We have all had that sinking feeling. You open your banking app, then stare at the balance, and wonder, "Where did all the money go?"
I know that feeling intimately. Five years ago, although I was having a very decent job, I was still living paycheck to paycheck. Do not mistake me, I wasn't buying any expensive cars or watches; I was bleeding money through "death by a thousand cuts. The daily coffees, subscriptions I did not use, and the impulsive online purchases. It wasn't until my car broke down and I didn't have the $500 to fix it that I got to know: I was not having an income problem, but rather I had a management problem.
The truth is one, handling money is not a talent or gift you are born with. And let us not throw stones into the clouds. Money handling is learned, it requires you to practice, and it requires you to be disciplined. The main purpose of this article is to help you with some guides on how to best handle money.
Where Does Money Handling Stem From?
Financial Management or Money Handling starts in your head. Financial management is often said to be 20 percent head knowledge and 80 percent behaviour. You must therefore know that finance or money is not controlled only by your head (your knowledge), but also by your behaviour. So, here is the question: how then do you identify that you have a good money handling behaviour or a bad one?
The Practical Guide to Better Finance
1. Identifying Your Money Handling Behaviour (Money Scripts)
Everyone has an unconscious belief about money, and for that, I am no exception. To identify your money handling behaviour, there are a few things you must know.
- Do you ignore bills, hoping they disappear?
- Do you spend to impress others?
- Are you afraid to spend even on necessities?
From an expert point of view, I used to personally suffer from "retail therapy". If I had a bad day. I bought something, and recognizing this behaviour was the first step to stopping it. Now, when I feel the urge to spend because of my emotions, I force myself to wait 24 hours. 90% of the time passes, the urge passes as well.
2. Budgeting Mechanisms That Actually Work
Many think budgeting means restricting yourself from spending, but no, that is actually the permission to spend. Come to think about it, putting your money in the bank is also an act of spending it and a form of budgeting as well, in my opinion. So then, how do you budget? Use the 50/30/20 Rule.
The 50/30/20 Rule
If you are new to budgeting, then I recommend starting with the 50/30/20 rule. This rule was book was popularized by Senator Elizabeth Warren in her book All Your Worth.
The book talks about allocating 50% of your money to needs, 30% to wants, and 20% to savings and debts.
Your Needs could include your rent, mortgage, groceries, utilities, and transportation, and these are non-negotiables. Wants will include dining out, hobbies, Netflix, and travel, while savings and debts will include emergency fund contributions, retirement investing, and paying down debt.
3. Building Your Financial Fortress
To handle money well, you need protection against life's unpredictability. This is the Emergency Fund. In case you do not know the meaning of an emergency fund, I define it as an insurance for your finances, which prevents you from going into debt when:
- You lose your job
- You have a medical emergency
- You have a sudden home repair
Therefore, we can say the emergency fund is like a financial pillow you fall on in case of an emergency.
A practical step to get your emergency fund going is to start small. Set a target of $1,000 (or your local currency equivalent) first. Put it in a High-Yield Savings Account (HYSA) separate from your checking account so you aren't tempted to touch it.
4. Attacking Debt Strategically
Let me be plain here: You cannot build wealth effectively while dragging the anchor of high-interest debt. If you have credit card debt or high-interest loans, you need a battle plan. What plan should you be thinking about? Below is a tip:
The Snowball vs. The Avalanche
There are two basic methods you can use to handle debt with a good strategy. That is the snowball method and the avalanche method. Experts debate which is better, but here is the breakdown so you can decide which works for you:
The Debt Snowball: Where You Focus On Your Behaviour
- List your debts from the smallest balance to the largest balance, making sure you ignore all interest rates.
- Pay minimums on everything, but throw every extra dollar (or your local currency) at the smallest debt.
Why this works: When you pay off that first small debt, you are motivated to keep going until you settle it.
The Debt Avalanche Where Mathematics Is Your Focus
In this case, you:
- List debts from the highest interest rate to the lowest interest rate.
- Attack the highest interest rate.
This is beneficial because, over time, you save the most money on interest payments. Since interest is often compounded, settling the highest debts with large interest rates relieves you of the financial burdens.
5. Guide Number Five: Investing: The Key to Long-Term Wealth
Saving is storing money, and investing is growing money. Due to inflation, money sitting under a mattress loses value every year, but what of the money invested in a business? That? It gains value.
Never make the mistake of thinking you need to be a stock wizard before investing. No. For most people, a small business or low-cost index funds (like those tracking the S&P 500) are the safest way to build wealth over decades.
Disclaimer:
I am a writer, sharing my personal experience and a guide on what I have learned through my experiences and knowledge, not a financial advisor. So, I will advise and encourage that, before you make a financial investment (an investment that contains use of money), please consult with a certified financial advisor before making an important decision. However, if you want to read more about compound interest and investment, resources like Investopedia or The Vanguard Group offer excellent knowledge and information. You can visit those sites and explore them.
To end with this guide, I want you to understand one thing: learning to better handle your finance take time and a lot of effort. As a matter of fact, without doubt, you have to be self-disciplined to better handle your capital. Impulse buying can be tempting, but so is your responsibility to also discipline yourself to better handle your money. I hope this guide was helpful. Thank you.
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