Learning how to manage money takes time and effort!
But we’re here to make money management much easier and help you fill your savings account and keep more money in the bank.
There are 9 steps in organizing your personal finance. After following these steps, you should have a very clear picture of what your personal finance looks like.
Not only do we have easy steps for you to follow, but we also have a few money management tips to help you gain focus- so let’s get into it!
9 Steps For How To Manage Money Effectively
It’s never too late to learn how to manage your money, and we’re happy to help you get it together and put you on the right path to success.
It’s time to share our personal finance strategy that will help you manage your finances like a pro with a simple straightforward approach that’s easy to follow.
For these money management steps, you’re going to need to be logged into your bank account, loan account, and whatever else you got- and grab your calculator!
Let’s talk about the main factors of managing money and taking better control of your money:
1. Calculate Your Net Worth (Assets and Liabilities)
The first step to money management is knowing what you own and what you owe, which leads to you’re net worth.
Many people believe that calculating your net worth is difficult. In actuality, it’s probably the simplest step in starting or learning to manage your finances.
To calculate your net worth, subtract your total debt from your total assets (Assets – Liabilities = Net Worth).
Assets: These include money from your checking and savings account, retirement funds (IRAs), vehicles, stocks, bonds, annuities, and home equity.
Liabilities: This includes student loans, mortgages, car loans, personal loans, credit card balances, and any other debt you might have.
Write down everything that has value to you, and write down all of your debt- check your bank account for money and check your credit cards for debts. Then subtract liabilities from debt to get your net worth.
If your debt is higher than your assets and cash flow, resulting in a negative net worth, it’s not a great sign! It likely means you need to start learning more, paying off debt, and get saving.
2. Earning Vs. Spending Money: Income vs. Expenses
The next part of money management is checking your bank account more closely to see how much you’ve earned and how much you’ve spent.
Figuring out your cash flow and creating a budget is critical in getting your finances organized.
The first 2 steps provide a great overall picture of your personal finance. They show how you are doing financially as a whole, which is very important. Equally as important is understanding your monthly cash flow.
Income: This includes your hourly wage, salary, bonus, side hustles, side business, etc.
Expenses: Fixed expenses (that don’t change price often) include rent, mortgage, insurance, student loan payment, cell phone bill, internet, gym membership, etc. Variable expenses (that change cost) include utilities, groceries, discretionary money, donations, gas, etc.
List all the income you receive in a month. Then write down all of your monthly expenses. Subtract your expenses from your income, and you’ll know how much money you have available for other things like savings and vacation.
If you’re just starting to organize your personal finance, pen and paper work great. Keep it simple write everything down with a name and dollar amount.
Other options include an excel spreadsheet or using a free website like Mint. It has free overviews of your money and can create graphics for you to check out.
Or check out Empower (formerly Personal Capital), which is like the next step up- where you can track your investments, get financial advice, and more!
3. Calculate Your Overall Cash Flow
Now that you know how much money you’re making and spending, you can use those numbers to figure out your cash flow.
This is also a simple equation. To calculate your monthly cash flow, take your income and subtract your expenses (Income – Expenses = Monthly Cash Flow).
In money management, your cash flow is basically your “money in and money out.”
Your overall cash flow is probably the most useful tool in your efforts to manage your finances because it gives you a constant checkpoint to see how effective your various financial strategies are.
As your income goes up and expenses go down, this calculation will show you concrete proof that you’re moving in the right direction.
4. Get a Hold of Your Credit Scores and Reports
You know your overall net worth (Assets – Liabilities) and your monthly cash flow (Income – Expenses). That’s a great start for money management!
The next step in organizing your personal finance is getting a hold of your credit score.
Think of your credit score as an insurance policy to lenders, so they can know you can manage your money and not max out your cards without paying that money back.
Your credit score is extremely important in getting the very best rates on loans. Having a good credit score can literally save you hundreds of thousands of dollars over your lifetime.
You have lots of free options here. Companies like Credit Karma and other credit score apps will provide you with a free credit score.
5. Evaluate Your Personal Finances From All Of The Above
So we did a bunch of math and have some numbers- now what? What do these have to do with better money management skills?
Having the information is great, but understanding it is a different story.
You need all these numbers to figure out where you’re at, where you can save money, how you can make money, if you have enough money month to month, and so much more.
Now that you have your net worth, cash flow, income and expenses, and credit score, it’s time to start evaluating and see what it all means:
– Net Worth
Your goal with your net worth should always be positive- that’s what financial success typically looks like. If you have more assets than liabilities, you have a positive net worth; congrats!
If your net worth is negative, it’s a good wake-up call to get your finances in check. Knowledge is power. Once you know your net worth, set some obtainable financial goals to increase it.
– Cash Flow
Your cash flow should be a positive number, this is very important. If you have a negative cash flow you are bleeding money from your accounts.
From time to time, you will have a bad month where your expenses out weight your income. If your goal is financial freedom, you can’t let this happen very often.
Always aim to have a positive cash flow every month. Be sure to include any money you are investing or putting into retirement accounts as an expense. This is money that is not liquid and you will not be able to use in the near future.
The entire premise of knowing your cash flow is maintaining a budget and grasp on your financial situation. In tracking your expenses, you’ll have a clear picture of what your biggest monthly expenses are. Y
You’ll also see where you are overspending, and knowing can help you change your spending habits and get things under control.
– Credit Score & Credit Report
Credit is a side piece of money management- when you keep your debts down and work on spending less, you keep your credit up!
Compare your credit score to the graph below from Experian. If your credit score is lower than you like, don’t fret! It’s easier than you may think to increase your credit score to excellent.
Go through your credit reports thoroughly. Understand what is being reported and why. Errors do happen in credit reports, and correcting those are important.
Contact the credit bureau directly to make them aware of the error so they can get started in correcting it.
Negative entries on your credit report will stay active for up to 7 years. After the 7 years are up, the negative entries will be removed from your credit report.
6. Create Monthly and Yearly Budgets
Once you have gotten this far, you should know where you’re at and can manage your money thoroughly Now that you know where you are, you can start planning where you want to be and get into better spending habits.
A budget is a must, and we’ve already talked about it a little, but now is the time to sit down and plan where your money will go, make sure you don’t overspend, and reach savings goals.
For example, you know that Christmas happens every year, so make sure that you start saving a “Christmas fund” at least a few months in advance, so you have enough money for gifts without going into debt.
Add it into the budget for a given month, as applicable, to make purchases you know are coming, such as birthday gifts, back-to-school supplies, or even oil changes.
Once you’ve set up a recurring but slightly customized budget for each month of the year, you’ve got a chance to see the entire year at a glance.
Make a note of things like the total amount needed for those here-and-there birthday gifts, any party costs, etc.
As the year moves on, you may find yourself able to save for an entire budget item that spans months in a shorter amount of time, freeing up cash in later months to be applied elsewhere.
Always remember that budgets should be followed pretty strictly, but they should also have room for change if absolutely necessary.
7. Stay Motivated!
The next step to manage your money is to really keep going and keep a positive money mindset! If you start to have a bad money mindset or resent your money management plan, then things will head south.
People will start a budget and lose motivation and give up on it, and you can’t do that and expect your savings to grow and your spending to stay under wraps.
Figure out the real reason why getting your personal finance organized is important to you, such as attaining financial freedom.
Do you have savings goals so you can start investing or retire early? Do you want to pay off debt quicker and put down more than minimum payments? Set financial goals, stick to your plan, and go after it!
Once you have your purpose and goals, getting motivated will become much easier.
8. Ongoing Review
After completing steps 1-8 it’s important to continue to review. Set a time each month to check on your finances. If revisions need to be made, make them. Continue to stay informed on what is going on in your financial life.
Don’t fall back into your old ways after learning your financial situation. Mistakes will be made and that’s okay, get back up and start over again. It might be frustrating at first, but once you get a system in place it’s extremely rewarding.
It’s also a great habit of doing a thorough review of your financial situation on a yearly basis.
Compare your net worth from one year to the next; hopefully, you are seeing it grow. Compare your monthly budget from year to year as well.
This is a great way to make sure you are always living under your means.
During this time of review, it’s always a great idea to also go back through your investment accounts to make sure everything is squared away.
As silly as it may sound, it really is important to stop and take a deep breath once in a while as you’re going through your financial journey. Managing finances can be truly stressful when you have debts and work a lot!
Yes, it’s important to make extra money, pay off debt, and stop overspending, but your finances take time, and you shouldn’t become a ball of stress over it.
Don’t forget to stop every so often and take some time out to recharge as needed. It’s totally reasonable to budget for an occasional (read: infrequent) break, sort of like taking a little “vacation day” from all your financial work.
Go see a movie, order takeout, or plan a little weekend getaway. Just make sure you don’t undo all your hard work!
Money Management Tips
Now that we’ve gone over the individual parts of money management, here are some general money management tips to get you started and keep you focused:
Know your financial goals.
The very first thing to consider with money management is your financial goals. How will you know you have financial success unless you know what it looks like?
We can give you all the quick financial tips you could want, but if you don’t have your goals clearly defined, it won’t matter because you won’t know which tips might apply to you and which would send you in the wrong direction.
Do you want to retire early? Do you have debts to pay off? Are you a parent who intends to pay for your kid’s college degree, or are you wondering if that’s even remotely possible?
Some people just want extra money in the bank week to week, where others want to become rich.
The specifics for managing money in your 20s are far different than in your 60s. Over time, your financial goals may differ, and you may decide to invest more or pay yourself first rather than do traditional budgeting.
Have a rough path forward.
Money management doesn’t have to be exact- especially when things change as you go. Flexibility is important to manage your money effectively.
You can have a general outline of what to do and how to reach your goals and keep extra money to your name.
The specifics of your next action steps will depend on the results of the steps outlined later in this article.
Generally speaking, you’ll want to go into all these steps and any calculations knowing the big picture of how you want to proceed, which in turn tells you which financial planning tips you need.
Do you want to pay off debts first, then save for retirement, then pay off your mortgage (following the advice from the wise Dave Ramsey)?
Do you want to chip away at debts while saving for a down payment for your first home, then worry about retirement?
Do you have an emergency fund or any savings?
If you answered “no” then you need to get on it. Life is unpredictable and things are going to happen. Things like car repairs, surgeries, and death’s in the family are going to happen.
Having an emergency fund prepares you to deal with those situations financially. The last thing you want to worry about in an emergency is “how am I going to pay for this”.
How much of an emergency fund you need varies. The typical rule of thumb is at least 3 months of living expenses. Ideally, you would have more than 6 months of living expenses saved up.
Use the tools you need, and find new ones as necessary.
There are some great tools out there to manage your money! You just have to decide if you want to do a budget by hand yourself or use a free or paid program that does some of the work for you.
If you’re looking for a simple pen-and-paper solution, try budget templates that have blank spaces and guides to manage your money- check out our Budgeting Binder, which can cover all your budgeting needs!
Some things really do need to be done a little more particularly. While pen and paper work just fine for budgeting, you might find that you need a budget app to have it more automatic and ready to use at any moment.
If you choose not to work with a professional for some of your personal financial management needs, you’ll definitely want to consider investing in some quality money management software, such as Quickbooks.
Money management doesn’t have to be rocket science, and we’ve gone over the best money management steps and tips to get you started right away.
We have gotten where we are today by having a clear plan and always reviewing our financial situation monthly. It’s actually really hard for us to imagine not being financially organized; it’s scary.
If you are looking for a digital way to track and organize your finances, try out Empower and test how well it can help you manage your money!
We LOVE our free account and highly recommend them. If you’re not as tech-savvy, a pen and paper always works wonders.
Now that you have the knowledge, it’s time to take action. Get your personal finances organized today!
Get clarity on your money, with tech you can trust. See all your accounts in one place, including your investments. And go deeper with our planning and analytics tools.