Money Management 101 – 5 steps to help live financially stress free
According to the annual Stress In America survey, which has been conducted by Harris Poll for the American Psychological Association since 2007, money worries continues to be the top source of stress in our lives. This beats work, family responsibilities, and health concerns.
This article’s sets out to give a broad view of ways effective money management can help to bring a level of calm and a feeling of peace of mind.
Before you continue reading, it is important to note that it may take years to get your financial house in order. Feel encouraged though that every step you do take will help to reduce financial stress and bring more financial stability into your life.
5 money management steps towards financial peace of mind
Step 1 – Budget
Stress free financial living rule number one is to create, track and keep within a budget.
Whether you use a whizzy spreadsheet or a low tech notebook it’s a must to know how much money you earn and how you spend it.
Scenario 1 – Your costs are greater than your income
If you find yourself in this situation, realize you are not alone. Economists at Princeton and New York University estimate that around one-third of all US households live paycheck to paycheck.
However, having identified the problem it is vital you make some changes to stop the downward spiral and get your basic finances back in order.
As Tony Robbins says, “identify the problem but spend your time and energy on solutions.”
There are two things you can do:
- Cut down your costs – At this stage your budget must be your essential costs. For example, food, rent or mortgage, utility bills etc. Look at ways you can reduce costs in these areas. Whilst you get your financial house in order everything that isn’t an essential cost is a luxury item. Get to work on eliminating or reducing these costs. Cancel your cable TV, curb your daily Starbucks fix, cancel an unused gym membership and make your meals at home are a few ideas. The short-term pain will be worth the long-term gain.
- Earn more money – can you take on more responsibility at work? Negotiate a pay rise? Take on a part time job? Or sell any unwanted items?
Scenario 2 – Your income is greater than your living costs
You are in a more fortunate position and you have the opportunity to make quicker progress towards achieving your financial goals. Use extra money to pay off any debt quicker, set up an emergency fund, save and invest. Still consider cost savings and additional income to help supercharge your efforts.
Step 2. Emergency or ‘peace of mind’ Fund
Stress free financial living rule number two is to create an emergency or ‘peace of mind’ fund.
There are two main reasons for this. Firstly, it will provide you with a safety net should you face an unfortunate emergency such as an illness, job loss, a major house or car repair or other unexpected expense. Secondly, it will help you avoid getting into debt to manage the emergency. This fund will help you to cope with whatever life throws at you.
Financial experts recommend saving 3 to 12 months of expenses for your emergency fund. (When setting your fund savings goal, it is important to know, that sadly a typical unemployment lasts 9 months).
Even if you have debt to pay off, still start to build an emergency fund alongside it. That way, if an emergency does come along you have a better chance of managing it without getting into further debt.
Whatever your ultimate savings goal is, it is vital to just make a start, as having even a month’s worth of savings is better than nothing. Can you spare $20 a month? Than start with that. It doesn’t matter where you start, just make a start. Every little bit you save is a little bit more peace of mind.
Step 3. Get & stay debt free
Stress free financial living rule number three is to get and stay debt free.
The ‘debt snowball’ method is a good method you can use to get out of debt. You simply list your debts in order from smallest to largest balance. As well as maintaining the minimum balance on all your credit cards, direct an additional overpayment to the smallest balance. The larger the overpayment you can afford the better but even if it’s a just $30 extra a month it is something. Once you have finished paying off the smallest balance use the funds you were using to pay off the balance and direct it to the next smallest balance. Continue this process, with your extra amount ‘snowballing’ as you go along, until you pay off all your debts.
Once you have paid off your credit card, look at paying off other personal loans and ultimately your mortgage.
It may take several years but keep focused on eliminating one debt at a time and your perseverance will be worth it.
Step 4. Save to spend
Stress free financial living rule four is to save to spend on planned purchases rather than ‘buy now pay later’.
Imagine what your life would be like if you could pay cash for purchases. For example, a wedding, holidays or a replacement car.
With electronic banking, it is easier than ever before to set up multiple saving accounts to achieve your various savings goals.
Step 5. Invest for financial freedom
The ultimate stress free aim is to achieve financial freedom.
Financial freedom means that the income from your investments and assets are able to meet your financial needs. Achieving financial freedom means you don’t have to rely on your job to support yourself. You are free to do what you really want in life without financial constraint.
People have achieved financial freedom through two methods. By reducing their expenditure and simplifying their lifestyle and by creating income producing investments.
Norman Vincent Peale said, “Shoot for the moon. Even if you miss, you’ll land among the stars.” Applying this thinking to your finances, you could say ‘shoot for early financial freedom and if you miss you’ll land upon a comfortable retirement.”
Learn about basic Saving & Investing
One thing you must not do is be intimated by investing. It is something that can be learned. A good place to start is by reading the following books to gain a good basic understanding:
- Rich Dad Poor Dad – Robert Kiyosaki
- Secrets of the Millionaire Mind – T Harv Eker
- Money – Master the Game – Tony Robbins
In closing, I’d like to say that I wish I had known these five money management steps a lot earlier but I’ve learned it’s never too late to get your financial house in order.
Money is not everything but it is a necessity. I encourage you to step by step work towards more financial stability, peace of mind and ultimately financial freedom.