Money Management

Photo credit: Pictures of Money via Flickr. 

We've all been there at some point in our lives: staring at the checkbook, wondering where all the money has gone and how to pay this bill that came in out of the blue. It might have been at that point that we thought about getting better control of our finances, and finally putting a money-management plan in place.

Some of us might have actually done just that, while others waited until getting married, having a baby, or losing a job. Others don't have a plan just yet. For those of you in that category, or who need a refresher, here are five easy-to-follow steps to get you on the right money-management path.

1. Determine your financial goals
Ever tried to plan a family vacation without having a destination in mind? It's nearly impossible to do. It's the same when you're trying to put together a financial plan without first having the destination in mind.

A good rule of thumb is to develop short-, medium-, and long-term goals. For example, set a short-term goal to have one month's living expenses in an emergency fund, a medium-term goal to have enough in your vacation fund for a dream vacation in five years, and a long-term goal to have your magic number sitting in your retirement account.

By setting these goals, you'll have a better idea of how achievable they are given your current income and expenses. Further, it will make it a bit easier to trim your expenses so that you can meet your goals. Finally, setting these goals might push you to look for outside-the-box ideas, such as couponing, or moonlighting to bridge the gap.

2. Organize your finances
Once you know where you want to be in a year, five years, and in a few decades, it's time to figure out where you are right now. This means opening up and sorting through that pile of bills and financial statements that have been stacking up. Then, organize them into piles, and then into folders that can be added to each month when bills or statements arrive.

3. Track your income and spending
Next, organize your income and spending. This can be done with pen and paper, but is better done with either a spreadsheet or money-management software like Quicken or Mint. There's also a number of money-management apps that will do the trick. You'll want to be as detailed as possible, digging into those piles of bills and statements, as well as store receipts, to really have a firm grasp on what you're spending money on each month.

4. Build a budget that reflects your goals
Once you know where your money is going, you can use it as a rough guide to develop a budget. However, the foundation of your budget should be your goals, as these should be first-line items in your budget.

Start by plugging in your short-term goal. Next, take that medium-term goal and divide that by the number of years until you want to meet that goal. Then, plug that figure into your budget, as well. Finally, take that long-term retirement goal, and play around with a couple of calculators to determine how much you'll need to pour into your retirement accounts each month.

Money Management Budget

Photo credit: StockMoneys.com.

Once you have the foundation, add in your current expenses and income. There's likely a pretty big shortfall between your income and your current expenses plus your goals; but that's to be expected, as you've just added a couple of really big "expenses." This is the problem you'll need to solve by looking at ways to cut your expenses, or even adjusting your goals to better reflect reality.

5. Look for ways to save, track your progress, and make adjustments
Once you've had a chance to digest everything, it's time to get to work at finding places to save. Common areas are credit card interest, going out to eat too often, or paying for services you could do yourself. Some cuts might be painful, while others will likely be unnoticed.

The other thing to keep in mind is the income side of the equation. It might be time for a second job in order to pay down credit cards or boost short-term savings.

After the initial work is put in, it's all about maintenance. Update your financial tracking at least monthly. Review what's working and what went wrong. Check your medium- and long-term goal progress annually, while also setting a new short-term goal and budget, challenging yourself to cut out more unnecessary expenses. Rinse and repeat.

Takeaway
Most of us can't afford not to be better at money management. That's because we'll undoubtedly find areas of waste that can be cut so that we can have the money we need to meet the goals that matter. Not only that, but the sooner you start, the longer you'll have to meet your long-term retirement goal, which can literally pay big dividends down the road as your money grows larger the more time it has to grow.

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