Managing Your Money
First of all, let us explain what we mean by money management. Money management involves identifying where every dollar you earn comes from and monitoring where it goes. It means keeping track of this information over time so that you can use it to make sound financial decisions.
Before jumping right into money management, it might help to better understand the jargon of personal finance. If you have trouble keeping assets, liabilities, income, expenses, cash flow and net worth all straight, you might want to take a look at my series about the anatomy of personal finance. It'll help you with the common terminology used in personal finance and money management.
By far the most common method for tracking your personal finances these days is by using a software tool. Some common tools today include: Quicken and MS Money or open source options like GnuCash and KMyMoney if you are feeling frugal. These tools allow you to break your earning and spending down into categories so you can see which areas of your life are the most expensive and which are the most profitable.
Why would you want to do this? Well, here are five reasons to consider:
1) It Helps Identify Financial Problems
If you've ever wondered at the end of the month where all your money goes then you'll understand this reason. By tracking your personal finances in detail you'll be able to identify current or potential money problems. A common problem is spending more than you thought you were spending on something. Detailed money management will allow you to identify where your money goes so you can see if your gas bill is too high or if you are eating out too much. The first step to fixing a problem is identifying the problem in the first place.
2) It Helps Identify Financial Successes
Before you get too worried, we should tell you that getting a grip on your finances is not always about finding problems. It can be about finding successes too. For example, we were surprised when we discovered some dividend income that we were getting but not fully appreciating. We had bought some stocks hoping that they would go up in value and we would be able to sell them for a gain. We knew that this company paid a dividend but I never really appreciated how important dividends were. By keeping track of every rupee we earned we noticed that this dividend income was starting to add up! Now dividends are one of the first things we look for in an investment. It's just as important to know what you are doing well as it is to know what you are doing poorly.
3) It Shows the Effects of Sudden Financial Changes
Our financial story does not always stick to the game plan. Sometimes things can change on us rather suddenly and it is very helpful to be able to see how these changes affect us financially. A financial change might be a windfall such as an inheritance or a bonus from work. It might also be an unplanned burden such as a major car repair or a large vet bill. If we have a clear personal financial picture before the change then we can quickly see how the change will alter that picture. You'll be able to see where you can scrape up some temporary funds for a big unplanned expense. You'll also be able to see where best to use a sudden windfall - maybe paying off a debt would be better financially than buying a new doodad. By knowing how we'll be affected we can take appropriate steps to minimize a financial loss or maximize a financial gain.
4) It Shows Financial Progress Over Time
This is one of our favourite reasons to practice good money management. If we take advantage of what we found in reasons 1), 2) and 3) by correcting problems, investing in successes and managing sudden changes, over time we will be able to see the fruits of our labours. For us, seeing our progress is a very powerful motivator. It constantly helps reinforce our positive actions and help us to quickly identify when we've done something that pushes us in the wrong financial direction. Generally, things have been going steadily in the right direction for us and seeing this keeps us motivated to stick with it, even when progress is slow.
5) It Keeps Personal Finances in Your Mind
Finally, by getting in the habit of tracking your finances on a regular basis, you are giving them a prominent place in your mind. Each month when you tally up the numbers you'll be giving yourself a little reminder of the things you've done well and the things that still need some work. Little by little you'll learn to keep yourself focused on your dream of financial freedom. Since your thoughts are the first steps toward your actions, you'll be setting yourself up for financial success.
So now that you've got 5 good reasons, there should be nothing holding you back from getting started with personal money management!!
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