Money management can be difficult for some. For others it becomes natural and others are taught at a young age to appreciate the value of money. There are plenty of opinions out there on how to manage your money successfully, but sifting through all that can be a challenge. If you are a peson who struggles to save or who has no idea where your money is going, here are my 6 recommendations and a few tips to help you getting started.
1. Have an emergency fund
Having an emergency is the foundation for any successful financial stability. Whether you are a student, part-time worker or full-time employee, your first target should always be to have an emergency fund. Calculate your basic monthly expenses and when I say basic it’s not your Netflix account or having LTE data on your phone. It’s the most basic necessities in life; Water, food, clothing & shelter. Calculate how much you spend on food, water, having clean and ironed clothes and rent (+ utility bills) and build enough to sustain yourself for at least three months, (six months is better). We don’t like it but, whatever happens in life sickness, losing a job, temporary injury, etc.. that we cant work for some time at least we have a safety net to protect us for a few months until we get back out there. You may be partially supported by your parents as a student or as an entry employee but you never know if they might fall on hard times.
2. Create a Budget
Keep in total control of your money because no-one will. Having a budget is very important for a number of different reasons. For example, I hear a lot of people having problems keeping their spending under control. Others just have no idea where their money is being spent. And some other people struggle to keep a month’s pay last for the entire month. A budget is useful to keep your spending under control. You might be shocked to find the ways in which you are wasting money.
An exercise I used to do is forecast my spending. So for example, at some point early one when I started working I got this habit of buying a takeaway cappuccino on my way to work which was around €2.50 so what I did is multiply it to 365 days (1 a day) which is extreme and would get over €900. Do I really want to spend that amount when I can easily prepare a hot mug from home or wait until I get to the office! The answer was a straight NO.
3. Spend less than you earn
This is crucial for any financial success. Always spend less money monthly than you earn. Some people are very good with money management, others have the urge to spend everything they make. As I always say in this blog, it is not how much you earn, but how much you spend.
There are people who earn €30k and manage to save €8k a year and then there are people who make €80k and are always in debt and live beyond their means. Unfortunately, this is a case of high earners who create big expectations that are not capable of delaying the lifestyle they desire. They want a new car, a bigger home, and a better everything now, that they can’t afford.
One tip here is to get rid of credit cards. I have never owned a credit card in my life. I always had debit cards that never put me in debt. Also, try separating your income into envelopes and assign every € a job. Say for example week 1 – €80 goes for groceries, €25 for restaurants, €400 for rent, etc. If an envelope runs out of cash, you have to prioritize your category and if it’s high up the priority list you have to find a way to fill the gap from other envelopes. This is very hard to do but an approach like this allows you to get your spending under control.
4. Develop a habit of saving
If you are already good with money my advice is to save more than you spend. For those who are still figuring it out, I’d say develop a habit of saving and automate it. It could be small to start with even if it’s €25 a week. The most important thing is to automate it and develop that habit as part of your mindset. Set up a recurring transfer from your bank account that takes a sum into a savings account.
5. Invest and start early
This is a hard psychological barrier to get started. Letting your money leave your bank account into the unknown is difficult but that’s how you grow your wealth, through diversification and risks. Where should you start? Read and learn before you throw money into something. Wealthy people only invest in things they understand well. Never listen to some random youtube guy earning money from views and referral links. Like this blog there is plenty.
If need be, meet a financial advisor in your local area and see what they offer but don’t accept anything. Take your time to understand investment strategies well then put your money. I read and follow different investment strategies and that’s why I want to share my experiences to help you the beginner learn your way in like I did.
Starting early allows you to compound your interests. Person A is 25 years old and invests €100/month at a 7% annual return – when he is 65 years old he would have €267,131.87. Person B is 35 years old and also invest €100/month at a 7% annual return. By the age of 65, he would have €124,007.25
6. Appreciate & value money
When we have a stable income monthly it’s easy for us to lose appreciation of the value of money. Our thoughts become automatic and we rely on the next payslip. We can easily fall into a trap, we wait for our next payslip and feel the guaranteed income. And that is well and good in a stable environment however, we are living in a very unstable time. We have no guarantee for what’s about to happen next month.
We truly appreciate the value of something when it becomes scarce. We may at some point end up in a situation that becomes hard to earn money and would be good to have some passive income flowing in.
I wrote this article based on my experiences and my knowledge. But in reality we are all different, we are all in different financial situations, and we have different opportunities in life. I would love to hear from you and learn more about what specific challenges do you encounter with your money? or when trying to set a budget.