Good money management skills are not restricted to finance consultants and corporate brokers. Anyone can learn the art of money management by applying common sense practices to everyday situations. At the heart of all money problems are two opposing forces: incomes and expenses. Unfortunately, it’s your money – your back pocket – that is dead centre in this constant tug-of-war. When one side gains the ascendancy, the entire equilibrium is shifted.
This makes it difficult to restore homeostasis. Consider an individual with rising expenses and falling income. It’s not difficult to imagine that over time the expenses will gradually erode away the revenues and eventually plunge the individual into debt. Income and expenses are like the Yin and Yang of life. They need to be carefully managed to avoid an imbalance.
An interesting phenomenon occurs when revenue streams start rising. People work harder to live better. Few people will strive towards 6-figure incomes and live like paupers. Your living standard increases with your income – that’s natural human tendency. However, the art of frugal living dictates that it is better to live well beneath your means. That’s the secret.
The Capital Cushion – It’s time to Get One
By spending less than your bringing in, you’re creating what financial experts call a ‘capital cushion’ to guard against the guaranteed uncertainty to come. Financial planners routinely caution individuals to save money for eventualities. These come in many forms, including medical emergencies, death, divorce, loss of employment, loss of income, economic downturns, natural disasters etc.
Capital cushions are required by the federal government vis-à-vis banks. Therefore, banks have to pass stress tests to ensure that they are able to maintain liquidity in times of crisis. The federal government of the US is not a good example of effective money management. The US government is in debt to the tune of $20 trillion, yet its income streams are a fraction of that and the interest-related repayments on the debt are growing ever larger. US federal tax revenue is just $3.3 trillion, comprised of a revenue of $10,418 per citizen.
The debt per citizen is $61,900, indicating that there is an almost 6:1 ratio of indebtedness in the US economy. Fortunately, national debt is the macrocosm of the microcosm. If household debt decreases, national debt decreases accordingly. Effective money management is possible by reducing the overall burden of student loans, credit card loans, personal loans, business loans, automobile loans and overdraft facilities. By managing personal debt effectively, it is possible to tighten the purse strings and restore homeostasis.
Here Are 5 Tips to Help You Manage Your Money Better:
- Live beneath Your Means – the precise ratio will vary from one person to the next, but it’s always a good idea to spend only a fraction of what is coming in. That way you can prepare for eventualities, and ride out the proverbial storm a lot better than those who don’t. Money management experts will always advise you to monitor your credit for any changes to your score or your credit report. If you spot an anomaly, report it immediately. The last thing you want is somebody taking advantage of your hard work.
- Distinguish between Needs and Wants – we all want everything, but do we need everything? The fact of the matter is that our needs are limited and our wants are unlimited. Since we are dealing with a limited revenue stream, we should manage our wants accordingly.
- Work Harder and Smarter – thinking outside the box never hurt anyone. If you follow a traditional path, you are likely to lead a traditional life, with hardship, prosperity, and certainty of outcomes as each different scenario unfolds. If you work harder and smarter, you may be able to break the mould and live a better-quality life with more free time, less limitations on your earnings potential, and greater life satisfaction. This will also help you to realize your financial aspirations. To get there, you will have to break the shackles.
- Target Debt – nobody likes debt, but ignoring it doesn’t make it go away. You have to make a concerted effort to pay off debt as quickly as possible.
- Distinguish between Different Types of Debt – Here’s a zinger: Contrary to popular opinion, not all debt is bad. Think about it for second. When you incur debt for positive purposes such as acquiring real estate, or an education, that debt is expected to yield positive dividends in the future. Credit card debt for entertainment purposes, eating out, or vacationing is bad debt. Not only is it wasteful, it comes at a premium. Distinguish between different types of debt and always ensure that what you are paying in interest is the bare minimum on borrowed money.