The most important part of personal finances is telling your money where to go. If you don’t tell it where to go, then it will go wherever it wants to go. And it will go where you decide it should go in “the heat of the moment”.
Either you are in control of your money, or your money is in control of you. There are no other options.
There are certainly other things to consider in where you want to put your money. But the fundamental “starting point” is just that. Don’t let your money tell you what to do. Do with money what you want it to do. And, believe that you have a choice. This is the first step to more money freedom. If you understand this concept and believe that it is true, you can move on to the work of “choosing” where your money goes.
The hardest part of being good at personal finances and money management is the mindset. This is the first step to being a good steward of the money you have been given.
If you need to know more of where this mindset comes from, there is good Biblical training in Crown Financial and Dave Ramsey’s Total Money Makeover where you learn things like the problems of debt and the importance of having a plan and a purpose for your money.
Once you master mindset, the two primary means of being good with money are:
- Track your spending habits
- Set a budget and stick to it
- Make investing automatic and first
Track Your Spending Habits
This is the most important part of managing your finances. Most people have no idea where their money is going. Track it and categorize it. Then you will have the framework to tell it where to go.
Set a Budget
Making a budget is nothing more than making a plan with your money. Budgeting is about choosing where to spend your money rather than it choosing for you and you being controlled by your emotions and whims. This is essentially categories of spending that you give on any given month. You will want to track your spending for several months to see where income comes from and where it is going. You can think you know but I am always surprised when I see where the money has actually gone. So, track spending in a ledger and categorize it as best you can for the primary needs: income, taxes, giving, retirement, savings, housing/utilities, phone/internet, groceries, transportation (and auto insurance), medical, ent/recreation, out to eat, clothing, miscellaneous, home repair costs. These are the categories that are tracked every month and then there are a few that are estimated for birthdays, Christmas, and other special occasions.
Once you have a good idea where your money is going, you can begin to consider what you want to spend your money on. This is the process of being proactive rather than reactive with your money. This is where you make a plan and you work the plan by staying with it day after day. You do this by making an estimated budget for each category so that you know where you want to be more intentional with your money. It’s as simple as that. If you are surprised at how much money you spend in say out to eat and really want to put more money away for a rainy day, you will need to cut back on something in order to do so.
I am very disciplined when managing my own budget. But as a married man, my wife and I are a team and so we have to work together on the budget, tracking what we spend and then changing our budget based on the needs of our family. It becomes more complex when you have different backgrounds in money and personalities that are different as well. Budgeting can be a challenge for two people to agree on. In many cases it helps to get alignment on the budget plan and goals for your money, including retirement, kids college, mortgage payoff, and the why. Then prioritize what’s most important to get paid or saved or invested when you get paid. Don’t wait til the end of the month. The second tip is to make your investing automatic.
Make Investing Automatic
In paying off our house, and paying off all of our debt in full, the hope is now that we can make investing more automatic. We have been doing our company 401k match and now we want to increase our Roth IRA contribution, our kid’s college funds, and our general investing in stocks. We want to do this every month and for a set amount so it is automatic and it applies first (before we have the chance to spend it on something else). Doing it this way means once we get used to living on the lesser amount, it we will begin to not expect the extra money. You can also increase your investing as your income goes up. Every little bit counts and the more time you have it in your investment account, the more time for compounding interest to do its work.
Choose Where You Want Your Money to Go
Choosing where your money goes is about paying yourself first. It is ok to start small in paying yourself first and increase it over time. But the hope is that you are not dependent on the money you are investing so you don’t have to pull it out in an emergency. So, it would be best to save up an emergency fund before you begin moving cash and treating it as a long term investment plan. If you don’t make a plan for your money, it will end up finding somewhere to go on its own. Most of the time those purchases are spur of the moment and completely unnecessary.