How To Manage Your Finances

Article by: Brian Macharia W - Personal Finance Educator and an Author of: Budget Like A Goal Getter

After three gruelling hours of dissecting a dollar, I’ve discovered that money is brainless and spineless. So I guess I’m the one who should have a brain and a backbone when managing my money.

Have you ever felt like your money really isn’t yours to keep? It’s like whenever you get paid, the money quickly says “Hi” then “Bye!”

“Money moves from those who do not manage it, to those who do.” ~Dave Ramsey

Is there a way to ensure your income no longer slips through you fingers like water?

Yes. The answer is management.

In my previous article 8 Ways To Grow Your Income, we dealt with the first money skill: Make Money.

Today’s article examines the second money skill–Manage Money–by exploring three important money management activities.

Since management is the answer to keeping more of what you earn, let’s briefly see what it means, then we’ll dive straight into the three activities for managing your money.

Management, as Dr Myles Munroe defined it, is applying resources in the most effective, efficient, and beneficial way.

Hence, money management is about utilizing your income in a way that avoids wastage, fulfills obligations, and enhances growth.

It’s about being a disciplined steward of resources who maximizes the minimum to get the most out of the least.

The following activities will enable you to manage your money effectively.

1) Create And Follow A Budget

“A budget is not just a collection of numbers, but an expression of our values and aspirations.” ~Jacob Lew

In personal finance, a budget is a plan of how you envision to use a particular amount of money to fund your goals, needs, and wants.

Not all spending plans are the same. The quality of your budget determines how effectively your resources will be utilized.

An inferior budget asks:

  1. a) What are my Needs?
  2. b) What are my Wants?

However, a superior budget asks:

  1. a) What are my Goals?
  2. b) What are my Needs?
  3. c) What are my Wants?

Goals Expenses are the essential value-producing expenditures that bring growth in your life. E.g., Saving, Investing, Giving, and Education costs.

Needs Expenses are the essential, value-consuming expenditures that create security and dignity in your life. E.g., Food, Clothing, Housing, and Medical care costs.

Wants Expenses are the non-essential value-consuming expenditures that bring comfort and variety in your life. For example: Pay TV, Eating out, and Vacation costs.

The inferior spending plan that only focuses on Needs and Wants is also called a Bills-based budget.

Its formula is INCOME – BILLS = 0.

By not setting aside resources for creating growth, a Bills-based budget keeps a person stuck in life.

The superior spending plan that accommodates and prioritizes growth is called a Goals-based budget. Its formula is INCOME – GOALS = BILLS.

Doing goals-based budgeting enables you to make progress in life. In my eBook, Budget Like A Goal Getter, I’ve delved deeper into this breakthrough budgeting strategy (goals-based budgeting) that helps people achieve their financial goals faster! Check it out here:

Before you spend your next income, pause and make a budget first–preferably a goals-based budget.

To create a goals-based spending plan from scratch, do the following:

(i) List all your typical monthly expenses.

(ii) Group them into three categories (Goals, Needs, Wants)

(iii) Calculate the total cost of the items in each category.

(iv) Have separate accounts for the three categories of expenses.

(v) Send the appropriate funds to each of the three accounts.

Now you are ready to start spending.

Keep in mind that your budget is a steering wheel and you (the budgeter) are the driver. So, take the driver’s seat and direct your personal economy to where it should be.

Let’s move to the second money management activity.

2) Track Your Spending

“Budgeting has only one rule: do not go over budget” ~Leslie Tayne

Once you begin spending money, it is inevitable that some actual costs won’t always be equal to what you had budgeted–assuming you aren’t deliberately overspending on any item in your budget.

Keep a daily or weekly record of all your transactions. It will give you the data you need to compare your budgeted costs with your actual costs.

This will help you figure out how to modify the next budget so that it reflects the reality on the ground regarding prices.

You can use a book, spread sheet, or an app to record and track your spending.

3) Review Your Budget

“If your money isn’t going towards your vision, neither are you.” Scot Anderson

Now that you have the data showing your real costs, it’s time to review your budget and adjust it, so that your spending plan still manages to take you where you want to go.

Every so often ask yourself, “What needs to change in my budget?”

To comprehensively answer that question, ask yourself three more questions:

(i) Which expenses do i need to raise?

(ii) Which expenses do i need to reduce?

(iii) Which expenses do i need to remove?

Go through your budget, item by item, and figure out which costs can be removed or reduced so you can create a surplus to be allocated to the expenses that need to be raised (increased).

When seeking to reduce or remove certain costs, start cost-cutting in the expense category of Wants. The reason is Wants are non-essential, value-consuming expenses.

If cost-cutting in the Wants category still isn’t enough, go to the Needs category and see how to downsize in some of your essential expenditures.

And if that still doesn’t free up enough cash to fund other expenses, or to eliminate a deficit, then go to the Goals category. Analyze where you can do cost-saving by either reducing some expenses or postponing some goals for a little while–just until you ensure that all your important and urgent expenses are well funded, and that your total expenditure is equal to your total income.

Having a balanced budget (expenses = income) is as important for your financial health as a balanced diet is for your physical health.

The skill of Managing Money is like a sieve that decides how much of your income gets to be maximized using the third money skill: Multiply Your Money.

Next time we’ll conclude our exploration of the ABCs of money by examining how to  multiply your money.

Source: Brian Macharia W


Please enter your comment!
Please enter your name here

Latest Posts