5 tips for mastering money management

The phrase "money management" may conjure up visions of complex calculations, expansive spreadsheets, and MBA courses – but it doesn't have to. For most people, it boils down to a few simple steps that can help them to take better control of their finances today – and help increase the chances of meeting their financial goals for the future. If you've already started a plan, that's fantastic. If you haven't, now is a great time to start. This article can help by telling you about the following:

• Why money management is important

• How to evaluate your current financial situation

• Envision and set your financial goals

• Developing a budget for today and tomorrow

• Ways to build your savings

• How to establish or improve your credit

Why do you need a money management plan?

Most people need a plan to help ensure their near-term financial well-being and achieve their long-term financial objectives, including a secure retirement. Without a plan, it's easy to spend too much, save too little and accumulate debt. A money management plan provides structure and discipline to help you allocate funds, control expenses, save for emergencies, and invest for the future.

A well-thought-out plan can also make it easier to track financial progress, adjust financial strategies as needed, and ultimately achieve financial stability and confidence. Having a plan in place can help you gain a sense of financial empowerment and confidence, knowing that your finances are being actively reviewed and optimized.

Five key steps to better managing your money more effectively

The five key “to dos” for an effective money management plan are listed below. Depending on your level of financial experience and expertise, some of these steps – such as investing – may require consultation with a financial professional. But most can be completed on your own if you have a calculator and are willing to put in a little time.

1. Evaluate your current financial situation

The first step to managing money better involves taking an inventory of your finances. It's important to know where you stand today – in terms of income, spending, debts, savings, and investments – before you start planning for tomorrow. Here are some suggestions for how to do that:

• Gather your financial documents, including recent pay stubs, credit card statements, recurring bills and statements from bank or investment accounts.

• Calculate your current income using all income streams, including salary, freelance work, rental income, dividends, interest, etc.

• Calculate your current living expenses, including total expenses, seasonal spending patterns, and areas where adjustments might be made.

• Calculate your current debt obligations - including loans and credit card interest – and add them to your living expenses.

• Inventory your assets, including savings accounts, investment portfolios, real estate holdings, and valuable possessions.

Once you've completed these steps, you'll have answers to some of the most important money management questions: Does your current income cover your current expenses? If yes, will it also cover unforeseen expenses such as home or auto repairs? Is there money left over for savings? Conversely, are your expenses outpacing your income, and if so, by how much? What adjustments might be made to solve the problem? Finally, consider how well you're keeping up with the financial milestones for people your age. How do your savings, investments, or other assets compare with others your age, and do they put you in a decent position regarding retirement and other financial objectives? The answers will form the basis of your plan to manage money wisely.

2. Start setting future financial goals

Once you have a clear picture of your finances, the next step is to think about the future. What are your financial ambitions moving forward? Are you planning to buy a home, start your own business, or pay for a child's college education? Do you want to travel extensively at some point? When would you like to retire, and what type of lifestyle do you want during retirement? While nobody can predict the future or the twists and turns that lie ahead, it's important to have an idea of where you'd like to go before devising a plan to get there. Here are some tips:

• Determine your long-term goals – like home ownership, college tuition, retirement, and travel – and prioritize them.

• Establish a clear timeline and target amount for each goal. For example, how much money will you have to accumulate to meet the goal of buying your first house? And how long do you have to save for it?

• Consider whether your list of goals and aspirations is realistic, and if not, think about how to adjust it to better conform to your current and projected financial condition.

By making a list of specific goals – and assigning a dollar amount and timeline to each of them – you can start to create a plan to manage money better and help realize the future you want. This plan may include setting specific, measurable goals that align with each item on your list — or breaking the long-term goals into smaller milestones for easier tracking and management. However you choose to proceed, be sure to monitor your progress regularly and celebrate milestones along the way. And always remember to maintain discipline, patience, and consistent effort, even when confronting challenges.

3. Create a realistic budget for today – and tomorrow

Now that you have a clear picture of your current financial needs and future financial objectives, the next step is to create a budget that can help you meet both. Creating a personal budget plan that covers current expenses while allowing for savings toward future goals can provide financial stability and peace of mind. There are several different budgeting strategies that can help, but the 50/30/20 budgeting rule is among the simplest and most effective:

• Calculate your monthly after-tax income.

• Calculate your essential monthly expenses, which should comprise approximately 50% of your after-tax income. If they exceed 50%, try to make some adjustments to your spending habits.

• Set aside 30% of your after-tax income for discretionary expenses such as dining out, streaming services, and vacations. If 30% doesn't cover them, consider what you might cut out.

• If possible, allocate at least 20% of your income towards savings and debt repayment. This includes emergency funds, retirement contributions, loan repayments, and saving for long-term goals such as your children’s college tuition or buying a house.

• Keep records to help you stay within the allotted percentages.

• Regularly review your budget and adjust it as necessary, especially if there is a significant change in your income or circumstances.

Remember, the 50/30/20 plan is a guideline, and you can modify it to suit your specific needs or adopt another strategy more suitable for your situation. The key is to establish a budget that helps maintain your current lifestyle and allows for savings toward a secure future.

4. Build your savings

Among the key components of any money management plan is establishing savings goals and then working to meet them. While not everyone has extra money to allocate for future use, most financial professionals would urge you to start saving as soon as possible, even if you can only afford to set aside a small fraction of your income. Whether you’re saving for short-term goals such as an emergency fund, big purchases such as buying a home, or long-term goals such as retirement, there are several effective savings vehicles to consider. Here are some of the most popular options to help you get started:

• Savings Accounts: Begin by setting up a dedicated savings account specifically for your emergency fund and other short-term goals. These accounts are low-risk and easily accessible, allowing you to deposit and withdraw money as needed.

• Investments: For longer-term goals like a home purchase or retirement, consider investing in stocks, bonds, mutual funds, or exchange-traded funds (ETFs). These investments can potentially provide higher returns but also carry more risk, so consider speaking with a financial professional before you start.

• Retirement Accounts: For retirement, make use of tax-advantaged accounts such as 401(k)s through work and Individual Retirement Accounts (IRAs) and Roth IRAs that you can open yourself. These accounts offer benefits like tax deductions, income tax-free growth, and the potential for income tax-free withdrawals, depending on the type of account.

• Cash Value Life Insurance: Some types of life insurance, such as whole life or universal life insurance, have a cash value component that builds over time¹. This cash value can be used as a savings vehicle and can provide additional financial confidence.

Remember, each person's financial circumstances are unique, so it's important to assess your goals, risk tolerance, and time horizon when choosing a savings vehicle. You may want to think about consulting a financial professional, who can provide personalized guidance to help you make informed decisions and optimize your strategy.

5. Establish your credit or boost your score

Establishing credit is crucial for achieving financial stability and unlocking opportunities both now and in the future. An established credit history and a decent credit score demonstrate financial responsibility and can make it easier to qualify for loans, mortgages, or credit cards and help you secure more favorable interest rates. A good credit score may even help lower car and other insurance premiums and increase your chances of securing employment. Here are a few of the most common ways to build credit or improve your credit score:

• Start with a secured credit card or become an authorized user to help establish credit

• Make sure you are paying bills on time, without exception

• Keep your credit use as far below your credit limit as possible

• Avoid making minimum payments on your credit cards – always try to pay more 

• Maintain a diverse mix of credit accounts

• Check credit reports for accuracy and address any errors promptly

Along with the other steps of a money management plan, developing good habits and managing credit diligently can pave the way toward a solid financial foundation and a secure financial future. Just remember, it's never too soon to start, and there's no need to feel overwhelmed – it's perfectly alright to start small.

Guardian can help

You can probably handle the basics of money management planning on your own with just a calculator and a little spare time. But if you want professional advice on your financial wellness journey, we can help. A Guardian Financial Professional can help you to better understand the ins and outs and help ensure that you make the right financial decisions. To find someone near you, start by filling in your zip code below.