Managing money is a little like dieting…only in reverse. To get thin we have to burn more calories than we take in. To get rich we have to spend less than we earn. Neither are difficult equations. But both can be very hard to do.
At its core, managing money boils down to living within your means. But that is not always as easy to do as it sounds. Here are some tips to help you focus on some essential truths about money, so you can manage it well, and avoid it managing you.
Don’t confuse the image of money with the real thing.
Far too many people’s lives seem wrapped up portraying themselves as having a lot of money, when in fact they don’t. They may earn good salaries, but if all their cash is going to houses, cars, and lifestyles that cost more than they earn, then they are not really managing their money at all.
Effectively managing money requires taking a good hard look at what is real in our financial lives and what is not. Real money is what we have in the bank, not what we pretend to have. The loss of a job or other crisis not only crashes lifestyles based on illusion, but can cause massive psychological stress when the illusion falls apart.
Focus on your net worth more than your income.
Real wealth is determined not by how much you earn, or how much you can flaunt. Wealth is defined by your net worth…how much more you own in assets than you owe. A primary goal in managing money is to maintain yourself in the plus side of your balance sheet, so you can watch your real wealth start to grow.
Get rid of credit card debt first.
Credit card debt is so invasive and the interest so costly, that not much else in your money management plan will work until it is under control. Setting up a plan for yourself to pay off your credit cards will make the managing the rest of your money much easier (see our article How to Get Out of Debt On Your Own). In the meantime, put your cards away, and pay down as much as you can.
Decide on goals for your money. What do you really need your money to do?
Take some time and prioritize what the most important things are that you need your money for, after your routine expenses. Retirement? The kids’ college? A bigger house?
Write those important things down, and how much you think you can set aside toward them every month. If it is a tiny amount, that’s ok. You can increase what you can save after your debts are gone.
Carry that list with you. Put it in your wallet if need be, or wherever you are apt to see it when some new non-essential purchase comes up to tempt you. Then ask yourself if whatever you want to buy is really worth giving up what you already said mattered to you the most.
Write down everything you spend.
The financial gurus tell us all the time…we spend more than we think we do. In order to manage our money, we must be aware of it…all the time. The dollars we don’t think about slip away unnoticed, and then we wonder where huge chunks of our paychecks have gone.
Awareness and vigilance are essential to managing your money. Watch every dollar, so you always know exactly where it goes.
Follow the example of the unflashy rich.
Several years ago Dr. Thomas J. Stanley wrote an excellent book, The Millionaire Next Door, after he had surveyed the lives of numerous wealthy people around the U.S.
Dr. Stanley found that unlike the glitzy celebrities that make the tabloid front pages, the majority of real millionaires in the U.S. live in modest homes, drive ordinary looking cars, and maintain relatively frugal lifestyles. They also have the immense freedom that comes from being financially secure.
The lives of these unflashy millionaires offer real life lessons in managing money, which we can all learn from. I highly recommend it.
In summary it all comes down to this:
Spend less than you earn.
Save the difference.
Watch your money grow.