What is Money Management and Why it is Important

You must have seen a lot of articles on the Internet with titles like “What are the best money management tips,” “How can I manage money better” and felt tempted to read those articles. Ever wondered what money management really is? Here in this article, I will break it down to you.

What is money management

Money offers you options. Having money in your wallet means having the option to do certain things. What these things are going to be depends partly on you and partly on how much money you have. If you have $100 in your wallet, you can buy a pair of jeans but cannot afford a cruise vacation.

Money management means handling money carefully to increase its inflow and stop its outflow. Going on a cruise vacation may seem impossible at this moment, but if you manage money effectively, it won’t remain a distant dream for long. When done right, money management takes you one step closer to fulfilling your goals.

Money management must do’s

Like every other thing, there’s a list of must-dos everyone who takes money management seriously needs to follow. There’s also a list of “don’ts” but we can skip that list as the “dos” list is pretty expansive. Let’s get started with the list.

Diversify your income sources

Would you put all your eggs in one basket? I guess not. Then why are you stuck with just one source of income? It’s best to diversify your sources of earnings. If you are doing a 9 to 5 job, start investing in the stock market. Don’t go for future and options right away. Invest in equity. With time you will acquire enough experience to be a day trader and then your earning will increase tenfold.

Ever invested in real estate? It’s easier than you think and the market is not as cryptic as some other industries are. If you have inherited property or land, consider renting it out for additional income. If you credit score is above 700, take loan at affordable premium rate and start an online business. Keeping track of everything may be difficult, so I recommend personal finance tools to manage your finances.

The safety-first approach

While income diversification is strongly recommended, going overboard is not. Remember that you are not a gambler, you are prudent and sensible. That’s why you need to choose the safety-first approach. Diversify your earning, invest in new fields, own assets for the future but always have the safety net ready just in case.

What does a safety net means in a financial context? It means having an emergency fund which you can use in time of a crisis. An investment may not bring the result you expect or it might backfire and put you in a spot where you owe massive debt to someone or some large corporation. If you plan your workarounds in advance, you can overcome the hardship. A workable plan is one that is based on the safety-first approach. The biggest benefit of this approach is even if you fall back, you can again gain strength and keep going ahead.

Redefine yourself

An important part of money management and personal finance in general is understanding yourself. What kind of person you are and what motivates you are both important when it comes to money matters. For managing money more effectively, you need to reevaluate your needs, wants and priorities.

Love shopping? Spend a huge deal of money every month shopping for clothes and accessories? If yes then maybe it’s time to cut down on your monthly shopping budget. But before doing that, ask yourself how you view shopping. Are you an impulse shopper? If yes then it’s time to change yourself. Grocery is a priority for all of us. Give it more importance than shopping.

The more you understand yourself, the easier it becomes for you to manage money.

Don’t trust banks blindly

This is an important advice and I want you to pay attention here. The cumulative debt in the United States is steadily on the rise. The debt has almost doubled over the last decade. If the debt crisis is not handled properly, it will create a mess and banks will expect you and million others like you to clean it up. In layman’s terms, if a bank ever goes out of business – a not-so-far-fetched possibility in 2019 – customers will see their account balance going down.

Yes reputation matters, but during the 2008 recession some major banks were forced to shut down their business. The safe way to survive a financial apocalypse caused due to mismanagement of funds by banks is to invest in multiple physical assets that you can sell off on a short notice.

Summing up

As discussed in the article, money management is understanding the nature of money, what relationship it has with you and foster that relationship. When you follow the tips shared here in this article, you nurture this relationship and become better at managing money.

Leave a Reply