The odds are that you graduated from high school without learning the basics of money management. It really is not a part of the curriculum at school.
Money management is the process of knowing how much money is coming in, how you are spending it and having a well-thought-out plan in place for where you want it to go in the future.
Below are six quick steps to brush up on your money management skills.
Step 1: Track your spending
Many people wonder why there isn’t enough money in their banks at the end of the month. They just spend blindly and think if there is money in their accounts, it is to buy something. Tracking your spending helps you understand where your money goes – are you eating out too much, buying too many cups of coffee from a café and so on.
If you own a smartphone, there are some cool apps that you can use to do this. A couple of my favourite ones are Pocket book and Expensify. Pocketbook especially pulls in data from more than one bank account (if you have it) and helps you keep on track with your spending. Once you determine this, then you can move on to the next step.
Step 2: Budgeting
The key to budgeting is to find out how to prioritise. Firstly, calculate how much money you have coming in, then note down how much you are spending on basic necessities (food, utilities, bills and so on). You should also consider saving a set portion (generally 10%) of your income every pay cycle and include that in your calculations. Subtract all these from your income and what you have left is for discretionary spending.
Living without a budget is like driving a car not knowing the route. Yes, you may eventually get to your destination, but it would be faster with a pre-planned route.
Step 3: The power of compound interest
Once you identify where you can cut back, then you should ideally think about how to make the best use of that money. Say you start saving $4 a day on a cup of coffee, that would be $20 a week or $1,040 a year. This may not seem like much, but once you save this amount over a few years, with the added benefit of compound interest, you can save a few thousand dollars.
The key is to identify a few damaging habits and then pool all of that money into a savings account and let the compound interest do its magic.
Step 4: Establish an emergency fund
You are the best person to go to when in a financial emergency. Of course, you may have friends or family to help you out, but you are your own saviour. Start with $1,000 in an emergency fund and work towards saving three to six months of living expenses. This way if you have an emergency doctor visit or if your car breaks down, you don’t have to use your credit card.
Step 5: Consequences of too much debt
Money is a good thing to have if you can take control of it and not the other way around. It is wise to take on good debt only. Do not buy things because they are on sale or someone else has it. Only buy things that are truly required, not because you have the money to buy them. Instead, use money to buy experiences which will make you happier for a longer time unlike material things.
Step 6: Use cash instead of credit
Our brain helps us spend less when we use physical cash instead of a card. Once you have set your budget, you can withdraw the money and use that to spend for the month. Credit cards are good when you are going to earn airline miles or reward points. Instead of using a credit card, you can also use debit cards where you use your own money to pay for things and you won’t over stretch yourself.
Whether you are going to college, entering the workforce, been working for a while, single or married, all women should know these personal finance basics. If you can master these basic principles, you are on your way to becoming financially empowered.