Money management for the individual is similar to corporate finance management for organizations. Both help in making financial decisions, such as whether to buy a car (investing in that project), how to finance the car (project), and how much to spend on it.
While the latter is commonly being taught to finance students, the former isn’t as often mentioned, and often go unappreciated by the average individual. With the recent sub-prime mortgage crisis, one cannot deny that mismanagement on the individual’s part has heavy implications on not just the individual.
The basic for managing one’s wealth is apparently basic enough that people usually take it for granted and ignore it. Here are some tips that will help in managing your money.
1. The importance of savings.
There are two overwhelming reasons why you should be saving your money.
a) Emergency purpose
Savings seems to be something forgotten by many, probably because they’re just into working life and the joy’ of spending is still greater than that of saving. It is in times of need that one realizes the importance of savings. As a financial advisor in the past, we always check that our clients have at least 3-6 months’ of savings, to cover any unforeseen circumstances.
b) Compounded Interest rates
As a finance student, I learnt about the magic of compounded interest rates, which was fascinating to me. Here’s a numerical example. If you save $4,000 yearly in an account that offers 4% interest compounded annually, at the end of 10 years it would amount to $48,024, giving an extra $6,424 solely from the compounded interest. While at first glance it might seem insignificant, know that it does matter with as the amount and interest acquired increases.
2. Record your expenses on a daily basis.
Track your expenses everyday, so you will know whether you are overspending, what you have been spending on, and that will help you in managing your money.
3. Credit cards
Most credit cards work like a loan, so make sure you repay your debts’ promptly, preferably as soon as possible, and avoid taking on loans’ you can’t afford to service. Remember that compounding interest can be hefty, especially when the interest rate is in the double digits.
Key to using a credit card: if you can’t afford to pay for it by cash, don’t use your credit card for it.
Confucius once said that if someone does not foresee any problem about the future, then surely he is preoccupied with solving the problems in the present (pardon my bad interpretation). When it comes to your finances, make sure you prioritize your needs and goals. For example, while savings is good, if you save money meant for your mortgage repayments for the sake of saving alone, then probably it’s not worth saving after all (which reminds of Keynes’s Paradox of Thrift, that deliberate savings might, paradoxically, cause the economy to have fewer savings).
5. Goals that pamper yourself
It’s one thing to know the rules; it’s another to adhere to it strictly. Set financial goals for yourself, so that you have a direction to head in, and while you are at it, have fun by rewarding yourself for attaining the goal. For example, if you manage to save 10% more than your target, consider using 5% of it to reward yourself for being such a disciplined person (perhaps some chocolate fondue, given you’re disciplined enough to exercise).
Work for your money, and watch your money work for you. Discipline yourself, and you’re well on your way to financial freedom.