Covid-19 has taught us many things, one of the most important being money management. With 114 million people losing their jobs globally in 2020 alone, global economies struggling to survive, and markets crashing by thousands of points, the spotlight fell on personal finances and it continues to be that way.
Many people want to avoid thinking about money, considering it is a stressful subject. However, awareness is the key. Managing one’s finances is not difficult. A little bit of smart work is all it needs.
If you are a beginner in this field, Koshex can help you go a long way in terms of money management. This unique behavior-based app studies your financial goals, horizons, and behavior, and curates suitable investment options for you. Sign Up with Koshex today!
What is Money Management?
Before getting into the nuances of it, it is important to understand what money management is. To put it simply, money management is how you manage your finances.
Money management is not about creating wealth. It is about smartly protecting and using your money. Along with saving and investing, managing your money involves tracking and reviewing your expenses periodically, thus controlling your finances.
5 Easy-to-Follow Personal Finance Management Tips
Whether you are a student or have just started your professional career or an experienced financial professional, here are some tips that can enhance your money management skills and help you make prudent financial decisions.
#1. Create a budget at the beginning of the month
The first and probably the most important step of money management is creating a budget for your monthly expenses. A budget is a rough estimation of how much you need to spend from your monthly income based on your lifestyle. An idea about your spending habits can help you have more control over your finances.
The budget that you create has to be detailed. The secret to successful budgeting is setting realistic goals to enable you to stick to them. Having a clear idea of your earnings, savings, and spending habits can relieve you from the stress of facing financial issues towards the end of the month.
So how can you create a realistic budget? It is pretty simple.
Use an Excel sheet and note down your total monthly income. Next, list all your monthly expenses. Typically, this would consist of your monthly bills (such as wifi, electricity bills, etc.), rent, EMIs, groceries, fuel costs, living expenses, etc. Don’t forget to add an extra amount as ‘miscellaneous expenses’ to cover additional costs you may incur towards entertainment or dining out.
This list may not be the same every month. For example, you may have to pay your health insurance premium or income tax in certain months. Hence, it is important to conduct this exercise diligently every month.
The importance of saving and investing cannot be understated. It is important to make sure you’re not spending all your income on monthly expenses. You should always set aside some amount as savings.
#2. Track your expenses
Creating the budget is only the beginning. The main task is to stick to it, which makes it essential to track your spending. Typically, people tend to overspend in the first few days of the month, when the salary is credited to their accounts. Being mindful can help you avoid overspending and stay on track with your budget.
The best way to go about this is to record your expenses. Several apps are available in the market for you to do this. You can also segregate your expenses into different categories to understand where you spend more.
Most importantly, save first, and spend later. Make saving and investing your priority, not spending.
#3. Set financial goals and invest
Setting your financial goals is a good way to stay within budget and avoid overspending. Think of what you want to achieve in the short and long term. Your short-term goals can be buying a car, going on a holiday, or purchasing a certain item for yourself.
Long-term goals, however, can be retirement planning, purchasing a house, educating your children, and others. You should also assign timelines to these goals to have clarity. Accumulating money for these goals will be your motivation for saving and investing.
Setting financial goals and saving is not enough, though. You have to make your money grow. And this is where investing helps. However, where you should invest depends solely on your risk-taking capability.
You can use an app such as Koshex to find the ideal investment opportunities and access investment products such as mutual funds, smart deposits, digital gold, fixed deposits, and more.
#4. Create an emergency fund
This cannot be emphasized enough. Almost everyone during Covid-19 felt the importance of an emergency fund. Emergencies come unannounced and have the potential to hit you hard.
Whether it is a medical emergency, a house repair, or a malfunctioning essential gadget, having an emergency fund is one of the best ways to stay prepared and reduce financial stress.
The key to building an emergency fund is putting aside a certain amount of money every month. This can be any amount based on your income. You can also opt for recurring deposits or mutual fund SIPs (Systematic Investment Plans) to assist you.
A certain amount will be automatically deducted from your bank account every month and multiplied based on the chosen investment option.
Finally, do not forget to take life and health insurance. They are crucial to being prepared for emergencies and help you save a lot of money during unforeseen events.
#5. Manage your debt
Debt is unavoidable these days. However, you can manage it prudently to avoid the debt trap. While budgeting, put aside some money in your checking account to repay your loan EMIs, if any.
Most importantly, always pay your credit card bill in full every month and avoid carrying it forward to the next month. Credit cards have one of the highest interest rates, and having outstanding dues can lead you straight to a debt trap.
Managing Personal Finances: The Final Word
Money management is not difficult. It is a habit that can be inculcated over the years. While it is better to start young, it is never too late to make a new beginning.
A well-known method many people talk about is the 50-30-20 rule, where you spend 50% of your income on needs, 30% on wants, and save the rest 20%. However, this is not the be-all and end-all of money management.
As you age, your needs and wants may not grow as much as your desire for savings. You may understand the repercussions of retirement after attaining a certain kind of maturity, and that is when you may want to save more for those days when you will not be earning.
The tips discussed in this article are the first steps towards prudent money management and attaining financial freedom. Every person’s goals are different. For some, it may be purchasing a house, while for others, it may be retiring early. Hence, you can always improvise on what has been discussed and make these steps work for you.
Using an app such as Koshex can help you with various aspects discussed in this article, including building an investment portfolio. Koshex studies your choices and behavior and provides customized investment solutions matching your risk profile and goals.
It uses state-of-the-art technology to curate product mixes for you scientifically. Sign Up with Koshex to explore the app today.
Why is money management important?
Having effective money management skills plays a vital role in your financial well-being. Understanding the art of budgeting, wise spending, and saving empowers you to achieve financial objectives, break free from debt, and grow your savings.
What is the smartest way to budget money?
The steps to smart money management are as follows:
- Creating a budget at the beginning of the month
- Tracking your expenses
- Setting financial goals and investing
- Creating an emergency fund
- Managing your debt properly