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How are you with your money? Do you have a clear financial blueprint laid out for your life, or are you struggling paycheck to paycheck?
No matter where you are in life, having a sound money management plan in place and continuously updating and improving it is a step towards your financial success.
So, let’s learn Money Management 101:
The very first step in money management is creating a budget. A budget helps show you exactly where each hard-earned dollar is going.
Here’s how you start creating your budget:
- Determine your monthly income – Collect all your paystubs and add up all your net earnings.
- List all your fixed expenses – These are the unavoidable expenses that happen every month and usually are a fixed amount. (Rent, mortgage, utilities, loans, etc.)
- List all other spending – List everything you spent money on. (eating out, groceries, gas, shopping, etc.)
- Categorize them – Put expenses into categories – Utilities, Car, Home, Groceries, Entertainment
- Subtract expenses from income – You then have a positive number or a negative one. A positive number means you have money left over, a negative number means you have more debt than earnings.
That’s how simple a budget really is – showing what’s coming in and what’s going out.
Now comes the hard part – trimming it. I’ll make it easy for you:
- Look for excessive spending – Go through all the categories and see what surprises you. You may not realize you were spending $25 a week for drive-thru coffees.
- Find ways to cut back – Look for cheaper alternatives or get the Trim app that will negotiate lower service fees for you.
- Determine your needs and wants – This can be tricky but separating what you need (housing, food, work) is more important right now and cancel the rest.
After trimming your budget you’ll see you do have money left after everything is paid. What you can do with that extra money depends on your priorities and I’ll cover those in upcoming sections.
Here are some more resources on budgeting:
- 16 Best Budgeting Apps to Help You Save Money
- How to Budget When Your Spouse or Partner is a Spender
- The Everything Budgeting Book: Practical Advice for Saving and Managing Your Money
- How to Manage Your Money When You Don’t Have Any
2. Debt Payoff Plan
Now that you have a budget in place and know how much debt you have, it’s time to create a debt payoff plan.
So, which one do I pay off first? Some financial experts suggest paying off the highest interest ones first, others advise to start with the smallest bill first, still others suggest to consolidate all of them. Let’s play with some numbers and compare the different methods:
List of Debts:
- $5,000 credit card with 3.75% interest, minimum payment $50 a month
- $11,000 car loan with 6% interest, minimum payment $122 a month
- $40,000 student loan with 8% interest, minimum payment $485 a month
You’re paying $657 a month on these bills, if left alone it would take 10 years to pay off.
You trimmed your budget and decided you can pay an extra $322 a month towards your debts.
Highest Interest First Plan:
Using the highest interest plan you would apply the extra $322 a month to the student loan with 8% interest and that monthly payment will be $807 a month, while the other bills are paid the minimum. This bill will be paid off in 5 years.
After 5 years, you now apply the $929 ($807 plus $122) to the second highest debt – the 6% car loan. The amount is now down to $6,415. This second debt will be paid off in 8 months.
Lastly, the third debt’s balance is now $2,400. Adding the $929 to the $50 monthly payment pays this credit card in 3 quick months.
The time it took to pay off all three debts is almost 6 years.
Smallest Bill First Plan:
Using the smallest bill first plan, you would apply the extra $322 to the $5,000 credit card. Your monthly payment is $372 a month while the others get the minimum payment. The credit card gets paid off in 2 years and 2 months.
You now apply the $372 to the $122 monthly car loan where the balance is now $10,030. This will be paid off in 22 months.
To finish, your student loan balance after 4 years is $27,697. Your new monthly payment will be $979 and it’ll take 32 months to pay off this last bill.
The time it took to pay off the 3 debts is a little over 6 years.
This last plan is to consolidate your debts.
You are able to consolidate the 2 smallest amounts onto a credit card that has 0% interest for 18 months. You go ahead and pay the previous combined minimums plus the extra $322 a month.
That’s $494 a month for the $16,000 balance, after 18 months it’s down to $7,108. The interest then goes up to 14.24%. This balance will be paid off in 2 and a half years.
You are able to get a lower interest loan for the $40,000 at 6% and $440 a month. After you paid off the credit card in 2 years this loan balance is down to $32,252. You now can pay $934 a month and this loan will be paid off in just over 3 years.
The total time to pay off all your debts will be almost 4 years.
Now, I didn’t go calculating how much money you’d save in interest and such, but you can see how much time you’d save. Which plan to choose is up to you, but the important objective is to create a plan and stick to it.
Now some debt payoff reading:
- 9 Mistakes You’re Making Paying Off Debt
- 11 Ways to Pay Off Debt Right Now
- Debt Free-Dom: Simple Steps to Eliminate Debt
3. An Emergency Fund
An emergency fund is savings set aside for just that – emergencies. The major reason for having an emergency fund is so your monthly budget doesn’t suffer.
Emergencies are a fact of life, everything breaks down, unforeseen circumstances, and mother nature intervenes. Events such as broken appliances, car repairs, medical emergencies, emergency travel needs, emergency home repairs and such.
An emergency fund is not for impulse shopping, upgrading to newer items, and for things that can be budgeted over time (vacations, new car, etc.)
Many advisers say to save at least $1,000 to start, then anywhere from $3,000 to 3 to 6 months of earnings after that. This amount depends on many factors, some of these are:
- Financial Stability – How stable is your situation? Those living paycheck to paycheck may want to start small until their finances are under control.
- Incomes – A 2-income family will be safe 3 months of expenses saved up. Whereas a single income should have about 6 months of coverage.
- Family needs – Do you have a larger family? Have some with medical emergencies? The more family members or special needs, the more you should save.
- Obligations – Do you have aging parents, a family business, or anything that may require time away will need to have more saved up.
The more money you have in the emergency fund, the better. Now let’s look at how to build your emergency fund:
- Add a category in your budget for your emergency fund.
- Assign a monthly amount to save (use some of the found money after trimming the budget).
- Open a separate savings account. Optimally one that’s not directly accessible with your debit card.
- Periodically adjust your budget. Change the savings amount whenever you paid off debt, get an influx of cash, or have new life changes.
- Stick to the plan. Don’t be tempted to borrow money from this fund for impulse buys, vacations, or other “wants”.
Now, some hypothetical emergency fund goals:
You and your partner both have jobs, have no children and a few debts. You both decide that after the $1,000 starter fund, you’ll need 3 months of expenses equaling $5,000, so $6,000 is a safe emergency fund for the two of you.
You open a savings account with 0.08% interest and start paying $322 a month.
- It will only take 4 months to save the first $1,000 ($1,288).
- It then will take 14 more months to save the extra $5,000 ($5,154).
Now, let’s say you’re single, have lots of debt and need 6 months of expenses covered equaling $7,200. You open a savings account with 0.08% interest but can only afford to deposit $150 a month into it.
- It will take 7 months to gain the first $1,000 ($1,050).
- Then it takes 3 ½ years to save $7,200 ($7,211).
Of course, this is not counting any emergencies that occur while saving up or any extra money deposited along with the monthly payment (your income tax return for example).
The emergency fund will save your budget, give you peace of mind, and keep you financially sound (no harmed credit report, rash money decisions, or incurring more debt).
Read more about emergency funds:
- 14 Tips For Building An Emergency Fund In 5 Months
- 5 Best Places To Hide Your Emergency Fund
- Building Your Emergency Funds
- Murphy’s Law Cash: How To Handle Financial Emergencies
4. Insurance Coverage
Getting the right insurance coverage for everything in your life can be confusing or overwhelming. As many as two-thirds of Americans have the wrong or inadequate insurance coverage.
So, what kind of coverage should I get? It’s different for each person and family, but the basics are:
- Home/Rental Insurance
- Car Insurance
- Health Insurance
- Life Insurance
- Disability Insurance
Homeowner or Renter’s Insurance
Homeowner’s insurance is absolutely essential. It protects your most valuable asset against damage and theft and renter’s insurance covers you against damage or theft of personal items in an apartment.
Some helpful tips when exploring home insurance:
- Some home insurance policies don’t cover things like floods, earthquakes, and some weather damage.
- Get your premiums paid through escrow with your mortgage company, many lenders prefer this and sometimes there are discounts.
- Find out the exact type of coverage – does it cover personal property, replacement cost, or actual cash value.
- Get riders to cover what your policy doesn’t – flood, antiques, etc.
Not only will you want car insurance, nearly every state requires that you have it.
Some helpful tips to remember when looking at car insurance is:
- If you have an older car that you don’t owe any money on, you can drop collision and comprehensive coverage and your monthly premium will be much cheaper. (Tip: put that savings aside for a new car fund).
- If you have a newer car, or a type that is at higher risk for theft (a sports car for example) you may want to insure against theft as well.
- Claim all your discounts – good driver, silver discount (for seniors), academic discount (for students with good grades), and others.
- Bundle your policies – you may get deep discounts for combining car, home, and other vehicle coverage.
- Look at the fine print for what’s actually included. You may find you’re paying for unnecessary options.
This is an important one, in 2009 over 60% of bankruptcies were due to medical bills.
When buying health insurance, you need to think about:
- Needs – Think about how often you will need to use it, if you’re young and healthy you can get less coverage than those with a family or someone with a chronic illness.
- Costs – You’ll need to decide how much you can pay per month and find a plan that covers your needs within that amount. Plans that offer higher deductibles and co-pays will be cheaper on a per-month basis for those considerably healthy. Again, those with families and illnesses may want a higher monthly premium that offers a smaller deductible and co-pay as you’ll pay these more often when attending appointments and medical tests.
- Look at Network Providers – When you find a few plans within your budget, take a look at the network providers and check if your doctors and specialists are included in that plan. If they’re not, you’ll end up paying more for “outside network” services.
- Subsidies and discounts – Look through the health exchange or department of health, especially if you have a family and have a low income for any subsidies and services you qualify for.
Surprisingly, 84% of Americans agree that most people need life insurance, yet only 70% of them said they don’t need any. Of those who do have coverage, many are inadequately covered for their needs.
How much coverage do you need?
- If you have debts as well as a mortgage – you’ll need enough to pay those off
- If you have a family – you’ll need enough to cover your income for a period of time
- You should also get enough coverage to pay for funeral costs and estate taxes
- If you’re a stay at home parent – you’ll only need enough coverage to cover daycare, babysitting and other child costs.
- If you’re nearing 65, you’ll need less life insurance – enough for funeral costs and current debts
In my personal experience, it’s best to get term life insurance with a steady premium and the payout is what the policy states. Whole life states they’ll grow your money and are able to use it later in life, or get a larger death payout – which isn’t entirely true.
This type of insurance has so many exemptions, rules, and fees attached that you’d be lucky to get back what you put in.
Similar to life insurance, disability insurance reimburses you for income lost during the times you’re unable to work.
Some reasons why you should get disability insurance:
- It can cover permanent, temporary, partial and total disability.
- Anyone can be incapacitated at any time in their lives – no one knows what tomorrow brings.
- Prevents financial strain due to loss of income and extra bills not covered by medical.
- Disability insurance is relatively cheap to get.
The insurance plans you definitely don’t need are:
- Flight Insurance – Most credit cards have this included
- Life Insurance for kids – Sad to say but you save money after kids have passed
- Disease Insurance – Too complicated to get coverage for every possible disease out there
- Mortgage Insurance – A good life insurance policy should cover this already
- Prepaid funerals – Many of these companies go bankrupt before you need it. Again, a good life insurance policy will cover this.
Be sure to shop around and compare the different offers on all your policies and read the fine print before purchasing.
Read up on getting insurance with:
- When Should You Buy Life Insurance? It Depends…
- 5 Best Cheap House Insurance Companies For 2019
- Insurance Made Easy: A Comprehensive Roadmap to the Coverage You Need
- Insurance For Dummies
Many people think investing is for those who are well-off or old codgers in business suits.
In fact, anyone can start investing no matter their financial situation. My suggestion is to start investing after you’ve completed steps #1 – #4, you’ll be in a better financial place to start investing, but you can actually start at any time.
Getting started in investing can be an anxious effort. Here’s a beginner’s guide:
- Decide how much to start with – Add a category in your budget and aim to invest every month.
- Decide how many years you want to invest – The time frame influences the type of investments to pick
- Pick an investing strategy – For short term goals, investing should be more towards money market or bond funds. Long term goals, 15 – 20 years, investing should be more towards stocks.
- Start small – When starting out, start small in a passively managed fund, pick one and leave it alone. You can start easily with a robo-advisor app like Stash for a feel of how it works.
Talk to your local bank’s investment advisor on how to start investing and keep learning on your own how to improve your investing strategies like with these easy reads:
- 17 Smart Investing Tips That Anyone Can Do
- 5 Apps That Help You Invest
- Investing QuickStart Guide: The Simplified Beginner’s Guide to Successfully Navigating the Stock Market, Growing Your Wealth & Creating a Secure Financial Future
- The Only Investment Guide You’ll Ever Need
6. Generate Extra Money
Your financial situation shouldn’t be solely dependent on your working salary, you can improve it by making extra money.
Generating extra money means you can grow your savings faster, pay off bills faster, have money for your goals like a vacation or a new car, and it easies your financial burden to meet your monthly bills.
There are so many ways to make extra money, I’ll list just a few:
- Use cash-back apps – Download some great cash-back apps and use them whenever you shop.
- Answer surveys in your spare time – Use several survey sites and earn quick cash or gift cards.
- Start a side hustle – Pick a job you like to work from home and make money.
- Make money while driving – Work for Lyft or Uber, or pick another driving job.
- Do small tasks – Run small tasks on your computer or around town.
- And many more ideas!
Just scroll through all the making money articles on Frugal for Less for many other opportunities to generate extra money.
Money Management doesn’t have to be complicated, in fact we’re the ones that complicate it with overthinking, procrastinating, not being diligent and following a plan, or just are slack with our money.
I hope I’ve given you a sturdy platform and learning prospects to start managing your money and become financially independent.
What are your thoughts?
Comment down below to share.