What Is Personal Money Management?
Personal money management is essential to a responsible individual’s financial planning. It encompasses budgeting, the wise use of credit, managing debt and banking, saving, and investment.
A strong understanding of personal money management will help you take control of your finances and achieve financial success. It will also help you understand your spending habits and plan your future.
Know Your Spending Habits
Spending habits are a significant factor in personal money management. The good news is that many bad spending habits can be easily fixed with self-reflection and patience.
Start by scanning your credit card and bank statements for the past few months to see where you are spending. This exercise can help you pinpoint where you are wasting your hard-earned money.
Next, record your daily purchases using a pen and paper, an app, or budgeting spreadsheets found online. Doing this will force you to think about your current expenses and encourage you to keep track of your spending.
Once you know your spending patterns, set short-term and long-term goals. These goals range from saving for a family vacation, buying a home, and paying down debt. Focusing on these priorities will help you make your spending habits more consistent with them and allow you to reach your financial goals faster.
Set Up a Budget
A budget is a way to keep track of your expenses and allocate the money you bring toward saving and investing. It’s also important to review your budget regularly to ensure it’s still aligned with your goals.
First, list your monthly recurring bills, such as rent or mortgage payments and utility bills. Then, write down variable expenses, such as food, gas, and entertainment, that you pay monthly.
After you’ve listed your expenses, subtract them from your total income to see how much money you have left over. You have more money to save or invest if your total income exceeds your expenses.
Now that you know where your money goes each month, it’s time to create a spending plan. It’s best to start with a budget spreadsheet, but you can also create a basic budget on paper or with a budgeting app.
Know Your Credit Score
Your credit score is a critical number that lenders look at when deciding whether you’re a good borrower. It can affect your ability to buy a home, rent an apartment and even get insurance rates lowered.
Your score is a three-digit number that’s calculated based on various factors. Some factors are more important than others, such as your payment history and amounts owed.
The length of your credit history is also considered. The longer you’ve been a credit cardholder, the better your credit score will be.
Other factors include your credit utilization rate, which is the percentage of your total available credit that you’re using. Lenders like to see this number at or below 30%.
The best way to improve your credit score is to pay your bills on time, only borrow what you need and always charge what you can afford to pay off in full. You can significantly boost your score in no time by making these improvements.
Create an Emergency Fund
Creating an emergency fund is an essential part of personal money management. This fund can help you prepare for unexpected expenses, such as medical bills, car repairs, or a sudden layoff, and avoid running up debt or asking friends to lend you money.
In general, saving at least three to six months of expenses in an emergency fund is recommended. However, this amount can vary depending on your income and expenses.
To create an emergency fund, start by assessing your budget and identifying areas where you can cut back. This can include restaurant meals, entertainment, subscriptions, clothing, and vacations.
Set a goal for how much you want to save each month, then make it automatic by setting up a deposit directly from your paycheck or setting up regular auto-deposits from your checking account into savings. Ideally, you want this money to be kept in a risk-free savings or money market account. Investing it in stocks or bonds can cause your emergency fund to lose value over time, making it less likely to have the funds available when needed.