You dread those cash-strapped days between your balance hitting $0 and your next paycheck hitting your bank account. You’re also in constant fear of an unexpected expense that’ll put you in the hole.
If that sounds like you, you’re not alone. Many people are stressed about money and barely making ends meet. In fact, Nearly 60 percent of Americans don’t have enough cash on hand to cover a $500 expense, according to a 2017 Bankrate survey.
However, you’ve probably noticed other people doing well. Maybe you’ve even wondered what their secret to making the most of their money is.
The truth is, how to manage your money effectively isn’t a secret formula — it all comes down to three core principles and disciplined behavior. Here’s a crash course in overhauling your money management skills to set yourself up for financial success.
1. Live within your means
If you consistently spend more than or about equal to what you make, you’re among the majority of Americans, according to the most recent National Financial Capability Study (NFCS) released by the FINRA Investor Education Foundation.
But the first principle of healthy money management is to live within your means, which means spending less than your take-home pay. Start small with these steps.
Track your cash flow
First, you’ll need to know what your cash flow (the money coming into and going out of your accounts) looks like.
Start with your income. If you’re salaried or have predictable paychecks, then you already have a good idea of your usual take-home pay. For paychecks that fluctuate because of varied hours, tips, or commissions, find the average income you earn.
Next, you’ll need to start tracking where you money is going. Start by reviewing statements from your bank account, credit cards, and receipts. Then, classify purchases as the following:
- Fixed living expenses: These expenses are the same each month, such as rent, insurance premiums, or a car loan payment.
- Necessary costs: These expenses can fluctuate from month to month, such as utilities, gas, or a grocery budget.
- Other categories of spending: Common non-necessary spending includes personal care, entertainment purchases, dining out, and so on.
Pay every bill on time
Once you know how much money is coming in, where it’s going, and in what amounts, create an accurate list of bills and financial obligations you need to pay each month. That way, you can make sure you pay each one in full and on time.
If you don’t have enough money to pay your bills, triage your money. Prioritize costs that are urgent or important to keeping you employed and everyone in your family healthy.
Also, talk to your lender or service provider before missing a payment. It might be willing to extend your due date, suspend service for a month, or otherwise work with you.
If you have enough money to cover your bills each month, you can take steps to make payments less of a hassle. Set up automatic transfers to simplify your finances and make sure you’re always paying on time. Turn on text or email alerts to notify you of upcoming bills.
Ultimately, making on-time payments is the best way to build credit. Paying on time also will protect you from budget-busting late fees, overdraft fees, or penalty APRs. And perhaps most importantly, paying your bills on time will significantly lessen your overall financial stress.
Set up a budget
A budget is an incredible tool to help you decide the best way to use your money — and make sure it ends up where it needs to go.
Explore some different budgeting systems to make the most of your dollars. Here are some ideas to get you started.
The cash-only or envelope system
Take out the money you’ve budgeted for each category and keep the cash in separate envelopes. When the cash is gone from an envelope, you can’t spend any money until next month.
Why it works: This system can make your dollars more real to you and naturally decrease your impulse spending.
Assign a job to each dollar that comes into your account to cover a specific cost or accomplish a financial goal. You can use it for a bill, add it to a budget category, or transfer it to a savings fund.
Why it works: This system can help you make the most of limited funds and maximize each dollar.
The 50-30-20 budget
With this budget, 50 percent of your take-home pay is spent on needs, 30 percent on wants, and 20 percent on saving or paying off debt.
Why it works: This system can be smart for people who want a flexible spending plan that’ll get them closer to their financial goals.
Technology can help automate a lot of the budgeting work. You can opt for a simple spreadsheet or use a free budgeting app like Mint. Subscription-based apps like You Need a Budget and Every Dollar also can help you save more than you spend on them.
Why it works: In addition to setting up your budget, these apps can help you make a habit of easily checking your spending and ensuring you’re on track. You can even see how to make adjustments to your spending to come up with a little extra money each month for a specific goal.
Grow your disposable income
As you play around with your budget, you’ll become more aware of how your spending and choices affect your overall financial situation.
Once you understand your costs and make on-time payments, you’ll be ready to try to increase your disposable income. Your disposable income is the amount that’s left over each month after bills are paid — funds you can decide how to spend.
Here’s how to get started:
- Start small. Finding even $15 extra dollars in your budget can be encouraging if you’re used to going in the red each month.
- Identify some money sucks in your budget. You’re likely sinking cash into a few things you don’t use, such as that neglected membership to a high-end gym. Cut some of these costs to painlessly increase your disposable income.
- Don’t overlook big expenses and bills. If your car payment is too high, for example, it might be time to sell the car and swap it for a cheaper, used model.
Then, look for immediate opportunities to earn extra money, such as picking up an extra shift at work, volunteering for overtime, or starting a side hustle. Also think about how you can work toward a raise or better career opportunities in the next six months to a year.
Build a basic emergency fund
Having a small savings buffer in place is crucial for protecting yourself against emergency setbacks, such as necessary car repairs or medical expenses. Try to build an emergency fund of $1,000 or a month’s worth of expenses — whichever is greater.
Having an emergency fund will decrease your panic when an urgent expense arises. It also will prevent costly money mistakes like overdrafting your account and getting hit with a fee or feeling cornered into credit card debt you can’t immediately repay.
2. Create a strategy for covering debt and credit costs
A huge part of managing money is knowing when borrowing makes sense and when you can’t afford it.
Being in debt means paying a major cost: interest. It also means a big portion of your budget is eaten up by payments you can’t cancel or change. That’s why paying off and avoiding debt is a core principle for how to manage your money. Here’s how you can get started.
Detail your debt, from balance to terms
I once interviewed a source about her debt payments. She had a personal loan, but the figures she cited didn’t add up. She double-checked, and, sure enough, her loan term was actually seven years, not the three she stated.
Americans tend to underestimate how much they owe on their unsecured debt, according to a 2015 study from the New York Federal Reserve Bank. Consumers reported having 40 percent less credit card debt than they actually had and 25 percent less student debt.
Even if you have a general idea of how much you owe, it’s important to get the hard facts on your debt. You won’t be able to make an informed choice when managing your debt if you don’t know how much you owe or how long you’ll be repaying it.
You can find out all this information by:
- Logging in to your account online
- Calling your lender or credit issuer
- Reviewing your credit report to get a detailed picture of your various loans, credit cards, or lines of credit
Once you have all this information, create a list of each individual debt, including the following details:
- The lender that holds the debt and what kind of debt it is
- The current balance for each debt
- The monthly minimum payment and the date it’s due
- The remaining length of the loan
- The APR or interest rate
Pay extra on your debt
There are several benefits to paying more than the minimum on your debt. You’ll pay off each balance faster, which will lower the total interest you pay on the debt. Plus, whenever you pay off a debt in full, you’ll eliminate a monthly payment and increase your cash flow.
If you’ve freed up some money in your budget with the above steps and have your bank account buffer in place, consider using those discretionary funds to make extra payments on your debt beyond the monthly minimum.
If you’re looking for the right debt repayment strategy for you, read up on the debt snowball and debt avalanche methods. They can be effective for prioritizing extra payments and building momentum.
You also can use our debt prepayment calculator to see how much money and time your extra payments can save you.
Check and understand your credit
Part of managing your debt is managing your credit.
Your credit is the history of the money you’ve borrowed and your behavior with regard to repaying this debt. It’s measured and represented by your credit score, which plays a huge role in the kinds of credit and loans you qualify for, including what interest rates you’re charged.
Take some time to request your free credit reports and check your credit score. There are many free tools that make it easy, including:
The better your credit, the more likely you’ll be able to leverage it to get the best deals and interest rates on loans. In other words, good credit gives you more financial options.
Learn about credit management, including what you need to do to build good credit. The image below outlines which factors affect your FICO score, for example, which is the credit score most commonly used by lenders.
Understanding how your credit score is calculated also will help you find ways to give it a boost. For example, it’s important to always make on-time debt payments and limit borrowing.
Get uncomfortable about taking on debt
Lastly, adjust your attitude about debt. Become less comfortable about swiping your credit card, financing a car, or relying on a home line of credit to fund a home improvement project.
Remember: Paying with credit will add to your costs and make your purchases more expensive.
For example, if you take a vacation, charge it to your credit card with a 20.00% APR, and then repay it over the next year, you’ll end of paying a fifth more than someone who paid in cash.
Get in the mindset of planning and saving for small purchases instead of charging them to credit. And become familiar with the best practices of spending with a credit card, such as paying off your balance in full each month.
You’ll keep more of your money, widen the margins in your budget, and increase your opportunities to invest your funds and earn interest — rather than pay it.
3. Work toward a secure financial future
Your plan to manage money should cover the basics, yes. But the real magic of working on how to manage your money will happen when you make your money work for you.
By building a solid foundation and planning ahead, you’ll create a path toward a higher net worth and achieve important life goals. Here are the steps that’ll help you build lasting financial security.
Build out three to six months’ worth of emergency savings
With a small emergency fund in place, you’re prepared to roll with the punches. But what about the financial crises that are knock-down, drag-out struggles? A major medical procedure or long-term unemployment can force you to rely heavily on your savings for a while.
To weather these storms, you need to have more money saved. In most cases, an emergency fund of three to six months will keep you on your feet — and out of debt — as you find a way forward.
Make sure you’re adequately insured
Your insurance policies are another important piece of your financial safety net. When the worst happens — from a car accident to a medical emergency — insurance can give you invaluable peace of mind.
Take some time to review your insurance policies to make sure you have enough coverage in these areas:
- Health insurance
- Car insurance (if you own a car)
- Homeowners insurance or renters insurance
- Life insurance
If you’re missing any of these forms of insurance, you should look into getting them. You also might want to supplement them with disability insurance, dental insurance, or even pet insurance.
Start saving for retirement
Another important financial goal is to start socking money away for retirement.
It might seem like retirement is far away and you’ll have plenty of time to save. But thanks to the power of compounding interest and returns, money you save now will be worth much more than money you save later.
Try these baby steps to save for retirement:
- Open a retirement account. If your employer offers a retirement account, that could be a good place to start. Otherwise, you can open an individual retirement account (IRA) on your own.
- Automate retirement savings transfers. Set up an automatic savings transfer to your retirement account each month or every paycheck. Your employer might be able to automatically deposit a portion of your check in a retirement account, or you can set up automatic transfers from your checking account.
- Claim the maximum employer match. Many companies will match workers’ contributions to retirement accounts. If you’re lucky enough to have this benefit, save enough to get the max matched amount — it’s basically free money for retirement.
- Start getting educated on retirement. Saving for retirement is a long process, one that’s often tied up in the complexities of tax codes and investing. Fortunately, that gives you time to research answers to your retirement questions and learn how to maximize your savings.
As you work to manage money better, the benefits will extend far beyond your bank account.
By saving up, you’ll have more resources at your disposal — which means more financial freedom and less money stress.
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