5 Steps to Manage Your Money
Do you manage your money or does your money manage you?
If your money manages you, I want you to know that it doesn’t have to be that way.
You can manage your own money.
Are you tired of living paycheck to paycheck or being in debt?
Do you want to have enough money buy a big ticket item or to take a nice vacation?
Would you like to save for retirement, but there’s no extra money at the end of the month?
I’ve been there.
It is no fun to be in that position, month after month. I struggled through those years, through different seasons of my life.
Along the way I kept learning more and more about managing my money. Today we live debt free. It’s been quite a journey.
You can do this too. This will take some hard work and time but you can manage your money instead of your money managing you.
It all begins with these 5 steps:
Step 1: Mindset Shift
The first step is a Mindset Shift. Spending your money aimlessly may make you happy in the short-term, but not for the long-term.
On the other hand, spending your money in a way that agrees with your values, will make you feel good – for a long time.
Think about the last couple of times you spent money on an item of clothing (dress, shirt, etc.) and ask yourself these questions:
* Did I really need it?
* Do I wear it often?
* Does it make me happy?
* Do I wish I hadn’t bought it?
Nine out of ten of us would probably answer those questions with a no, no, no and a yes.
If you are willing to make the effort, you can change our mindset. You can begin focusing on spending your money on things that you truly value. When you do this, you will be well on your way to managing your money.
Step 2: Practice Discipline
The next step is to practice discipline in your spending. Have you ever thought about discipline applying to your money habits? Perhaps not.
Discipline is something we use all day long. We comb our hair and brush our teeth before we leave our house. Also, we drive our cars on the correct side of the road.
These are habits, but discipline is at the root of these habits.
If you wish to manage your money instead of your money managing you, then you will need to learn to use discipline with your money.
You will need to establish habits for your money-spending that are true to your values. For example, perhaps you value eating healthy (and you value the effort you made to earn your money). If you value these two things would you stop at a fast food restaurant on your way home and spend your hard earned money on fatty foods?
The answer is probably yes. We do that way too often. What if you began practicing discipline in not using your hard-earned money on things you don’t value? Then you wouldn’t stop at that fast food restaurant so often. Instead, you would be willing to wait until you got home where you could prepare a healthier meal.
Step 3: Track Your Money so you can Manage Your Money
In order to manage your money, you need to know exactly where all of your money is going. All.of.it!
You will need to track every single penny.
This can be accomplished by using a couple sheets of paper or an online spreadsheet. It doesn’t matter which way you choose. What’s important is that you track every.single.penny. You want to know exactly where ALL of your money is going.
Decide on several categories for your expenses (examples – groceries, dining out, utilities, house payment, car payment, gasoline, insurance, yard care, contributions, etc.) Try to use about a dozen categories for those things that you spend money on every single month.
Now, write down every penny you spend this month. Note the date, the item, the amount and the category.
At the end of the month, total the amounts for each category.
Ideally, you should do this tracking for two months. Add the amounts for each specific category together and divide by 2 to give you an average of what you spend each month in any given category.
If you are eager to get started, you can certainly use just one month’s numbers to start.
Step 4: List your Irregular Bills
Usually we have bills that are not paid every month. They may need to be paid every quarter, or twice a year, or maybe just once a year. This type of bill could include car insurance, subscriptions, personal property taxes, real estate taxes, dues, propane, etc.
On a separate sheet of paper, write down every bill that you need to pay during the year that is not something that you pay every month. Be sure to note the month that it needs to be paid.
Irregular bills don’t have to create havoc in your monthly budget. Read the post How to Handle Irregular Bills for some excellent tips on how you can best manage these bills.
Step 5: Create Your Budget
This is where you get to start making some choices for managing your money.
Let’s begin by preparing a budget for next month:
- On a sheet of paper, write down the amounts you spent in each category from your one (or two) month’s tracking of expenses.
- Also write down any irregular bills that will be due next month
- Add up the totals for all of these items
This is the amount you plan to spend (your EXPENSES) next month.
Now let’s see if that will be a reasonable budget for you.
Write down your expected INCOME for next month, after taxes.
What is the difference between your INCOME number and your EXPENSES number.
A Zero-Based Budget is the Goal so that you can Manage Your Money
If it’s zero, that’s perfect. Because zero is the goal. A zero based budget is exactly what you want.
Let’s say your EXPENSES total $3000, but your INCOME is $2800. That means that you have budgeted $200 more than you will earn.
You’ll need to do some fine-tuning to your budget at this point. Decrease expenses where you can. Oftentimes people can decrease their budget easily in the food, clothing, entertainment or monthly subscriptions categories. You are in charge here so you get to decide which categories are best for you to decrease. Be realistic.
By the way, let’s say your EXPENSES totaled $2600 and your INCOME was $2800. That means that you have budgeted $200 less than you will earn. Awesome!
But, don’t leave that $200 just hanging there. Go ahead and assign those funds to whatever category(ies) you would like a little more money in.
Remember your goal is a zero-based budget.
You want your budgeted EXPENSES to be exactly the same as your INCOME.
Here’s why: Money that is not budgeted usually just disappears. We blow it because we haven’t told ourselves where that money is suppose to be used.
Remember your goal is to manage your money. You want to tell it where you want it to go. Budgeting every penny is how you do that.
However, I’m not telling you that you have to spend every penny every month. I’m just saying you have to tell every penny where to go. You can carry money over in a category. Better yet, you can create a savings category (how about setting aside money for a vacation or for unexpected expenses or for next Christmas)?
On Your Mark. Get Set. Go!
There’s no better time to begin managing your money than right now.
Once you have worked through these 5 steps you will be on your way to managing your money.
This post is intended as an overview to introduce you to the idea of beginning to manage your money through the use of a budget.
We’ll be sharing more ideas for these 5 steps and other money managing ideas in future posts. Be sure to check out the Irregular Bills post for tips to handle those types of bills.
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