7 Basic Steps to Managing Your Money

It’s said that money-smart kids grow up to be money-smart adults. Which direction are your kids headed? And what can it tell you about your own personal finance habits?

by Terry Rigg

Simple Steps to Managing Your Money photo

Are you properly and effectively managing your finances?

Statistics show that many people could manage well on the income they have now if they could keep their bills and expenses within their income. Sadly, too many people do not understand how to do this or how to recover once they have overextended themselves.

Personal money management is not a one-step process. Simply having a budget in place or keeping up with your bank account isn’t enough. You need to follow a set process that covers several aspects of money management. Here are the basics of this process:

1. Set your goals.

Most people think of setting goals as strictly long-term, such as retirement and college for the kids. While these are critical goals, they are just the beginning.

It would help if you decided what you and your family want your future to be and made all financial decisions with that in mind. This could include things like setting aside money for an annual vacation, replacing your car, or home repairs.

2. Find out where you stand now.

You must know what you have coming in and going out.

While a pre-set budget form is best to accomplish this, you can do it on a piece of notebook paper. Just write down your bills and expenses in one column and your income in another. Then, add them up and subtract your expenses from your income.

You will know at a glance if you have money problems.

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3. Develop a budget you can live with.

Thousands of budget sample forms are available, and most are very effective. However, many have as many as 50 categories of expense items you must keep up with to make it work. This requires entirely too much time and effort and is usually abandoned within a few days or weeks.

Find or create a simple budget system with very few categories that, once set up, only requires your attention for a few minutes on payday.

4. Cut expenses in every budget category that you can.

There are thousands of ways to cut your expenses and not change how you live.

For example, the current trend that is saving a lot of money is eliminating your cable provider and using streaming services as your source of ‘TV’ programming. It’s a fact that most people could cut their monthly expenses by 10% or more, leaving that money to be used for more essential purposes.

Subscribe to Dollar Stretcher Tips to get cost-cutting tips sent to your inbox each week.

Consumer debt is robbing people of hundreds of dollars each month in interest charges and late and over-limit fees. Your goal should be to eliminate all of your debt as soon as possible. A simple process called snowballing will allow you to pay off your debt much earlier and save you possibly tens of thousands of dollars in interest charges.

Snowballing is where you add up all of your minimum payments and choose one bill to which you add extra money until it is paid in full. Then you take the extra money and the payment you were making on bill one and add it to the next bill, and so on.

The extra money you add doesn’t have to be much. Just adding $25 will pay down your bills much faster because the amount of money you have allotted for bills remains the same until all of your bills are paid off.

6. Know your credit.

Your credit rating, or credit score, is critical when obtaining a loan. The lower your score, the more you will pay for loans and sometimes other bills, such as insurance.

The only way to know what your credit looks like to lenders is to regularly obtain a copy of your credit report. Residents of the US can obtain a free copy of their credit report from the three credit reporting agencies each year. I urge you to get your free copies by visiting AnnualCreditReport.com.

7. Look for more sources of income.

If your paycheck doesn’t stretch far enough to cover all of your bills and expenses, you may need to look for additional sources of money to cover everything. I would first employ the expense-cutting method mentioned above, but if you still can’t make it, more money would help.

Each of us has our specific talents. Trying to develop a one-size-fits-all method of generating more income is next to impossible. But, if you take the time to look at your talents, you will probably find that you could use them to provide a product or service that people are willing to pay for.

As I said, these are just the basics. Other areas of personal finances are just as important, like investing and building your personal wealth, but those are topics that you can concentrate on when you have the basics covered.

If you aren’t aware of where you stand financially, you may be a victim of what I call ‘financial complacency.’ That is simply defined as not being willing to put in the time and effort necessary to control all aspects of your finances. Usually, this results from being confused about your money and how it should work because you were never taught the right way.

Simply making a concerted effort to manage your money properly will go a long way toward solving any problems. You may be surprised at how easy the solution can be.