Do I Have Enough Money to Need Managing?
It seems like if we’re going to talk about money management basics, we should begin by agreeing on a useful money management definition. I mean, it sounds rather lofty, doesn’t it? Like something rich guys in suits hire multiple lawyers to handle, or a little bald nerdy guy with glasses like the sort who always gets knocked off in mobster movies before he can turn state’s witness against “the family.”
And yes, rich folks no doubt have lawyers and accountants with lambskin briefcases to manage their unseemly hoards of cash and stocks and bonds and gold bullion and vibranium and whatnot. I suppose the mob – assuming that’s still a thing – may have nerdy little bald men with glasses who keep “two sets of books.” But neither of these scenarios has an exclusive claim on money management basics. Neither of these situations are unique in crying out for effective financial management.
If you have three kids you can barely keep in school supplies and decent clothing on your wages from the RV factory, you could benefit from revisiting and applying some money management basics.
If you’re doing fairly well with your dental practice but concerned about paying back your own student loans before trying to get your twins into a good college, you could benefit from revisiting and applying some money management basics.
If you’re divorced and waiting tables part-time while trying to get your home-cleaning business off the ground, you could benefit from revisiting and applying some money management basics.
If you’re heading towards retirement with multiple sources of comfortable income, struggling to pay off medical debt or credit cards without living on Ramen Noodles and store-brand chicken pot pies, or fresh out of high school and excited about the $20/hour you’re making at your brother’s friend’s garage working on cars, you could benefit from revisiting and applying some money management basics.
The lambskin briefcases and nerd glasses are optional – entirely your call either way.
So What Is Money Management?
To answer that, let’s do something we were always told not to do in high school. Let’s cite Wikipedia:
Money management is the process of expense tracking, investing, budgeting, banking and evaluating taxes of one’s money… Money management is a strategic technique to make money yield the highest interest-output value for any amount spent.
Spending money to satisfy cravings (regardless of whether they can justifiably be included in a budget) is a natural human phenomenon. The idea of money management techniques has been developed to reduce the amount that individuals, firms and institutions spend on items which add no significant value to their living standards, long-term portfolios and assets.
I like this for two reasons. First, it’s a pretty good summary of money management basics. Second, it feels like I’m getting away with something by using Wikipedia as a source (even though in this case, I think it's a perfectly decent explanation). Take THAT, Mrs. Wyznershinski!
Set aside the lofty bits about “the highest interest-output value for any amount spent” for a moment. Money Management Basics begin with some pretty basic ideas…
Keep track of your expenses.
Put your money where it does you the most good.
Have a household budget. Use the household budget. Adjust as necessary, but keep using it.
Pay attention to your tax options.
Make debt work for you; avoid becoming a servant to your debts.
Then there’s that second part – about reducing what you spend on items which “add no significant value” to your “living standards.” Money management basics aren’t about telling you what you can or can’t buy. It’s your money; you can do whatever you want. Getting better at personal financial management is about making more informed and conscious choices – but they’re still your choices.
So Money Management is About How to Handle Money?
Well, sort of. But it’s also about being aware of your money. It’s about paying attention to where it comes from and where it goes. That’s not a rich thing or a poverty thing or an educated thing or an ignorant thing, and it’s not about being petty or greedy or denying yourself little pleasures here and there. It’s being mindful about the resources in our care. It’s about doing right by ourselves and those for whom we are responsible. It’s about trying to pay attention today so that tomorrow doesn’t completely suck.
And yes, it’s also about how to handle money.
See, there are sometimes events and circumstances beyond our immediate control with make it very difficult to keep our wallets above water. Unanticipated repairs, medical bills, divorce, accidents, etc., each come with their own unique challenges. But far too often, it’s not the big traumatic stuff that gets us. It’s the self-inflicted lingchi that spirals us into overwhelming debt, mocks our frustration, and leaves us feeling like no matter what we do, we’ll never quite get ahead.
Lingchi is a term from Chinese history which can be translated as “the slow process” or the “lingering demise,” but in western culture we most often refer to it as “death by a thousand cuts.” It wasn’t metaphorical in the Ming Dynasty; just ask anyone convicted of treason or other particularly heinous crime. The term isn’t entirely accurate, of course – in reality the final tally was usually something like 3,600 cuts.
Then again, most people didn’t make it past the first 1,000, so maybe the term works after all.
The point is, it’s not always the big stuff that kills you, or, in this case, your checking account, credit rating, or long-term savings. It’s often our daily choices which add up over time to make all the difference. To use myself a few decades ago as an example, I wasn’t broke because my house burned down (it didn’t), my wife got a horrible disease (she didn’t), or a meteor shower destroyed my bank (that’s not even a thing). I was broke (with broke here meaning “over $10,000 in debt”) because of stopping for sausage rolls on the way to work twice a week.
My credit cards didn’t get maxed out ransoming loved ones from Somali pirates; they bought clothes and CDs and dinners and spontaneous vacations. My credit rating didn’t go down the toilet because I lost a job or was in an accident; it tanked because I didn’t keep track of my utility bills very well, bounced too many checks (unintentionally), and had no real plan to do anything different other than playing Powerball from time to time. (I didn’t win.)
Money management basics are about taking control of your own resources and choices and doing some straightforward, sometimes stubborn things, to help yourself out. It’s the little things, my friend – always the little things.
Fortunately, this is true of our good choices as well. It may not feel like it right away, but they add up. They make a difference, no matter when or where we start. Let’s hit a few common areas in which many of us could be doing a better, more deliberate job of personal financial management.
Money Management Basics: Where Should I Start?
One of the most obvious things we can do in terms of money management basics is to make a personal or household budget. Organize your monthly income and expenses, and start getting serious about what’s absolutely essential, what’s important to you, what’s negotiable, and what could go.
The process is not complicated, but it can be difficult – logistically as well as emotionally. It takes time and determination to end up with an accurate idea of where our money really goes each month. Then again, that’s the whole point – to figure out where our hard-earned dollars go each month. Be ready to adjust your figures several times in the first few months until you have a more genuine and accurate picture of your finances.
That’s the logistical part, and it often leads to the emotional part. Let’s be honest – money is not just numbers and exchanges. Our work, our labor, our skills and our choices over years and years all go into whatever we do for a living right now. That, in turn, largely shapes how much we bring home as a result. Your job may or may not be something you love, but it’s a huge part of you for better or worse. Many of us spend more time at work than we do with our spouse or kids. So yeah, it’s emotional when we can’t seem to make enough to cover our bills.
Wanting stuff we can't have is emotional. Not being able to fully take care of those we love is super-emotional. We can't change that, but we can be honest with ourselves about it.
When my circumstances changed a few years ago, my wife and I made the reasonable decision to limit eating out to once a week. It wasn't a huge sacrifice – we have food. We’re clothed and comfortable. The cable is still on and we kept the NHL package. But emotionally, that was the thing that hurt. That was the part that made me feel… inadequate. Less than. Resentful. Maybe even angry.
It’s not the same thing for everybody. For some, giving up the third home on the coast is a real blow to their sense of identity and worth. For others, it’s selling plasma to pay for gas to get to work. The point is, once you’re making real choices about dollars and sense – especially if you’re doing so with a partner – don’t be surprised if it suddenly feels very personal.
We can’t do it for you, nor should we, but we are working on a few things which should make it easier for you as you begin. In the meantime, check out this list of the Top 10 Personal Finance Apps for 2019. Not every app is for everyone, but I suspect you’ll find one or two which simplify your life or help with your personal productivity.
Let us know how it goes!
What If My Income Doesn’t Cover My “Out-Go”?
Sometimes a clear budget reveals the good news and the bad news at the same time. The good news is, you haven’t been reckless; there’s really not enough money coming in to pay everything you owe each month. The bad news is, there’s really not enough money coming in to pay everything you owe each month. Sometimes the issue is short-term and can be covered with a small personal loan from a legitimate lender (not that sketchy “payday loans” place next to the gas station), but other times you might have to cut back on the Starbucks.
I’m not trying to make light of a bad situation. If things are truly serious, don’t be afraid to seek help from local community services, legitimate credit counseling organizations, your religious institution of choice, or even family. On the other hand, if it’s more like you could keep up if only nothing unexpected or bad every happened – you’re close, but just can’t quiet get on top of it – there may be less drastic solutions.
If your budget reveals that much of your monthly debt involves high interest credit cards or multiple other obligations, a bill consolidation loan or other one-time personal loan might simplify things substantially. Instead of trying to keep up with multiple bills every month, you’ll pay off most of them and make one, most likely lower, payment each month instead. This could even help you start rebuilding if you have bad credit.
Sometimes creating an honest budget reveals to us just how many things we’re paying for each month that we don’t really need, or at least don’t need so much of. How much data are you actually using on your cell phone most months for that higher payment? How many add-on channels are you actually watching all three streaming services? Wouldn’t it be nice if you could lower some of your recurring communication and entertainment expenses by even a few hundred dollars each month?
My colleague, Carlie, has written an excellent piece on how to negotiate bills with companies in just these sorts of circumstances. Read it. Print it out. Keep it in front of you while you start making the calls to lower those bills. None of it requires special skills and it’s entirely legitimate. It’s just a matter of knowing what you’re willing to do to and helping the corporation on the other end of the line to understand that it’s best for them as well. Go, read it – but come back here when you’re done.
Money Management Basics: The Big Stuff Matters
I’m a big believer that much of our debt, our inefficient use of resources, comes from dozens of small decisions each month more often than it does the big decisions every few years. That said, the big decisions still matter – a lot, actually.
That’s probably why we call them the “big decisions.”
Mortgages, Home Equity Loans, and Refinancing
For most of us, the purchase of a home is the single largest debt we’ll ever take on in our lives. That’s OK, because the system under which most American homes are financed over the past century is designed to make this sort of purchase possible for almost anyone with a little planning and effort. It’s also a purchase for which it’s generally assumed you must be pre-approved. In other words, you should have your loan secured before you even start looking at homes.
If you have pretty good credit, you’ll most likely be approved for an amount well above what’s necessary or even reasonable based on your income. Banks make their money by loaning you money and charging you interest, and home loans are biggies. That doesn’t mean the numbers they’re offering you are dishonest or unfair, but it does mean you should do a little math of your own in terms of what a reasonable monthly house payment would look like for you. (That’s where that budget we were just talking about comes in so handy.)
A good estimate for how much of your income you should allot to housing is around 25%, or one-quarter of your income. By the time you roll in taxes and insurance and such, that may creep up a few points, but generally you want to keep it well-below 33% (one-third). That doesn’t mean you have to spend a quarter of your income on rent or mortgage payments, of course. If you have other debt, that may be much too high long-term.
If your credit is less impressive, you may still be offered a maximum home loan well-beyond what’s practical for you – albeit at a higher interest rate. While banks don’t actually want your house (they’d much rather have you make your payments, I assure you), the fact that the home being purchased acts as a natural collateral for the loan makes it easier to take some amount of risk on home-buyers with bad credit.
Compare interest rates. Even a fraction of a percentage point can make a huge difference with a loan of this size. Consider making a larger down payment if practical, or shortening the length of the loan. One bit of money management basics we almost all know about but too rarely do is to simply pay a little bit extra towards the principle of the loan each month. With a little consistency, it adds up – quickly.
What About Refinancing or Home Equity Loans?
Many homeowners have saved thousands of dollars by refinancing in recent years while interest rates are low. Refinancing requires some paperwork and comes with closing costs of its own, but it might be worth doing the mortgage payment math to see if it’s a good choice for you.
Home equity loans are also a popular option. Sometimes the goal is bill consolidation, but often they’re used to finance remodeling or expansion of the existing living space. There are several variations, but the most common distinction is between lump-sum home equity loans and line-of-credit home equity loans.
With a lump-sum loan, you receive a one-time large amount based on the value of your home (minus what you still owe on your mortgage) and pay it back over time just like any other traditional loan. Because your home is acting as collateral, rates and terms tend to be much better than other types of loan. With a line-of-credit loan, you essentially open up a revolving source of income using your home as collateral. This is better for long-term projects whose total costs aren’t entirely certain.
Whether you're buying a home, refinancing an existing loan, or using your home as equity, don’t take the first thing you’re offered. Compare local banks and credit unions to alternative sources of financing. There are a number of established and legitimate mortgage online lenders who deal in everything from small, short-term emergency loans to helping you purchase a new home. Even if you have limited credit, or bad credit, you’re still the customer. You’re still the most important person in the equation. And you still have a right to be happy as you begin building or rebuilding your credit rating.
Money Management Basics: The Credit Card Conundrum
Credit cards, as I’ve said before, are a blessing and a curse. They give us security and freedom and financial flexibility, and with a little planning, attention to detail, and self-control, they can be a powerful tool in our personal financial management.
But you already know the flip-side of this, don’t you? The dangers of credit card use are so fundamental as to almost be part of any basic money management definition. Interest rates are often the highest of any sort of loan or credit we access in our adult life. Minimum payments seem to be set up by credit card companies to keep us paying them eternally while never actually lowering our balance. And that same freedom and flexibility they offer, while wonderful in many situations, is also a big part of the problem.
“What went wrong? How did you end up so buried in reckless debt?”
“Well, I had all this freedom and flexibility, you see… although now, of course, I have neither…”
Consider writing down a few of your long-term goals on a small piece of paper and wrapping it around your credit card in your wallet or purse. Whenever you’re tempted to use the card for an impulsive purchase, stop and look at what’s on that slip of paper. Is this spontaneous thing you’re about to do or buy worth it? Is it more important than the things on the paper?
For emergencies, of course, you’ll still have access to your credit cards. That is, after all, a large part of why we have them to begin with. But just like with dieting or getting work down around the house or spending quality time with the kids or significant other, sometimes we have to shift our mindset from only thinking about the big things to changing how we approach the day-to-day things.
Four Wheels and a Motor
Americans love our cars and trucks, and I’m not here to tell you not to buy or drive the vehicle that’s right for you. I am here to suggest that you balance some of the emotion of an auto purchase (in some ways it’s right up there with buying a house) with the same detached, calm reasoning you’re trying to bring to organizing your utility bills. I am here to suggest that you be willing to walk away from an offer or a financing arrangement that doesn’t serve your long-term personal budget goals.
One of the other big elements of money management basics we all know but have trouble holding to when it’s most important is that lenders and car dealers need you more than you need them. You may want, or even need, a vehicle, but you don’t need their specific car or truck. You may want or need a loan, but you don’t need their specific offer.
Educate yourself on auto loan basics before you shop. Arrange some financing options other than whatever the dealer will push, then make the decision that’s best for you and yours. This is the 21st century; it doesn’t have to be your parent’s car buying experience. In fact, it absolutely shouldn’t be. If it is, you’re not trying very hard.
Don’t Forget The Taxman
Your tax obligations should be part of any personal or household budget. No, they’re not exactly optional and rarely negotiable, but they are relatively predictable and they are something you’re going to have to pay – whether annually, quarterly, or monthly.
Your thoughts on taxation, government spending, and the overall system are between you and the ballot box. You watch the news; you know the discussions. I’m simply going to point out an element of money management basics which gets many of us in trouble despite being almost 100% preventable:
Don’t owe taxes on April 15th.
There, that was easy, wasn’t it?
What I mean is, check your withholding. Make sure it lines up with your most likely tax obligations come April. With recent changes to the tax code, many Americans were unpleasantly surprised this year when they realized that reduced deductions from their weekly paychecks simply meant they owed far more than before come tax time. If you have several thousand dollars sitting around, waiting for the government to need it, this might not be a problem for you. If you’re already having trouble keeping that budget under control, however, this one can be a real humdinger.
Your employer can tell you what you’re currently withholding and you can run the estimated math yourself. If you have small business income or do any contracting or freelance work, start setting aside around 25% of everything you make from this sort of work. Payroll taxes still have to be paid on the income, but the folks hiring you for piecework aren’t responsible for taking it out and setting it aside for you.
We can gripe about taxes themselves another time; for now, control the parts you can control, my friend!
Money Management Basics: Pay Your Bills On Time
I know, I know – if only it were always that easy.
Obviously it’s not always so simple, or we wouldn’t be having this discussion. We’ve already talked about the importance of a personal or household budget and a few ways to get debt under control. Right here, though, I’d like to address something more basic. Lean in a bit, if you don’t mind – I don’t want to say this one too loudly. It’s rather embarrassing, and I know that because I’ve been there far too often…
Sometimes the biggest problem with our money management is that we don’t keep up with bills we could easily pay. The mail gets tossed on a table or shoved in a drawer. We sign up for “paperless billing” then forget to check that email account for three months. The credit card we used for automatic monthly payments expired and we never updated it. We keep meaning to sit down with a checkbook or laptop and knock out some bills, but… well, there are always better things to do.
Choose a system. Write it on the calendar or set something up on your phone. Do it whether you feel like it or not. You’ll feel better as a result, and emerge far more likely to afford those “better things to do” you had in mind to begin with.
The good news is that the millennials among you are doing a much better job of this than I did. You’re making better use of online financial advice and mobile tools for managing their bills. While Americans are still way out of balance in terms of overall debt, it’s nice to know these crazy youngsters we keep making fun of (without justification most of the time) are doing OK with money management basics.
You may just be starting out in your adult life, or approaching retirement, or somewhere in between. You may be living paycheck to paycheck or comfortably invested in a diverse portfolio (whatever that means, right?) No matter what your situation, the best time to get serious about better money management is now.
That's not because money is the most important thing in your world. It's so that you can spend less time worrying about the money and more time focusing on the things that are important. Let us know how we can help.