step toward money management is to prepare a budget. Budgeting is all about estimating how much money you will need to fulfill your needs, wants, and savings. Having an estimated budget will help you to take better control over your finances. You can try the 50/30/20 budgeting rule if you don't want yourself to be giving excuses with budgeting. It allows you to use 50% of your income for needs, 30% for wants, and 20% for savings and investments. Let's say your income is Rs. 1,00,000 per month. So, based on this rule, you should allocate around Rs. 50,000 to needs like buying groceries, paying rent, and basic utilities. Rs. 30,000 can be spent on wants like dinners out, travel, watching movies, etc and the remaining 20,000 can be invested in financial instruments such as stocks, mutual funds, ETFs, or bonds.
- Track your spending: You need to track your spending to have an accurate picture of your spending habits. You can take inventory of all your accounts including your debit and credit cards, also there are applications available in the market to track wasteful spending habits and then eliminate them. Before making any spending decision ask yourself whether you need the product or want the product, if not cut them off.
- Manage your credit: Good credit management will help you to qualify for loans when you need money. you should not use more than 30% of your credit limit as over usage of credit can impact your credit score and disrupt your budget while paying on time can help you to build a good credit score. So, try to use a credit card whenever it is necessary. High-interest rates charged on loans can eat into savings and Late payments and can lead you to pay a penalty. So, to avoid paying the penalty, you should pay off your debt on time. Paying off your debt not only reduces your accrued interests and loan debt but also saves your money from paying interests.
- Learn more about personal finance and investment: Learning personal finance can improve your financial life and helps you make better financial decisions. Personal finance helps you to manage money in every aspect of your life and increase cash flow. Anyone can learn personal finance irrespective of their age, income and profession. You must devote some time to reading books or taking online courses on personal finance and investment to take control of your financial future.
- Create your retirement fund: Once you retire, you will no longer be receiving a salary or regular income but your expenses will remain the same. To maintain your daily expenses and live your post-retirement years, you need financial backup and that's why you need to plan your retirement early today. Start saving and investing to generate your retirement fund in a balanced and safe option such as a balanced mutual fund or large cap mutual fund to remain independent in your future, also you can invest in PPF (public provident fund) and NPS(National pension scheme). The goal is to preserve and grow your wealth at a normal pace.
- Create your emergency fund: An emergency fund is money that you keep aside to meet sudden or unexpected expenses. The fund should be in liquid form as liquidity enables you to convert your money whenever you want to. You can allocate your funds into liquid funds or money market instruments. The main objective of the emergency fund is to safeguard or preserve your capital. Your emergency fund should include 9-12 times the income of your monthly income because you never know how much time it might take to find a new job, also you need to keep in mind that your savings and emergency fund are separate. you should save 10-20% of your savings every month to allocate to the emergency fund. You can create your emergency fund by allocating 25-30% in cash, 30% in gold(physical/digital), and 40%in debt instruments. Or, you can allocate your emergency fund in a dedicated high-yielding saving account and think of your fund as an insurance policy against unexpected expenses.
- Manage your Taxes: Start educating yourself about taxes before you get your first salary. You should know about income tax and understand how it works. It will help you to calculate how much taxes are being charged and how you can claim deductions. One can claim tax deductions by investing in tax-saving instruments under section 80C of the income tax act of India which helps you to save a major chunk of money.
- Start investing early: The early you start investing, the more interest you earn in your investments. You get interest on the interest earned on your investment which is called the power of compounding. Even if you have limited money, you can start your investment journey by starting a SIP in mutual funds or index funds. Regular investing will help you to inculcate discipline spending habits.
- Have insurance to protect yourself: You should always prepare yourself to meet uncertainties in life like health emergencies. Insurance plans like health insurance, term insurance, and critical illness insurance help you to protect your family from a financial crisis. It will help you to provide financial support to your loved ones by paying for hospitalization, illness, or medical care.
- Set financial goals: Financial goals help you to avoid overspending and stay focused. Your financial goal can be buying a house, marriage, or children's education. So, based on your financial goals, you plan your budget, savings, and investment.
To conclude, The above money management tips will improve your financial life and protect you from any financial crisis. However, if you are still confused or are a beginner then you can consult a financial advisor to plan your finances and reach your investment goals.
How to manage finances?
Manage money by creating a monthly budget based on your income, investment goals, and time horizon.
How to manage money in India?
- Plan your budget
- Set a financial goal
- Start saving early and investing
- Avoid falling into a debt trap
What is money management?
Money management is all about budgeting, saving, investing, understanding tax, and creating retirement and emergency funds.
Why money management is important?
With the right money management skills, you will be able to meet your investment goals early and manage your cash flow.