Here’s my ten-step guide to managing your money better so that you can find financial freedom.
HOW TO MANAGE YOUR MONEY BETTER
If your dream is to create financial freedom for yourself, you need to make sure you are managing your personal finances in the best way possible. Why? Because financial freedom isn’t just about earning enough money.
Financial freedom comes about when you are managing your money and life in a way that means you don’t need to spend more hours than necessary earning money or indeed getting to the point where you just live from the passive income that you are earning.
Freedom comes from being in control of your money and your spending so that you don’t get caught up in debt.
So, the first thing you need to ask yourself is, “is there a way I can manage my money better?”.
Do you know what your total net worth is – do you even know what ‘net worth’ means?!
Learning how to manage your money takes time and effort, but it is well worth investing that time and effort as soon as possible to give yourself the best chance to reach financial freedom.
Taking the time to get intentional with your finance and establishing good habits for managing them on a regular basis is the best way to be control of your money and your financial future.
Things to consider before you start shaping your personal financial management include:
- What are your financial goals?
- Where do you want to be financially in five years / ten years
- When do you want to retire?
- Do you have student debt that you are committed to paying off?
- Do you have a mortgage that you want to pay off?
- Are you looking to buy your first home?
- What are your biggest financial commitments?
- What earning potential do you have over the coming years?
Ok, now it’s time to get started managing your money better than ever before. Take a look at these simple money management tips and then start getting to grips with creating a money-management system that works for you.
TIPS FOR MANAGING YOUR MONEY BETTER
1. START A MONEY MANAGEMENT TRACKING SYSTEM
You might prefer good old paper and pen or you might like to start a google sheet/excel document. Do whatever works for you and use a system that you know you will stick to. Don’t go getting fancy or spending ages making it look pretty at this stage, you simply want to get a money management system up and running.
Personally, I love a google sheet, they are free, easy to access and easy to use. So, I’m going to refer to google sheets within the following steps, I know you’ll be able to adapt the info to whatever system you choose to use.
2. CREATE YOUR PERSONAL FINANCE OVERVIEW
If you’re using google sheets, start a tab for your assets and liabilities overview.
Your financial assets include your savings, stocks and shares, retirement plan, IRAs, equity in the property you own, annuities. Your financial liabilities include student debt, outstanding mortgage, car loan, personal loans, overdraft, unpaid credit card balances, any other debt you have.
3. CALCULATE YOUR NET WORTH
Uh-o, does it sound like I’m straying into ‘accountant-speak’?! Don’t worry, it is actually really simple to calculate your net worth. All you need to do is subtract your total debt from your total assets. Really. It’s that simple.
I keep this calculation at the end of my Assets and Liabilities tab sheet.
4. SET UP A MONTHLY BUDGET
Set up a second tab on google sheets and call it ‘Monthly Budget’. Well, you can call it whatever you like, but this is the sheet where you create your monthly budget so you can keep track of your cash flow.
List all the income sources for the month. So, your salary if you have one, bonuses, side hustle money, money earnt from your own business, dividends, any other cash that comes into your account.
Then list all your expenses. Start off with fixed expenses, like mortgage, regular student debt repayments, insurance, cell phone, fixed plan utilities, memberships, subscriptions, childcare, cleaner, commuting season tickets.
You can then make a list of variable monthly expenses, such as groceries, variable utility bills, childcare, pet daycare, travel costs, fuel for your car. You can get a rough idea of how much each is likely to cost by taking an average from the last few months.
4. CALCULATE YOUR ESTIMATED TOTAL MONTHLY CASHFLOW
Just like working out profit and loss for a business, you simply want to take your total income and subtract your monthly expenses from it.
Understanding your monthly cash flow is one of the most powerful ways you can start to better manage your money. It gives you a real-life snapshot of your finances and perhaps also a reality check.
You will see instantly if there is more going out on a regular basis or on the flip side if there is a surplus each month that you could be doing more with to invest for your future.
Set up a monthly calendar reminder to check and update your cash flow as part of your money management strategy.
6. DISCOVER YOUR CREDIT SCORE
Your credit score is part of what dictates the rates you get offered on loans, including your mortgage. In fact, it can determine whether you will qualify for a loan at all. It is better to know if there are any issues with your credit score, so you can resolve them as soon as possible.
You can use a company like Experian or Credit Sesame to grab a credit score report. Check for errors – they are not unusual – you can contact the credit bureau directly to tell them that errors need to be corrected. Understand if there are any weaknesses you can work on.
7. START ACTIVELY MANAGING YOUR MONEY
Now you have everything you need to know about your money in one money management tracker system, you can start to actively manage your personal finances. This is where the fun starts and how you can start shaping your financial future and your path to financial freedom.
Set yourself a target of always being in credit rather than in debt at the end of each month. This is known as having a ‘positive net worth’.
If you are not currently in credit at the end of each month it’s time to see if there are ways that you can:
- Increase your incomings
- Decrease your outgoings
A. SET FINANCIAL GOALS
Set yourself some goals that will get you in credit at the end of each month as soon as possible. Remember to class any long-term savings or retirement savings as expenses, as this is not money readily available to you as cash flow once you’ve saved it.
B. SET MONTHLY BUDGET FOR VARIABLE COSTS
Set yourself a maximum monthly budget for your variable costs. It’s much easier to be discerning about your grocery shopping if you have an upper limit each month. Meal planning can be a great way of keeping your monthly grocery bill in check.
C. GENERAL UNEXPECTED COSTS FUND
Everyone needs an unexpected costs fund. Everyone. I call ours our rainy day fund. It will cover off the unknown expenses that will inevitably pop up each year. Car repairs, medical bills, unexpected house repairs.
Unless you have lots of spare cash swilling around you won’t be able to instantly set up a rainy day fund, so aim to build one up over a few months. Once you have a fund established aim to keep it topped up on a monthly basis.
One extra thought on having a rainy day fund is to look for a high-interest savings account, one that will avoid your money deflating over time and one that will actually give you an added incentive to save.
Do also read my post on why should think twice about starting an emergency fund, which is a fund that is much bigger than a rain day fund and bandied around by many a personal finance guru as an essential part of financial management.
D. MANAGE YOUR CREDIT SCORE
Knowledge is power when it comes to your credit score. It’s not the end of the world if you have a low credit score. In fact, it can be easier than you think to increase your credit score.
E. CHECK YOUR SAVINGS AND INVESTMENTS
It’s very easy to set up savings accounts and investments and then forget about them, only to discover you could have been making more in interest and dividends by switching them up. Always take the time to make sure your savings are earning the most possible.
8. CREATE A YEARLY BUDGET
Your yearly budget is where you can really get to grips with managing your money better and getting the most out every cent that comes in.
It may seem weird that I’ve listed this step at the end of my list of tips, but the thing is, you really need to go through the other steps to understand your finances. Otherwise, you could end up creating an unrealistic yearly budget, which would be really demotivating for you keeping on track with your money management.
So, your yearly budget is where you forecast and project your incomings and outgoings for a twelve-month period. This is where you can really shape how you save, invest or spend your money.
Take a look at my post on defining financial freedom to help you make decisions about whether you need to increase your earnings or whether in fact there are ways you can reduce your outgoings to find your own version of financial freedom.
Don’t forget to plan in big expense periods like birthdays and Christmas. Consider starting up a monthly savings plan for Christmas – and also consider reshaping how you spend money to celebrate Christmas. Here’s a list of annual expenses it’s worth planning for in advance:
- Family birthdays
- Back to school
- School breaks
- School fees
- Emergency fund / unexpected cost fund savings
Once you are clear of all your financial commitments make sure that as many of the outgoings are automated as possible.
You can also set up regular automated payments to move money between your checking account and your savings accounts, which will save you time and make sure you’re earning the most interest possible each month.
10. MONTHLY MONEY MANAGEMENT REVIEW
Set a monthly date in your calendar to review your finances, check off your outgoings, make adjustments where necessary and move any spare cash into your savings, all those extra dollars here and there can really add up.
If you regularly have extra cash to spare, take a look at making overpayments on your mortgage or other debts.
Getting to grips with managing your money is one of the best ways to set yourself on your way to financial freedom. Get to know your personal finances inside and out, stay one step ahead and always do everything you can to maximise your incomings and reduce down your outgoings.
There’s no time like the present to start to manage your money better, so what are you waiting for?! Good luck!