How To Manage Money? 10 Tips for Money Management

We’ve seen that many people talk about making money, but there are hardly a few who talk about managing it in the right way. Financial management is a tricky subject, and many of us struggle with it. Effective money management allows you to save, invest, and systematically spend your money, ensuring long-term stability and easy retirement. However, money management can be done right when you follow a few ways to manage your finances. This article will guide you with the best money management tips so let’s take a look.

What is Money Management?

Money management is about how you manage the money you earn and spend. It focuses on two main parts: your income and your expenses. Knowing how to handle these areas is important for making good financial choices.

To improve your finances, you can find ways to increase your income, like lowering taxes, using benefits such as food coupons, or investing wisely. On the spending side, creating a budget, paying off debt, saving for the future, and figuring out the difference between wants and needs can help you cut costs.

Taking the time to look at and improve these aspects is what money management is all about. How well you manage your money can show a lot about your financial health. With good money management, you can keep better control of your finances and work towards reaching your goals.

10 Money Management Tips

1. Set Financial Goals

   As long as you don’t know how to spend your money, you’ll never be able to manage it in the right way. Hence, it is important to have financial goals to determine how you want to use your money in the short term and in the long term. Having these financial goals gives you more control over your money and allows you to spend wisely.

   For long-term goals like buying a house, or planning for your retirement, it is recommended that you start investing your money so it can grow with time. Make sure you set realistic goals which can be fulfilled and keep you motivated.

2. Make a Budget

   Making a budget is an easy task, and it plays an essential role in your money management journey. People have been making their monthly budget for years now because that allows them to manage their expenses better.

   While you make your budget, you’ll have to categorize your spending into different categories depending on your wants and needs. Once you have assigned a budget for every category, you’ll be able to spend your money better, and it’ll help you to achieve your financial goals without compromising your lifestyle.

3. Track Your Spending

   Once you are done making your budget, the next important step is to track your spending. Tracking your spending might take some work because you’ll have to pull up all your bank statements, bills, and credit card statement to know how much you’ve spent. You can later divide your spending into different categories, which will help you to see where you are spending more and where you can save up some money.

4. Relook Your Debt

   Many people get into the habit of taking unnecessary loans and excessively using their credit cards which gets them in a lot of debt. This gets worse when a customer fails to pay it back because these things attract the highest interest in the market.

   Therefore it is recommended that you pay back all your debt at the earliest, and if you find it hard to do it at once, you can opt for a debt consolidation loan(with due diligence) to get rid of existing debts.

5. Start Saving and Investing Early

   Starting your savings and investments early can significantly benefit you in the long run. Even if you can only save a small amount at first, aim to set aside at least 10% of your monthly income for investments. Look into options like stocks, cryptocurrencies, or mutual funds, as these can help your money grow over time.

   Let’s look at an example to understand this better. Imagine Mr. A, who begins saving ₹10,000 each month starting at age 30 and continues until he is 60. This totals ₹1,20,000 each year. Now, compare him to Mr. B, who saves ₹20,000 a month, amounting to ₹2,40,000 yearly, but starts at age 45, only saving until he turns 60.

   Here’s a quick comparison of their savings:

   	Mr. A	Mr. B
   Age at Start	30 years	45 years
   Age at End	60 years	60 years
   Annual Savings	₹1,20,000	₹2,40,000
   Expected Return Rate	8%	8%
   Total Saved	₹36,00,000	₹36,00,000
   Value at Age 60	₹1,46,81,504	₹70,37,828

   As you can see, even though both Mr. A and Mr. B saved the same total amount, Mr. A ends up with ₹76,43,676 more at age 60. This difference is due to starting his savings much earlier.

   The key takeaway is simple: the sooner you start saving, the more your money can grow thanks to interest over time. With compounding, you earn interest not just on your initial savings but also on the interest you accumulate each year. So, starting early can lead to significantly more money down the road.

6. Different Time Horizons Need Different Types of Investment as Below

   Different time frames require different types of investments:

   1. Short-Term (1-3 years)

      If you need your money within the next one to three years, it’s best to focus on safe, stable options like debt and liquid investments. Stocks might not be a good choice here since they usually take longer to grow in value.

      • Suggested Asset Allocation: 100% debt or 90% debt and 10% equity.
      • Types of Investments: Fixed Deposits, Recurring Deposits, Liquid Funds.
   2. Medium-Term (4-7 years)

      For goals you plan to reach in four to seven years, a mix of debt and equity investments is wise. This combination can help you balance safety and potential growth.

      • Suggested Asset Allocation: 60-70% debt and 30-40% equity.
      • Types of Investments: Balanced Funds, Equity-Linked Savings Scheme (ELSS).
   3. Long-Term (7+ years)

      For long-term goals, putting a larger portion of your money in stocks can lead to better returns. This approach works best if you can afford to keep your money invested for a long time.

      • Suggested Asset Allocation: 75-80% equity and 20-25% debt.
      • Types of Investments: Equity Funds, Public Provident Fund (PPF).

      When planning your finances, remember to consider inflation. Assume that prices will rise by about 8% each year. This means that the purchasing power of your money will decrease over time. By factoring in inflation, you can set more realistic financial targets and make sure your investments will meet your needs in the future.

   4. Avoid and Pay Off Debt Traps

      When you’re young and have fewer responsibilities but a decent income, it can be tempting to spend money on things you don’t really need. It’s crucial to change this mindset early on. One way to stay financially healthy is to use a credit card only for emergencies. This practice can help you avoid falling into debt and make your life easier.

      Here are 2 useful tips to help you steer clear of debt traps:

      1. Don’t Roll Over Credit Card Payments

         Have you ever found yourself close to your borrowing limit just because you could spend that much? This is a common way to slip into credit card debt, and it can be hard to escape. If you have an outstanding balance, make it a priority to pay it off as soon as you can instead of carrying it over to the next month. The high interest—often around 3% per month—can quickly make your purchases cost much more than you expected.

      2. Use a Mix of Debit and Credit Cards

         While using a credit card might seem complicated, there are times when it’s necessary. A credit card can provide quick cash for unexpected expenses. So, it’s a good idea to keep one on hand. For your everyday purchases, stick to your debit card or online banking. This way, you can manage your spending better and avoid accumulating debt.

7. Diversify Your Investments

   One of the golden rules for investing is to diversify it because when you put all your money in one place, you can lose it all when it falls. Hence, you must invest your money in different assets that can help you fulfill your long-term and short-term goals.

8. Expect Emergencies

   Emergencies such as medical problems and job loss can come anytime, and hence it is always recommended to have some extra emergency funds on the side. These emergencies usually put you under stress, and in situations like this, not having money can put you under more pressure. Therefore, you must have some emergency funds to feel secure and prepared for the problems that come in your life.

9. Save For Retirement

   Saving for retirement is one of the most important things to do, and many people fail to do it. As we start ageing, our capacity to work decreases and hence we have to retire at some point in our life. Many employers have stopped giving pensions, which means that you must have some funds in hand when you want to retire and live a good life.

   Therefore, it is suggested that you start saving money at the earliest when you want to live a peaceful retirement life. You can also consider investing in Real Estate, so the value for your money goes up with time safely. Remember that the more you save, the earlier you can retire.

We hope that these personal money management tips were helpful to you. If you liked this article, you can also check out our article on Best Money Management Apps to manage your money efficiently.

FAQs

1. What is the 50-30-20 rule of money management?

   The 50-30-20 rule is a simple guideline for managing your money. It suggests that you should use 50% of your income for necessities like housing and groceries, 30% for things you want, and 20% for savings.

2. What are the 4 principles of money management?

   The 4 main principles of money management are income, spending, saving, and investing. Here’s a closer look at each:

   • Income: This is the money you earn. Understanding how much you make is the first step in managing your finances.
   • Spending: Pay attention to how you spend your money. Creating a budget helps you track your expenses and live within your means.
   • Savings: Make it a habit to set aside money for the future. Saving a portion of your income ensures you’re prepared for unexpected costs and helps you achieve your goals.
   • Investing: Look for ways to grow your money. Investing means putting your funds into opportunities that can earn you more over time.

3. How do you improve money management?

   To enhance your money management skills, regularly assess your financial habits and adjust them as needed. If you don’t have a budget yet, consider creating one. If you already have a budget, track your spending to see if you’re sticking to it. Understanding your income and expenses will allow you to make informed choices about increasing your savings, paying off debts, or starting to invest according to your financial objectives.