Now more than ever, in response to the global pandemic, we should stress the importance of money management. There is so much uncertainty looming in the air regarding the fate of the economy and the plight of people who are left unemployed from their jobs. We never know when an emergency might happen, and having backup savings on-hand can make or break a dire situation. Not sure how you should be practicing money management habits in your day-to-day life?
Here are five money management habits you should be following to safeguard your chances of long-term financial success.
1. Live by the 50/20/30 Budgeting Rule
The word “budget” doesn’t have to be some big, scary term. Setting a budget probably isn’t as hard as you think—but following it is another story. It requires some discipline, yes, but you can quickly set up spending and saving rules so you can easily maintain your budget and prevent overspending.
Take the golden 50/20/30 rule, for example. This model suggests dividing your post-tax income into three different category allocations: 50% should be spent on needs, 30% on “wants”, and the remaining 20% on savings account contributions.
So, by this logic, if you know that your income is relatively stable, you can atomically direct one-fifth of it towards savings. Then, deduct the price of your rent and other fixed necessities, such as a car lease, student loans, or tax payments. You don’t need advanced tax software hosting with ProSeries & Lacerte to run these numbers—we’ll show you another simple formula you can use at home (no matter how good you are at math) in the section below.
2. Prefund Major Purchases
Another way to think about purchases is to “prefund” them (especially large ones!) to reduce the need for financing down the road. Whether you’re saving for a house, the latest iPhone release, or a trip it to Europe, the less money you need to borrow on credit, the better.
If you know a big-ticket item is on the horizon, do a simple equation: Total $ Needed / # Months Before $ Is Needed = Requires $ Saved Each Month. You might have to sacrifice a few restaurant outings, but the amount you can save by avoiding interest will be well-worth it.
3. Constantly Search for Savings Opportunities
Here’s the thing, saving money doesn’t always have to feel like a personal sacrifice in spending decisions. You can use budgeting apps like Qapital to create spending rules, such as automatically rounding up every transaction to the nearest dollar, $5, or $10 increment then contributing the additional amount into a savings account. Another example might include making savings contributions for “guilty pleasure” purchases like fast food.
Money management habits are far less difficult when it goes on behind the scenes without your conscious effort or approval—you can check out our other post on three pain-free ways to save within an hour to learn more. Set it an forget it, then watch your next egg grow slowly overtime.
4. Start Investing Systematically
If you want you that nest egg to grow faster, you’ll need to strategically make your money work harder for you through calculated investments. Be sure to open an account with a high “annual percentage yield” (APY), or the rate of return based on compounding interest. Then, go one step further by opening a brokerage account so you can allocate a portion of those funds into carefully selected investment securities.
If your employer offers a 401(k) plan, hopefully you’ve been contributing to it already, but those investments are different because they’re managed by your company’s provider, and there are special rules regarding when and how you can access those funds.
5. Read the Fine Print (or Hire Someone Who Can)
Managing your own investment portfolio encourages you to be much more hands-on with your money and assets, but be sure you know the risk involved with any financial decision you make—especially when purchasing volatile securities or managing debt. For example, you might get targeted for student loan refinancing with the promise of a lower monthly payment, but without reading the details in fine print, you could wind up with a new loan on longer terms at a higher interest rate, thereby increasing the overall borrowing cost in the long run.
As you build your wealth and explore strategies to minimize debt, invest in the market, reduce taxes, or build savings, you might want to speak to a financial advisor who can help you put a plan in place.