Money management is the way daily financial events are handled in step with financial goals. The reason money management is important is because if it is done properly, there are potential benefits or at least less monetary problems that may crop up. Money management is an essential ingredient to growing wealth, controlling costs, keeping cash flow under control and maintaining proper credit, debt to income ratios and so forth. A few key areas of money management are savings plans and budgets, personal money management, money management programs and money management software.
Creating a Savings Plan and Budget:
Savings plans are for money that shouldn't be used for anything other than saving. It is essentially a financial faux pas if not bad financial form to use money allocated for savings for anything other than transfer to a potentially better savings product. Savings plans could be a corporate pension, an Individual Retirement Account, a brokerage account, money market account, life insurance policy etc. In other words, there are many places to save. Choosing the right savings instrument depends on personal factors such as time-line, risk tolerance, rate of return, tax benefits and accessibility. Savings plans may also include weekly, monthly, biannual or annual contributions depending on the individual savings plan.
Budgets compliment savings plans in the sense that a good budget keeps costs under control and when adhered to, can allow one enough extra money each month to be able to save. This is often easier said than done as people often experience unexpected bills such as car repairs, medical co-pays, or higher than anticipated travel expenses. For this reason budgets should also include emergencies and unanticipated expenses. For example, 7% of one's monthly income is a reasonable amount to contribute to an emergency expense fund every month. What isn't used can be carried over to the next month.
Personal Money Management:
Personal money management is the application of money management principles to one's individual or household finances. This may involve balancing check books, filing taxes, record keeping, paying bills, juggling accounts, overseeing investments and expenses and so one. There are several ways personal money management can be achieved such as a customized money management system, pre-designed money management program or computer software money management. An important note to consider is personal money management plans should serve individual goals and be practical. Some discipline is required to effectively implement all the steps in a money plan, examples of such steps being the items listed above.
Money Management Programs:
Money management programs are plentiful and can be found high and low. Some of these programs may be better than others but one may often see a common thread of reasoning behind them all i.e. save, budget, lower costs, and invest. These are the only four words one really needs to know to manage money but putting words into action isn't always easy.
One example of a money management program attribute is the Three Account System. The three account system facilitates a money manager's intent to save, budget and invest by channeling funds. Since Income-Expenses=Profit, one must have more income than expenses to save money. For this reason establishing the three account system in the beginning is the hardest part.
The three account system uses one account for paying bills, another account for buffering and balancing cash flow and a third account for saving and growing money. Ideally all three accounts will be increased in size every month for a net growth however, if the expense account never grows that's not necessarily bad because that is its designated purpose.
While the above system helps in the allocation of funds and cash flow, it still requires additional money management techniques such as record keeping, budget balancing, debt management, asset management etc. In other words, a money management program ideally includes all the steps, tools, and information necessary to successfully manage money.
Money Management Software:
Money management software can be a very helpful tool for managing money if one has the discipline to use the software as one's financial information hub and portal. That is to say, for the software to be most effective, every transaction and piece of financial information should be entered into the software on a weekly if not daily basis. Such financial information can include expenses, investments, allowances etc. in addition to accurate entry of total assets and liabilities, creditor account information, banking information, tax deduction information such as interested expenses, capital gains and so on.
The financial software processes the information and can then create up to date spreadsheets, financial scenarios, interest rate calculators, retirement forecasts and so forth. In other words, money management software helps organize financial information through a software program. However, for that software to be effective, the software must become a primary money management tool.
Money management is fiscal discipline translated into monetary action whether such monetary action be utilization of financial software, a money management plan or an individualized money management system. The goal of money management is to keep finances under control, organized and increasing in worth to the money manager. Bad money management might include bank overcharges, bounced checks, decreasing net worth, and poorly archived financial records such as previous years tax filings. Good money management can be considered to be generally the opposite. Additionally, what makes good money management effective are fiscal discipline, savings and budget plans, and successful implementation of money management programs and/or software. Money management is more than just making sure what goes out is less than what comes in, but it is also what happens in the time between money coming in and it going out.
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