How To Create An Effective Money Management Plan

Wednesday, 31 March 2021 10:32

Young adults entering the workforce are in a unique position. On one hand, you have spent twelve plus years getting educated in school and preparing yourself for life after school. On the other hand, you are now forced to make financial decisions that you’ve never had to make before. For generations, schools have provided inadequate financial literacy education and young adults have not been prepared to make smart financial decisions. One way you can set yourself up for success is by creating a smart money management plan!

What Is Money Management? And Why Do I Need Do It?

Money management is exactly what it sounds like: managing your own money. And it can be done in various ways. Budgeting is the main thing that comes to mind when you think of a money management plan. A budget is “an estimation of revenue and expenses over a specified period of time” (Investopedia). Your budget essentially allows you to make sure that you are not spending more money than you are currently earning. Most people use monthly budgets to track expenses, but you can make it for any period of time that works for you.

You should aim to achieve a surplus budget, which means your earnings are more than your expenses. A balanced budget is when your earnings equal your expenses. But the main goal of managing your money is to avoid having a deficit budget, which is when your expenses are greater than what you are earning. If you have a deficit budget, it’s easy to go into debt and it’s even harder to get out of that deficit.

Saving money for your money management plan in Denver.

Making A Budget

Making an accurate and reliable budget consists of four main steps:

  1. Determine your income: This comes from your primary job as well as any other ways that you earn income. If you have a side job, include the earnings you expect to make in this category.
  2. Determine your expenses: You want to be sure to include all the expenses you will have in the set time period of your budget. This includes, but is not limited to, rent/mortgage payments, utilities, insurance, taxes, groceries, healthcare, and other expenses. You might want to group your expenses into categories such as “food” and “entertainment” to help simplify your tracking.
  3. Subtract your expenses from your income: Add up all your expenses and subtract them from your earnings. This will determine your revenue which can give you a better idea of where you are at financially.
    • If the amount is positive, you have a surplus budget.
    • If the amount equals zero, you have a balanced budget.
    • If the amount is negative, you have a deficit budget.
  4. Allocate income to each expense category: You can do this by either allocating a percentage of your income to a category or allocating a set amount. Either way works, but the point here is to be as realistic as possible to reduce the risk of going over your budget.

Different Kinds Of Budgets

You can personalize your budget as much as you like! But the only thing that matters is that the system you choose to manage your money lets you track your expenses as easily as possible. Some people may want to have a physical budget on a piece of paper, while others may want to use an excel spreadsheet or one of the various budget-tracking apps on the market. Here are just a few examples of the different types of budgets you can put together.

Traditional Budget: Keep track of your budget the traditional way by using a spreadsheet or table to allocate your expenses to categories. Then track your actual spending to see if it’s in line with your budget.

Envelope Method: This is a great system if you use a lot of cash. Put a category label on each envelope and add to each as you earn money. This is a great way to physically separate your spending money, especially if you receive payments in cash.

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50/20/30 Method: The purpose of this method is to apply 50% of your income to living expenses, 20% to your savings and debt reduction, and 30% to your personal spending. This can be adjusted if your living expenses account for 60% or more of your income. If your living expenses exceed 50% of your income and you plan on using this method, make sure you adjust the other categories to make the ratios equal 100% when summed up. This money management strategy is meant to promote a more balanced lifestyle and allows you to account for personal expenses when making a budget.

Use A Budgeting App: Here are just a few of the best budgeting apps and who they can best work for:

  • Mint: For those who are personal finance newbies
  • Personal Capital: For those who are advanced budgeters
  • YNAB: For those who are visual learners
  • Albert: For those who want to do minimal work
  • Goodbudget: For those who want virtual envelopes for each category of expenses
There are plenty of apps out there that can benefit your money management plan.

Staying On Track With Your Money Management Plan

Using an app will make it significantly easier to track expenses, especially if your purchases are mostly on credit or debit cards. You can also track your spending by hand or with an excel spreadsheet. Just select the system that works best for you!

The most important idea here is that it is not enough to just make a budget. You also need to track how well you are doing at staying on track with your plan. If it’s halfway through the month and you’ve spent almost all of the allocated money for entertainment, you may want to stop going out for the rest of the month or allocate a larger percentage of income to this category. Your actual spending should align with your budget as much as possible to ensure you do not overspend.

If you notice a category that is almost always over-budget, you should consider either adjusting your spending or changing how much is allocated to that category in the future. It’s better to be realistic about your spending rather than to be hopeful that you’ll spend less if you budget a lower amount. The more realistic you are with yourself, the easier it will be for you to stay on track with your budget.

Protect your budget by practicing these money management habits

Good Habits For Managing Your Money

Here are just a few effective ways to better manage your money.

  • Save more money: Saving money might sound obvious, but it is one of the best ways to build wealth and financial stability. If you have a surplus budget, it's a great idea to put any excess income into your savings account. Savings accounts allow you to make larger purchases by allowing you to save money over a long period of time. Experts suggest saving 10%-15% of your income, but this is not feasible for everyone. The goal is to save your extra money, so you not only have something to fall back on in emergencies, but also so you can purchase high-priced items when the time comes.
  • Factor taxes into your budget: If you do not factor taxes into your budget, you run the risk of going over budget when taxes are added in. Everyone must pay taxes, so by accounting for them early, you can ensure you aren’t spending money that isn't yours to spend. This can help prevent you from overspending and going into debt when tax season comes around.
  • Account for one-time purchases: When making your budget, it is important to account for one-time purchases that you know you will need. If your mom’s birthday is in May, you should account for the gift you purchase for her in your May budget. When it comes to the holidays in December, it is a good idea to account for any gifts you plan on purchasing for others that month. Just because it’s a one-time purchase doesn't mean you can just exclude it from your budget. By building these one-time purchases into your money management strategy, your budget will be more accurate and more reliable.
  • Put fixed expenses on credit cards: If you know you have recurring expenses each month, it’s a good idea to put them on your credit card. This includes rent, utilities, internet, streaming service, and other subscriptions. Putting these recurring expenses on a credit card allows you to build credit each month, and it also allows you to easily track your spending through your credit card statement. It’s just an effective way to better manage your money throughout the year.
  • Set up automatic payments: If you can set up recurring payments, you should. This will allow you to spend less time paying bills while still keeping you on track to make payments on time. With automatic payments, the stress of paying bills by the deadline is reduced greatly as you don’t need to worry as much.
  • Cut out unnecessary expenses: Once you’ve been budgeting for a few months, it’s a good idea to go over your budget again and cut out three (or more) unnecessary purchases. By reducing the number of purchases, you will have more money to spend or invest with.

Emergency Funds

When we go through life, we need to expect the unexpected. Of course, no one wants to experience an accident or an emergency of any sort, but even though we don’t plan on it, they still happen. Keeping track of a budget is hard enough already, but when an emergency comes up, it’s even harder to keep your expenses under budget.

Having an emergency fund is a great way to prepare yourself for unexpected events that have the potential to put you in a tough financial situation. Without an emergency fund, you may have to use your savings or take out a loan to cover the expenses.

Make sure you have emergency funds built into your money management plan.

There is no set amount of money you should save for emergencies, but you should aim to align your emergency fund with your lifestyle. Most experts believe you should have three to eight months of expenses set aside in an emergency fund. It’s generally suggested to put $500-$1,500 in the fund at the start and then add more to the fund each month as you see fit. This kind of emergency fund can be a life-saver in certain emergency situations such as:

  • The loss of a job
  • Medical emergencies
  • Child or pet emergencies
  • House or auto problems
  • A death in the family

The recent COVID-19 pandemic is a prime example of when an emergency fund would have been useful. No one expects to have to deal with an emergency, but being prepared financially for something to happen will allow you to focus on the emergency itself rather than how you’re going to survive financially after it happens.

Improve Your Money Management Plan Today

If you want to get a better handle on your financial goals, reach out to us at Adler Insurance Group. At our Allstate agency, we have Personal Financial Professionals on staff with decades of experience that can help chart your path to a brighter financial future.

Contact Adler Insurance Group today to get started on your money management plan.