Managing your Money

Chapter 1 Needs and Wants

The idea of management implies that you have a goal or a set of goals in mind. Therefore, the first and most important part of money management is to clarify your own goals, commit to them and write them down. Why do you need money? What will you use your money for? How much do you need? For what? For When? Be specific and realistic. Different people have different needs and different wants. Prioritize your needs. Some wants and needs will have a higher priority than others. Make your priorities clear and allocate sufficient funds to each according to the importance you give it. Avoid inconsistencies. IE: If retirement is more important to you than owning a house, then more savings should be diverted to retirement than to housing. And, if funds are scarce, then you should fund your retirement savings before funding your housing savings.

Unfortunately, there will be times when you simply cannot fund all of your wants and needs. Having a priority list will help you decide where to allocate your limited resources.

Your priority list should be time-sensitive. For instance, college tuition may come before retirement in chronological order. So, you have to have completely funded the tuition before you have completely funded the retirement.

In this case, every month in order to fully fund their wants and needs, they must save 2,800 US$. If the money is not there, they will have to sacrifice their wants and needs or delay them.

This scenario assumes a number of things.

The House cost is the amount of money you need to accumulate before actually buying a house in cash or getting a mortgage, in which case, the mortgage would become an expense rather than a savings item.

The Car costs include repairs, insurance, and a new 20,000 US$ car purchase every 7 years until age 60.

Retirement savings are in addition to government pension programs and will, hopefully, yield 400,000 US$ after 20 years. This is assuming that half of the money is placed in stocks at a 10% annual rate of return and that the other half is in CD's at a 3% rate.

A few things will skew the results of this exercise.

Firstly, the amount of savings required to reach your goal may be overstated because you may switch from renting to a mortgage faster than expected. This would seriously reduce the amount of money you need to save for your house. You will still need to repair it and to pay property taxes, but that shouldn't come to the total value of the house.

The time frame doesn't take into consideration compounding interest from your savings unless you figure it out separately as with the Retirement savings above. This can be a significant boost to your total savings.

Finally, and most importantly, the numbers here are AVERAGES over the entire career of the subject. That's why the numbers look so daunting. Most people get raises over time, which, in theory, increase the amount they can save. Therefore, the more distant goals can be safely underfunded for longer periods of time than the more immediate goals. If you have a 30,000 US$/year job and get 3% raises every year for 20 years, you would finish with 54,183 US$/year. Then, assuming you hit a plateau for the next 9 years, you would average 44,931 US$/year over the span of your career.

So, if you can't imagine ever saving 2,800 US$ per month, don't worry too much. The other factors mentioned above should lend a helping hand. However, those figures can be used as inspiration to let you achieve your goals faster.

We rarely hear of people who complain because they became rich too early in life and found they could safely retire much earlier than they had first planned.

Writing down all of your goals in this manner will naturally lead to the next item in money management:

 

Chapter 2 The Basic Budget

Budgets don't have to be painful experiences. Now that you have a set of realistic goals for all of the money you will be getting and that you have an idea of how much money you will be obtaining, you can start to budget effectively.

For the first month, just count the ins and outs. You can use a normal notepad for this.

Example: (All amounts in US$)

August 2005 Income Expenses Rent Insurances Food Entertainment Clothes/Diapers Phone Train Credit Card Gasoline Gas Electricity Total Expenses Leftover cash from July Leftover cash from August

4,095 1,000 300 200 100 100 98 50 43 40 34 20 165 2,150 820 520

In August, they had 820 US$ in addition to 4,095 US$ from their income for a total of 4,915 US$.

They spent 2,150 US$ and had 520 US$ left at the end of the month. They therefore saved 2,245 US$ in August.

Counting the leftover cash in your wallet allows for a precise expenses count even if you forgot to actually count an item or two. The forgotten cash will show up as Mysteriously Vanishing Money (MVM).

Savings were distributed according to the priorities set out in Chapter 1 and were as follows:

House Tuition Retirement Car Travel

700 545 500 400 100

In case of unforseeable emergencies when expenses exceed income, they use their travel money first, then the car money and then the retirement money to pull them out of the scrape. This is not recommendable. In fact, an extra savings account for emergencies should ideally be created and hold about 6 months worth of income to deal with the ups and downs of life.

Unfortunately, that is simply not possible for the family in the example above. They must therefore prioritize their needs and perhaps create a tighter budget.

Continue to Chapters 3-7
Reducing Expenses - Dealing With Debt - Credit Cards - Savings vs Investing

Personal Finance Solutions

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