Does the mere idea of looking at your bank balance give you a knot in the pit of your stomach? Whether your spending is totally out of control or you’re just looking to have a healthier relationship with money, it’s important to develop strong money management skills.
Learning how to effectively manage your money can reduce stress day to day, and allow you to achieve more of your long-term goals like getting out of debt or saving for retirement. Here are some steps you can take to build better money management skills.
1. Take a Hard Look at Your Finances
It can be intimidating to assess your financial situation, but it’s the only way you’ll ever start improving your relationship with money. Facing the reality of where and how much you are spending can be hard, but not knowing the details of your situation could lead to even more problems down the road.
Look at your bank and credit card statements over the past year and note what you spent your money on, including your student loans, credit cards, mortgages, car payments, and seasonal expenses.
If you find that you are spending money you don’t have by using your credit cards and not paying them off in full at the end of the month, try to think of ways to reduce your spending—like eating out less often, spending less on clothing, or other unneeded items. By paying close attention to your finances, you may be able to pin down bad spending habits and start correcting them.
2. Start Budgeting
If you find that you are overspending and relying on credit cards, it could be a good idea to create a budget. A budget is an estimate of your income and expenditures over a given amount of time. Most people create a bi-weekly or monthly budget, depending on their income cycles.
To start your budget, use your pay stubs and bank statements to figure out how much money you have coming in and going out each month. Then track your spending over the next month, doing your best to make sure that your total monthly expenses are less than your income. You can use the extra money left over in your budget to create a nest egg or start paying down your debt more aggressively.
3. Set Ambitious Financial Goals (and Start Working Towards Them)
Having financial goals puts you in the driver’s seat with regard to your future. You can use your money to help get you closer to where you want to be in life. Do you hope to own a house, get out of debt, or retire someday? You can take steps now to make those things a possibility down the road.
Creating a savings account to save up for a down payment on a house, or opening a 401(k) to save for retirement can lead to a huge payoff later in life. On the other hand, if your goal is to become debt-free, using all of your extra cash to pay off your debt could help you reach that goal faster. Write down your financial goals and return to them frequently to check your progress, celebrate successes, and re-prioritize to accommodate your shifting needs.
4. Build Up an Emergency Fund
Before you start tackling any big financial goal, you need to make sure you have money socked away for unexpected expenses like medical bills, car repairs, or a sudden loss of employment. In other words, you need an emergency fund.
Paying for emergencies with credit cards or a personal loan turns your momentary setback into a long-term financial burden. Having an emergency fund, though, can ensure that unexpected expenses don’t end up plunging you into further debt.
Depending on the size of your family and other factors, it is a general rule of thumb to keep 3 to 6 months’ worth of expenses in your emergency fund. With that much money saved, you should be able to deal with most expenses that come your way.
There are many ways to start building an emergency fund, even on a lean budget. Learn more about the importance of an emergency fund, and how to get one started here.
5. Find Ways to Save More
If you’re on a tight budget already, it might seem impossible to save up for an emergency fund—let alone pay off debt or start a 401(k). But you may be able to achieve these goals more easily if you can figure out ways to cut down on your spending.
When assessing the ways you’ve been spending your money, you probably noticed plenty of items, large and small, that were unnecessary purchases. If you can be more discriminating about what you spend money on and when you buy things, you’ll improve your ability to save and prioritize your money towards your financial goals.
Re-evaluate the number of subscriptions you have, research large purchases for a month or longer before buying, and only purchase what you truly need. A little here and a bit more there definitely adds up over time. You could try out some of these money-saving tips to potentially save hundreds each month.
6. Know When to Get Help
If your financial situation seems like it’s getting out of control and is too much for you to handle alone, this is ok! There are many reasons a person’s finances could spiral out of control, so don’t be ashamed to ask for help.
Credit card debt in particular is a problem for millions of Americans, and there are many resources to help you manage and pay down credit card debt. These could include do-it-yourself debt payoff methods where you put your extra cash towards your credit card bills, or getting help from debt professionals through credit counseling or debt settlement.
No matter how you choose to handle your debt, it’s crucial to start as soon as possible. Not only will it help you build a better relationship with money, it could also help you achieve your other long-term financial goals.
Understanding Your Money Is Empowering
While confronting your financial situation might be daunting at first, the benefits of getting a true picture of your finances will become apparent as soon as you start. As you come to reap those benefits, you can continue to build upon and improve your financial literacy by finding smarter ways to spend and save your money. With a renewed commitment to good habits, a fruitful financial life is in your future.