Roadmap to Managing Your Finances

If you’re not in control of your money, your money is likely controlling your life, and to a lesser degree, you. Your money can only really work for you if you understand what it should be doing in your life and how careful control of your finances can create a more stress-free lifestyle.

There are essentially four important parts of your financial journey that often overlap but are equally important. First, you’ll work on making money. Then you’ll focus on saving money. Once enough money is saved, your focus shifts to building wealth, and finally you’ll want to protect your assets for the future or perhaps the next generation. That’s why you need to be in control of your funds now. 

Why budgeting is important

If you don’t know where you’re spending your money, you’re likely wasting it. A budget is simply a spending plan, and with a good plan you can tuck away some savings for the future and emergencies and you’re also able to pay down any debts you might have.

A budget doesn’t have to be about limiting yourself or making yourself feel deprived. A good budget is created as a thoughtful plan for spending your money. You set your own limits and then you monitor your spending to stay within your own parameters. Since you’re creating the budget, you can create one that reflects your own priorities and interests.

Tip: When creating a budget be sure to give yourself some “fun money” to enjoy every month. If you have funds you can spend on an impulse buy or a special something, you’ll never feel deprived. 

Related: How to Pay Off Debt While Saving Money

What to know about debt and how it can affect you

Debt is a budget killer in many aspects. Some debt is normal and is even considered healthy, like a mortgage. Other debts, like credit cards have high-interest rates and require hefty minimum payments. If you have run up some debt with credit cards or other loans, paying those balances off quickly should be a priority in your budget. 

So long as you’re carrying debt, you can’t make your money work well for you and your credit score will suffer as well, creating potential issues down the road if you’re considering buying a new car or home. A heavy load of debt skews your debt-to-income ratio, making it hard to borrow money later when you really need it. 

Tip: If you’re trying to pay down debt, pay the minimum payments on all but one bill. Pay as much as you can each month on that bill until you’ve paid the debt completely and then roll that minimum payment into your payment and apply it to the next debt in line. 

Relatated: 5 Things You Need in Your Family Budget

Saving money

There are many reasons to save money, but they don’t all need to happen at the same time. 

  • Your emergency fund is your priority. Get $1,000-$2,000 in savings so that when you have car trouble or need to call a plumber you aren’t dipping back into credit cards to pay for the problem. This fund should be easily accessed for immediate use, perhaps in savings account hooked up through your regular banking. 
  • Long-term emergency savings is next. A healthy financial plan requires 3-6 months’ worth of bills in savings. That way you never have to worry about losing a job or a larger, more expensive emergency. This fund can be less accessible since the hope is you never need to use it. Consider a certificate of savings or a brokerage account through your bank. 
  • Retirement savings is critical. The sooner you start saving for your retirement, the more comfortable your retirement will be. Start by investing as much as your company matches in your 401k. Then, as you pay down debt and build up your other savings, keep moving money into your savings accounts.
  • Long-term goals need attention, too. If you are planning to buy a home, send kids to college or perhaps travel the world by cruise ship, you need to have some money stashed away to make that possible. Set up a monthly allotment to savings to afford your dreams in the future. 

Tip: Consider opening a checking or savings account with an online bank that doesn’t charge fees for multiple accounts. Then you can divert your savings into different accounts for different purposes. 

Live frugally

Enjoy watching your savings grow and put your energy into saving more rather than spending more as your income and your net worth increase. The temptation may be strong to keep up with those around you who are taking on large debts to afford new toys or shiny things. 

Creating a frugal lifestyle means living comfortably on what you’re making, saving as much as possible, and spending money mostly on what you need, not on every passing fancy. The reward for a frugal lifestyle is more spending power in your retirement years and perhaps beyond.

Tip: One of the best steps for living frugally is to buy one house and pay it off as quickly as possible rather than planning to move into a larger house down the road and then downsize again. Moving is extremely expensive. Buy once and buy wisely. 

Plan for the future

As you watch your savings grow, it’s time to think about how you want to make your money work for you. This is where investments come in. If you can take advantage of a 401K through your employer, that is a great spot to start investing. Keep saving there until you’ve maxed out your investment every year.

Then you can transfer your savings attention to other investments. You can continue saving for retirement through a Roth or traditional IRA. You can take advantage of specialized investment plans for college savings that you can contribute annually. You can also invest in other mutual funds, real estate, and other areas as you work to preserve your funds and encourage them to grow.

Tip: The stock market is a great place to grow your money for your future but anticipate volatility. While most investments do earn money over time, there can be substantial dips and changes in the short term. Invest money for the longer term in the stock market and create a balanced portfolio to help manage the innate risk.