The benefits of successfully managing your finances are infinite. Being on top of your finances allows you to reduce your stress levels and gain control of your money. It enables you to realize that you are richer than you think by quantifying your discretionary income. Being in control of your finances enables you to increase your discretionary income by reducing your unnecessary expenditure. It allows you to assess your affordability level and to live comfortably.
Managing your finances involves looking at your monthly expenses versus your income and assessing whether you are in the red, and thus need to stop spending so much, or whether you are in the black, and thus should invest your money.
Let’s look at 8 different ways to manage your finances.
1) List Your Monthly Expenses
In order to efficiently manage your personal finances, you need to be on top of your expenses. You should definitely list your monthly expenses in a diary or in a spreadsheet to keep track of where your money is going. It is also a good idea to categorize them based on frequency in order to easily foresee recurring expenditures.
- Essential expenses usually account for the largest portion of the budget and are central to the operation of a home. These expenses can be either fixed or variable, and recur each month. Let’s take a look at an example of what you should list.
Rent or mortgage
- Daily expenses usually represent small sums of money, but account for a significant amount when added up at the end of the month. You can use a document to list your daily expenses and to meticulously manage your money. These expenses are typically discretionary, which means these costs are not essential for the operation of a home. These are defined as "wants" rather than as "needs." You can easily cut from this expense category in times of hardship, hence the importance of listing them in the daily expense tracker.
- Grocery store or convenience store errands are relatively frequent expenses that you can adjust to fit your budget. For example, you can substitute fresh fruits with frozen fruits when you need to cut costs and you can occasionally splurge on higher end products on special occasions or when the budget permits.
- Going out generates recurrent and discretionary expenses. You can save money by eating a home-made lunch instead of buying fast food and you can indulge in a premium cup of coffee when you deserve a treat.
- Entertainment expenses, such as sports tickets and movie tickets, are periodic discretionary expenses. You can use the daily expense tracker to assess whether or not you can afford to integrate a new hobby into your lifestyle.
- Rare expenses are larger discretionary expenses as opposed to the daily ones which are smaller discretionary ones. Rare discretionary expenses can be foreseen and quantified monetarily, such as the cost of a ski trip, as opposed to emergency expenses which are much harder to foresee and to quantify. They are discretionary because you can tweak the spending according to the budget.
Let’s take a look at some examples of rare expenses that you should definitely list.
- Electronics, such as laptops or microwaves, sometimes break or need to be replaced.
- Holiday shopping involves buying gifts, food, decorations and clothes. You can use a holiday budget planner to calculate holiday expenses in advance.
- Vacation, such as a week-end getaway or a summer vacation, unwinds the mind and the body.
2) Open a Savings or a Joint Account
In order to control your money, you not only have to categorize your expenses, but you also have to categorize your savings. If you were planning to buy a new car by the end of the year, you could open a savings account and opt-in for pre-authorized
monthly deposits to help you achieve your goal. If, in addition to the car purchase, you were also planning to go on vacation during the summer, you could open a second savings account destined to fulfill your second goal. Opening several savings accounts can help you manage your finances and keep track of your multiple goals – no matter how ambitious they are.
Opening a joint account would be suitable for those who wish to pay the routine bills together. Indeed, you and your significant other can each set up pre-authorized monthly deposits from your checking accounts into the joint account. You can then use the money from the joint bank account to easily pay your bills, your car or your home. You can even use online banking to keep track of your money, right from the comfort of your home.
3) Prioritize to Pay Off Debt
Taking on some types of debt is not necessarily a bad thing, especially when you use it to generate income or to finance a large purchase such as a car or a home. However, taking on other types of debt, such as credit card debt with outrageous interest rates, can harm your finances and you would be better off paying the debt sooner rather than later.
In order to manage your finances efficiently, you have to prioritize what liabilities you get to pay off first. In order to assess which debt should be paid first, you can start by looking at the terms of the creditors, at the interest rates and at the consequences of being late on your payments.
Consequences of not paying off your debt can include:
- Paying late fees, penalties and interest rates;
- Damaging your credit score and affecting your ability to take on future loans; and
- Losing the collateral, such as your car or your home.
In order to prioritize your debt payments and to remain on top of your debt, you have to successfully manage your finances and to be on top of your expenses. Indeed, you have to assess which are not necessary and which ones you could cut from your budget in order to save up money and use it towards paying off your debt.
4) Review Insurance
The idea behind insurance is that it provides peace of mind to its policyholders. But can you really be worry-free when you don’t review your insurance and when you have no idea whether you are really covered or not? You should review your insurance coverage – including medical, home and car - on an annual basis because your insurance needs change as circumstances in your life change. Your policy coverage should reflect your family, home and career status in order to ensure your assets are protected correctly. Furthermore, you can open a savings account destined to save up enough money during the year to pay the insurance policy so you don’t have to worry when the time has come to pay.
5) Note Down All Income and Benefits
In order to assess how much money you can spend, you have to assess how much money you can earn. Therefore, write down all your sources of income and benefits that you and your partner have, such as:
- Gifts and inheritances;
- Child support payments;
- Investment income such as interest, dividends and capital gains;
- Scholarships and fellowships, etc.
You can use a Family Financial Statement to record your finances including income, monthly expenses and assets. The document draws a clear picture of your current financial situation and allows you to successfully manage your money.
6) Start an Emergency Fund
It is always prudent to save up in case of emergency. Indeed, managing your finances successfully requires planning for rainy days and for unforeseen scenarios. An emergency fund can shield you from the high cost of borrowing and can prevent you from incurring additional debt. The first step in creating an emergency fund is to estimate how much you would need, if your car needed repairs for example, and for how long you would need the money, in case of redundancy for instance. Once you have established your savings goal, you can start contributing monthly to your emergency fund. The best place to keep the money is in a readily accessible place, such as a liquid personal bank account. Liquidity is key here because you will need to quickly and easily access the money in case of emergency.
Daily Expenses Template
A document used to record your daily expenses.
7) Set Up a Fund for Your Children
When you are expecting a family, it is essential to be financially prepared. There are several smart ways to save money for your children:
- A dedicated child’s saving account allows you to teach your children about money and savings as they get older. You can open such a bank account in your name or in the child’s name.
- A college savings plan allows you to set aside funds for your children’s future education costs. Such plans offer various tax benefits and overall reduce the cost of education.
- A trust fund allows you to protect the distribution of significant sums of money to your children after you pass away. Trust funds offer interesting tax benefits. You can even set stipulations on how the beneficiaries can use the funds, such as for the purchase of a first home.
8) Live Economically
Spending time with friends and family does not always have to be expensive. Going for a walk in the park, watching a film at a friend’s house or even cooking at home are just some inexpensive activities you can do. Cultivating zen habits and adopting economical spending methods create a lifestyle that allows you to put your money where it matters. At the end of the day, you can either become richer by making more money or by saving more money.
Family Financial Statement
A document used to record your finances including income, monthly expenses and assets when planning to purchase a house.