Despite what many financial professionals want you to believe, managing your own finances doesn’t require advanced math skills or graduate degrees. What it does require is knowledge of a few simple facts and a little bit of research on your part. You must do the research yourself (although the Internet makes that increasingly simple), but here are the facts…
1. The goal of personal money management is for your income to exceed your spending.
When your income exceeds your spending, you are building savings for the future. If your income equals your spending, you will never increase your savings, but at least you won’t be getting deeper into debt. If your income is less than your spending you will keep getting deeper and deeper into debt until there is no way out.
In case you were wondering, income is any money coming in, so it can be regular money from a salary, money from the sale of investments, dividend income, interest income, social security payments, etc. Spending is anything you spend your money on. This seems obvious, but many people don’t consider such fixed expenses as taxes, insurance, utilities, etc. when considering their spending because these expenses are no “fun”.
2. Know where your money is.
Once again the Internet has made following this step much easier. If you aren’t already using online banking services, start now. If you need help setting up and learning how to use online banking, your banker should be happy to help you. Check your account daily. Set up online accounts for all your finances if you have multiple financial accounts (for example, brokerage, money market, CD, etc.). Check these accounts at least once a week, preferably once a day.
Next, set up online bill pay for your bills. I’m going to part company with most financial experts here and tell you my personal experience with online bill paying. I don’t use recurring payments. The reason I don’t is because I’ve had problems with the same bill being paid more than once. I’ve also had problems if I want to discontinue a recurring payment. As a result, I log into each of my online billing accounts once a month and pay that month’s bill. This is slightly more time consuming than recurring payments, but less aggravating for me than trying to get money back that has been improperly debited from my bank account.
3. If it seems too good to be true, it is too good to be true.
This rule isn’t only true with regard to personal finance. It is true for EVERYTHING in life. You will save yourself a lot of grief and heartache if you avoid anything that seems too good to be true. It’s hard, to be sure, because as human beings we all want good things to come to us as easily as possible. Unfortunately, life doesn’t work that way. Don’t invest money in anything that sounds too good or too easy or that makes you think “how did I get so lucky.”
4. If you don’t understand it, don’t invest in it.
Most of my losing investments have occurred as a result of someone else’s “hot tip”. Like most people I would think the “hot tipster” knew something I didn’t know, so I would rush out to invest my money without doing my due diligence (research). Unfortunately for me, no matter how trusted my tipster was I never made money on a single one of these investments. Take my advice. There are plenty of fish in the investment sea. Stick to the fish you catch yourself.
1. Figure out your sources of income. Write them down.
2. Figure out where you are spending your money. Keep a spending diary for a month in which you write down everything you spend, even the small amounts of cash you spend unconsciously. Have your family members do the same.
3. See where you stand on the income/spending spectrum. If you aren’t earning more than you are spending, what changes can you make to get there?
4. When you are ready to invest, remember. “If it seems too good to be true, it is too good to be true” and “If you don’t understand it, don’t invest in it.”