Having a bundle of money seems like there are a lot of imaginable numbers in the bank account that seems satisfactory, but running out of it happens in no time and leaves you in an undesirable situation. How could one possibly lose it quickly? That shows the need to take care of money. The question is, “Are you doing it?” Mostly “no” or mostly “I do but yet don’t know how it fades away sooner”. Well, the answer to it is money needs to be wisely managed!
Highlights
- Money management aids in making planned budgeting decisions.
- 50% for essentials, 20% for savings, and 30% for wants are allocated as per the 50 – 20 – 30 Budget Rule.
- Money management habits reduce the possibility of running out of cash.
What’s in the wise Management of Money?
If you think the term save, spend and invest is something related to finance but of no significance, stop right there. That’s something you need to give a deeper look at. When you begin to do budgeting, all these three terms come into action!
Money management in this context refers to personal finance and does not concern investment or portfolio management.
So, “It is a way to track and plan one’s capital in hand.”
In our day-to-day activities, we don’t really plan to manage money but just know, there is money in the bank account that could be used for our needs, wants, and future finances as an individual. But without our notice, while spending or investing, we realize that the money is gone or sometimes take out money from savings to manage the expenses. Do we have an actual plan to consciously control the amount of money to invest, save and spend? That’s why you need to do “Money Management”.
Financial planning: It’s 3 phases!
The use of 50 – 20 – 30 Budget Rule
This is one of the concepts widely used to plan the money, before taking a randomized action on investing, spending, and saving. The consideration here is for the allocation of 50% of your capital after tax deduction into essentials, 20% of it in debt reduction or to make a saving, and 30% in spending for personal wants.
Why 50% for Essentials?
Essentials are those things that one cannot live spending without. For instance, rent for living, travel expenses to the workplace, and food. It is legitimate to take away 50% of your budget for these essentials, as the name itself suggests the significance of the terminology.
It is always great to hear if one uses less than 50% for the essentials but if it is more, then there is a need to optimize the lifestyle for that matter.
Why 20% to the Savings?
Savings might not be the go-to thing in most of our lifestyles, but realizing the gravity of it is essential right from the moment one starts earning. And to go about it by setting aside 20% is an absolute call to take.
But on the other hand part of this section might also be a requisite for a need like clearing the credit card dues and the obligation towards the loans. After clearing, the remaining can always go into multiplying wealth by investing or preserving the money for another opportunity.
For instance, one way to explore the finance market is to consider bonds, as they generally carry less risk compared to the equity market. Bonds can provide a means to approach wealth creation with a more stable perspective in the realm of finance.
Investment strategies in bond market
Why 30% in wants?
It’s common human nature to have a list of things on the wishlist. Can we remove it from our system? No. But can we optimize it? Surely! The wants in general can include things like entertainment, outings, shopping, dine-outs, and many more. Of course, it needs to be done but indeed it is great to know if it could be reduced and in other cases not increased above the set limit.
That’s about setting out your priorities in money management to have a clear understanding of how the money is spread across in achieving specific goals. To a greater extent, you have a transparent visibility of where all is your capital segregated.
The mindset or habits to wisely Manage Money
It’s the mindset or the habits that one adheres, to keep an individual in discipline to follow money management. Without it’s hard to achieve, but what are those in your hand to control?
1. First comes first is “Budgeting”
Without allocating the amount for the needs and wants, there is no way to manage money. Hence a widely thought out percentage towards each of the sections like Essentials, Savings, and Wants is the sought-after thought, to begin with. One can opt for the 50-20-30 rule or any other customer rule for that matter.
2. Time to Track
What’s the point if it’s not about abiding by the rules you set while budgeting? Tracking is quintessential to keep in line with knowing if you are going with the plan as a set.
This allows you to also know if there exist any unusual costs to cut down in the latter part of your management as you stick on to it.
3. Living Consciously
We are existential beings but mostly living unconscious lifestyles 80% of the time and consciously for the rest of the moments. Certainly, your consciousness is lost when it comes to spending. For instance in things like spending money even after having Sodexo coupons. Not availing offers while ordering though you have a choice to opt for it.
4. Thinking like an Investor
Having a saving mindset is old and where are you in having an investor thought process? Been investing or have yet to begin investing, the right time is now! The time value of money in the present is more than the time value of money in the future. Have a plan set to invest if you don’t have it yet.
But why invest at all? Nothing is certain at the moment, you may have the running cash flow for now but what about having it in the future? Emergency doesn’t knock beforehand but randomly. And that certainly needs a plan with certainty while in the present. For instance, having money after retirement has to be sought after now rather than making a plan later. That gives you a gist of why investors must be a part of your budgeting plan.
Time value of money
5. Debt that awaits your Repayment
Debts are taken for having something at the moment while not having enough money to purchase right away but later over EMIs to the lenders who are offering money. Though the money is offered to you, it comes with interest over the time you repay. Paying more interest is an act that you don’t want to be in or having a worse CIBIL score is something you want to avoid, in that case, it asks you to have paid the debts on time. It’s of utmost importance that you are sincere towards your repayment and it is a must to have a habit to follow diligently.
Concluding Thoughts
The moment an individual understands their personal financial goals, the need for controlling the unnecessary spending of money into various divisions becomes the priority. Having a plan at hand is essential to avoid randomizing the budgeting process and at the same time to avoid running out of cash flow, especially at times when you are in a catastrophe.
FAQs on Money Management
1. What is money management?
It is a way to track and plan one’s capital in hand be it personal finance, investment or portfolio management, or corporate finance.
2. What is the 50 – 20 – 30 Budget Rule?
It is one of the money management concepts where the capital after-tax deduction can be set aside in 3 divisions. 50% of the capital is in essentials, 20% in savings, and 30% in wants as a process of budgeting wisely.
3. Is it possible to manage money just by following one of the rules?
No. Though the rules are set, without disciplined habits, attaining them is impossible. Constituency and Consciousness in following any sort of rule is the key.
4. What are the benefits of money management?
Money in the pocket is like ensuring there is no hole in the pocket in the first place. Though there isn’t, running out of capital is very easy. Money management ensures control of your financial status by managing your spending from income to segregate it proportionately into divisions that are equally important than just spending.
