This year has been a wake-up call for more than just personal health or self-care, but also there is a higher need to focus on our basic money management skills.
With so many job losses and economic uncertainties, you should take a hard look at managing your money and maybe even reassess the idea of financial security.
Most of us were caught off guard this year when COVID 19 started and work places had to be closed for over four months. And, the economy has been the same since then.
This is why I decided to write this post with the goal of helping you who is reading this to prepare for moments like this and know how to manage money and gain a better understanding of the basic money management skills you can use and survive, under any circumstances.
Now is an excellent time to look at your overall financial picture and set financial goals for the coming year in terms of money management.
What Are Basic Financial Skills?
Basic financial skills are abilities or strategies you can learn along the way that help you understand how your actions impact your personal finances, but also help you make better decisions and improve your money management.
Some basic financial skills include; budgeting, minimum bank account balance requirements, having a savings account ,managing and paying off debts, paying bills on time, understanding your credit score, and investing.
Why Are Financial Skills Important?
Financial skills are important because they help people understand the best options which fit their needs or financial goals and make informed decisions, such as deciding how and when to save and spend.
As a result, you become more empowered to do the things that matter most to you.
Without basic money management skills, It becomes almost impossible to do many things you want in life, like investing for the future or planning for retirement.
Additionally, as an immigrant from Uganda, most of our parents did not have the awareness or skills to make financial decisions critical in establishing life-long positive financial habits.
Personal financial literacy gives you the knowledge and understanding that you can pass on to other generations.
With less opportunity to spend, you are becoming more aware of your saving tendencies and knowing what needs to change your bank accounts.
These tough times can give us lessons to learn something valuable about our financial habits. Show us what we might need to establish a more secure financial situation in the future.
A few questions to ask yourself first that will help manage your money in 2021 and in many years to come.
Have you set money set aside for emergencies, and how much?
Do you track or review your spending?
Do you know your credit score?
Do you know the approximate interest rates on your loans, credit cards, and savings accounts?
If you are ready to be the boss of your money, I will take you through a few steps on how to start managing your money better. But first, find out where you stand financially by taking this financial wellness test.
Now that you are done with the test and where you stand with money let’s talk about some valuable financial lessons I have learned from the pandemic.
Basic Money Management Skills- The 4 Lessons We All Need About Our Finances
What is basic money management?
Basic money management is a process of setting strategic financial goals, creating a realistic budget, investing, tracking expenses and overseeing the your money usage.
1. Having A Budget Is Crucial
Your number one financial goal for 2021 should be creating a well-organized monthly budget if you don’t have one already. With a budget, you will have adequate resources for the things you need and the essential things.
Now that COVID has deemed a shopping splurge as non-essential, this is the right time to write down all your essential spending and know where your money is going.
Create A Basic Budget
Some people say they have the budget in their head or already know what they spend every month. The TRUTH IS! You cannot possibly remember every little thing you spent your money on in a month.
However, seeing it on paper or your laptop helps you visually bring your expenses to life. Having a spending plan keeps you out of debt.
Sometimes budgeting gets overwhelming especially if you use a complicated system. It almost as if you are about to have a panic attack once you sit down and start filling out your expenses
One most effortless way to review your monthly spending is by downloading your online bank statement and viewing each transaction. Then group the transactions to get a bigger picture of where your money is going.
It is essential to know your total income from all your income sources. Do you have a stable of a source of income, or does it change month to month? These are some of the questions to ask yourself when creating your budget.
Then list down how much you spend on all the essential expenses like food, rent, phone bills, gas, and electricity, that you absolutely cannot live without.
Also, write down all the non-essential expenses like shopping for new clothes, money you spend in coffee shops, buying gifts during the holidays, and money spent on vacation trips , outings with friends or family.
All these expenses need to be accountable for when handling money. The main goal is not to spend more than what you earn each month.
You can then use this budget template for free and start spending wisely.
2. You Need a Money Management and Savings Plan
Now that there is a budget in place, next is Money management. These are strategic practices that provide you with the highest value for any amount of money you spend.
Savings as A bill: You should start by adding savings as a fixed bill in your spending plan.
Open a Savings account: Set up a separate savings account and set up automatic transfers from your checking account to a savings account each time you get paid.
Create Saving Buckets: Within your savings account, create different fun savings buckets to help you put away money for your specific personal goals.
Maybe you want to vacation in Spain, make a saving bucket for Spain.
If you are planning on buying a home, then create another bucket for Home. In the long run, you have a savings account that is intentional and easier to track your goals.
Be Prepared: Have an emergency fund that is separate from your savings account. Your emergency fund helps you be prepared to pay for unexpected emergencies without borrowing a loan or using your credit card debt that will create more debt and stress.
Dave Rumsey suggests starting with a goal of $1000 and putting aside what you can on that $1,000 account until you raise it to six months of monthly expenses as you pay off your other debt.
Open a college fund: Knowing how expensive college is these days, you wouldn’t want your kids completing a four-year college with a $80,000 loan. The earlier you start saving for the kids, the better it is for both you and the child.
Calculating Your Savings Rate
According to this Investopedia article, an individual’s savings rate is the percentage of disposable personal income that he/she can save instead of spending on consumption.
Add your total income, maybe your pay check is $4000 a month after taxes, subtract your total expenses $1500. This means you have disposable income of $2500. If you decide to save $1000 a month, then your savings rate is $1000/2500 *100 which is 40 percent.
For the 50/30/20 rule, it is recommended to save at least 20 percent of your income. However, it doesn’t matter how much you save, as long as it works for your based on your financial goals and needs.
Concept Of Paying Yourself First
What is the concept of paying yourself first? Realistically, it means that your priority should be to put a certain amount of money into your savings and investment accounts before spending on non-essential monthly expenses.
Paying yourself first is not an easy money management task because usually, after all the bills have been paid, we become excited to have that extra money laying around, it times for dinner with friends, buying that new iPhone that just came out.
Before you know it, there is not adequate money left over for our savings.
In most cases, we blame our lack of savings on not making enough income, yet we can afford the latest iPhone or that $1000 purse.
Basic money management skills are about setting up a strategic system like looking for small ways to make extra contributions to your savings accounts or setting up automatic deposits and transfers where you are saving without thinking about it.
3. You Do Not Need Extra Credit Cards
Since the start of the coronavirus lockdowns, many people have lost their jobs. Some have had to put more charges on top of their existing credit card debt to help pay for essentials.
Credit cards are a great tool. Having one or two credit cards is manageable. More than 2 credit cards is inviting more debt.
Avoid using credit cards as part of your emergency fund due to the high-interest rates involved unless you are using a credit card that does not charge interest on purchases for a certain number of months after account opening. You can repay that amount before the offer expires.
4. Spending Habits Have to Change
Who knew that Lysol disinfectant wipes would be hot commodities? It is the time to evaluate if what parts of your spending are truly necessary as part of managing your money.
I’ve saved a lot of money in the past six months, mainly by not buying clothes and shoes I don’t need. And frankly, I don’t miss the spending or the new shoes.
The pandemic has shown us that we do not need all the extra stuff we used to spend money on to be happy. I have learned that being grateful for what I have and what we have is enough.
Managing Debt Skills
Can you imagine all the things you thought you couldn’t live without? Well, You are now living without them. If you are eating out less, you are cooking more and, you are saving more money.
We are now adopting healthier options and might want to make this a more beneficial lifestyle change.
A lot has been going on this year, emotionally and financially. It is the year to change how we live and spend money to prepare financially for 2021 and the next years to come.
As financial expert Dave Ramsey says, “You will either manage money or, the lack of it will always manage you.”
What is the best way to manage money?
The best way of managing money is by having a life map. How do you imagine your life in the future? Does financial stability and generational wealth mean anything to you?
You might be wondering why I chose to have a life map as the best way to manage money, but here is my reasoning. If you do not know what you want, how do you expect to get what you want?
I did not start managing money until my late 20’s. Why? Because before then, there was no clarity on what I wanted, and I felt no need to deepen and broaden my financial intellect.
To start budgeting, saving, and investing financially, you need to know the kind of future you see for yourself. You can not manage money by living day by day, paycheck to paycheck. There have to be motivators and reasons why money is necessary to you 20 years from now.
Even though life does not go as planned, at least there is a backup when it does. Right? So in each stage of life, get to know you want to achieve financially now and in the future.
Your can achieve your financial goals no matter where you are on your journey. I encourage you to incorporate these Valuable Lessons and start Managing Your Money.
For more financial tips and advice, check out what I posted about Tools and Tips to help you gain over you finances.
Let me know how you are managing your money, and what basic money management skills have helped you reach your financial goals you set for each year. I would love to hear from you.