Generally speaking, money management refers to the processes of budgeting, saving, investing, spending, or otherwise overseeing the capital usage of an individual or group. But we're all wired differently, and therefore mastering your finances looks different for everyone. Here's how to create a money management plan that has structure and meaning to your unique needs and goals.
Money management covers a broad domain of knowledge including everything relating to handling money wisely. Whether it’s budgeting, saving or investing in your personal assets. To embrace money management means to learn financial practices that help you accumulate wealth and security, while understanding the key to preserving that wealth.
Implementing the management of your money takes your unique needs, goals, and risks into consideration while focusing on your financial decision making and your previous habits that could stand in the way of your success. Here’s a look at the basics of money management and why it's important to start implementing these practices into your financial strategy.
The Basics of Money Management
Not understanding the foundation of money can create some issues for you down the road. Without a firm, educated grasp of financial matters, you’ll likely end up like the majority of Americans; locked into years of debt, paying high fees, and unsure where all of your money is going.
Money management can help people accumulate wealth instead of potentially spending all of their money. When you accumulate wealth, you will be able to increase your capital, create security for your family, make positive investments, better your standard of living, and develop a cushion in the form of assets and savings. Overall, money management increases your lifestyle, providing security and greater opportunity for you and your family. Take a look at a couple steps below to see how you can begin to implement money management into your life.
- Create Goals to Manage Your Money
The bottom line in money management is that you need to know where you’re headed. Without a clear destination, you’re more than likely going to keep going around in circles. That’s exactly what it’s like to be dealing with money without goals. However, if you establish your financial goals, you have a roadmap of where you're at and where you want to end up financially. You’ll be prepared to intentionally use or save every dollar that comes your way.
By setting your goals, you’ll also be able to set some smaller goals that act as steps along the way. These small goals are basically milestones that help you to progress further down the path to your financial destination. Your goals will give you clarity and vision, helping you make the best decisions for reaching them.
- Develop an Investment Strategy
Having a long-term investment strategy is often the key to strong and effective money management and wealth accumulation. When you create a long-term strategy, you’re more likely to keep your eyes on the prize and not be swayed by the many things that come your way.
An investment strategy helps people stay focused, moving towards their small milestones instead of veering off in every which way. They are better able to ignore the stepping stones that others are putting in their path in order to keep on heading in the right direction towards their own goals.
- Money Management & Tax Efficiency
Understanding your taxes is a big part of money management. While everyone knows that they pay taxes, they’re not really aware of how much they pay. They certainly don’t know about unnecessary taxes and how they can actually hinder the accumulation of wealth. When you are managing your money, you aren’t thinking of your income as everything you make. Instead, you know that your income is really whatever you make after taxes, enabling you to better allocate your finances.
In regards to investments, you will want to consider your account location, essentially allocating your money based on their tax status. You will then do the same for your various investments, allocating them in the same manner. This will give you a better understanding of your overall wealth, your options for wealth distribution, and will help you accumulate wealth faster.
- Portfolio Risk Management
In the financial world, risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Poor management of risk is one of the main causes of investment underperformance. You need to be proactive when it comes to risk management, understanding the risk-return relationship and acting on it.
How much volatility an investor should accept depends entirely on the individual investor's tolerance for risk, or in the case of an investment professional, how much tolerance their investment objectives allow.
When you have a seamless money management plan, you will understand the market risks and the likelihood of negative returns. You will be cognizant of the fact that holding your portfolio longer means more negative returns, yet also means a greater probability of a positive annual return.
From managing different aspects of your personal finances, to developing a coherent plan that maximizes financial growth while minimizing risk, money management is not to be taken lightly.
You can improve your money management skills by regularly evaluating your current money management plan and making necessary changes that make sense for you. When you create a roadmap of where you want to go, there will be changes along the way. At Agemy Financial Strategies, our team of financial advisors are here to help you through those changes and to help you understand the ins and outs of money management.