We all want to get better with money. We want to have enough money for emergencies and invest in retirement instead of struggling to make ends meet and pay off our debt at the end of the month.
The truth is, managing your finances is mostly behavioral. It’s not rocket science, but it does require a few tweaks in your spending and saving habits. And like most habits, it’s better to start with baby steps, one step at a time.
If you want to know how to get better at managing your take-home pay but aren’t sure where to start, here are some steps you can take.
Take stock of your assets and liabilities.
Assets and liabilities are usually business accounting terms, but these concepts are also important in personal finance. Simply put, an asset is something that puts money in your pocket, such as property, job, cash, bonds, and rentals. On the other hand, a liability is something that takes money away from you. For instance, the car loan or mortgage that you are still paying off is considered a liability.
Your total assets must outweigh your liabilities for you to have a healthy cash flow. If you find that your liabilities are greater than your assets, then consider making a plan to eliminate some of your liabilities or to increase your assets. For example, if your car is taking out more money from you for gas and monthly payments, then consider selling it and commuting to work or buying a cheaper secondhand vehicle if public transportation is not an option.
Set a realistic budget.
Why do you want to get your finances in order? This is a good question to start asking yourself. It might be that you want to travel, pay off your debt, save for retirement, or help out a family member. By starting with a purpose, you are more likely to stick to your budget instead of balking when the going gets tough.
With budgeting, there are no hard and fast rules. Just make sure that your income always exceeds your expense. Experts recommend that you review your budget every month and tweak accordingly. Sure, it’s challenging to start but once you get the hang of it, it’ll become easier.
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Here are some budgeting methods that work:
- Subtraction Method: This is the most common budgeting technique. First, add all your monthly bills and payments, and subtract the total from your monthly income. Then subtract your desired savings (be reasonable and start small). What’s left is your spending money.
- The 50/30/20 Method: This is pretty straightforward. Divide your income into three parts: 50% goes to fixed expenses (e.g. rent, phone bill, etc.), 20% goes to your financial goals, and 30% is for flexible spending (e.g. shopping, restaurants, groceries, etc.) Of course, if you need to pay your debt, then you can adjust the percentage to allocate money on your debt payment plan. Which leads us to…
List down all debts and create a payment plan.
Can’t keep up with your debt payments? Keep calm and make a plan. First, list down your balances, interest rates, and minimum payments. You can use a spreadsheet or a simple pen and paper for this. Once done, you can now revisit your budget and find out how much money needs to go to paying off your debt.
Some of the popular debt-busting methods include:
- The Stack Method: With this method, you have to pay off your highest interest rate balances first while making sure to pay the minimum payment on the low-interest ones. You can also check if you can transfer your high-interest balance to a lower interest one using a balance transfer credit card or personal loan.
- The Debt Snowball Method: The goal here is to build momentum by paying the smaller balances first while paying the minimum on the rest. Once you’ve fully paid the smallest debt, you can now add the money allotted for the first debt to pay the 2nd smallest balance, and so on. According to research, this method works well for most because people tend to stick to goals when there is observable progress. The Debt Snowball offers quicker wins that motivate people to push through their goal.
Save money for emergencies.
An emergency fund is crucial to help keep your finances in order. After all, you don’t want to always ruin your budget when unforeseen circumstances arise – and trust us, they will happen without warning.
Always have money to spare in case your car breaks down, your dog needs to go to the vet, or your roof leaks. Most experts recommend that you set aside 3 to 6 months’ worth of your income for emergencies. However, we do recommend starting small. Start setting aside at least $100 a month for emergencies, and only use that amount during a real emergency… not when you “accidentally” see a product that you like on sale.
Find ways to save every dollar.
Now, that you have a set plan in place, it’s time to discover different ways to save more money and stretch your budget. Always be on the lookout for the best deal. Don’t just accept the first offer that is given.
This works not only for groceries and electronics, but also for financial products. For example, you can shop around for the best price for your cellphone or cable plans, personal loans, car insurance, or even credit card rewards and fees.
With technology, saving every dollar and finding the best deal gets easier. You can download smartphone apps to compare prices on hotels, car rentals, clothes, and even electronics. With online comparison websites, you can also find the best credit card deals, lowest interest rates, and the best rewards for free.
These online resources and tools can help any beginner manage their money like a boss.
Want more tips on how to be savvy in handling money? Check out our financial guides on the website or subscribe to our newsletter for regular tips on how to manage debt, use credit to your advantage, and more.
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Author Bio
Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook.
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