Why is Money Management Important: Benefit and Tips
Posted on July 15, 2021 in Money
It can be difficult to learn to manage money. However, if you ever want to transition from simply “having money” to “wealthy,” you need to understand the importance of money management and begin implementing it in regards to your finances.
Those who make a decent amount of money but aren’t practicing money management tend to simply spend money without any rhyme, reason, or purpose. Money comes in and it goes out, while the person remains stagnant and doesn’t ever move forward.
On the other hand, those who have wealth, tend to have peace of mind. They aren’t looking to money or things for fulfillment, yet they know that they have all that they need and will continue to throughout their life.
To embrace money management is to learn financial practices that help you accumulate wealth and security, while understanding the key to preserving that wealth. Implementing the management of your money takes your unique needs, goals, and risks into consideration while focusing on your financial decision making and your previous habits that could stand in the way of your success. It also includes a humble awareness of certain factors outside of your control, such as inflation, taxes, debt, and market volatility.
Learning the basic tenets of money management will help you to understand why it’s important and how to start implementing the practice for yourself.
The Basics of Money Management
Not understanding the foundation of money creates a multitude of issues. For example, if you aren’t aware of the way credit and interest works, you might charge something small on a credit card that ends up costing you 20 percent or more in interest over the course of a year. In fact, you could end up paying for that one thing over and over again, essentially throwing your money away, and making it difficult to achieve a higher credit score.
Without a firm, educated grasp of financial matters, you’ll likely end up like the majority of Americans; locked into years of debt, paying high fees, and unsure where all of your money is going.
When you understand money management and utilize principles to secure your financial wealth, you can eliminate debt-inducing mistakes that leave you bound to creditors and even to material goods. Along those lines, a good skill to learn regarding money management is how to fix your credit yourself, which will help you gain financial independence as you build your credit score.
Additionally, here are some of the most important money management tips that you will want to follow as you embrace financial literacy:
Create Goals to Better Manage Money
The bottom line in everything is that you need to know where you’re headed. Without a clear destination, you’re more than likely going to keep going around in circles. Your GPS isn’t programmed, your map’s not out, you’re not driving in one set direction. Instead, you’re just driving. That’s exactly what it’s like to be dealing with money without goals. You’re wracking in an income every month and you’re just throwing that money around with reckless abandon because you have no set purpose.
However, if you establish your financial goals, you’re going to have something programmed into your GPS. You’ll know exactly where you’re headed and what you want to do with that money. You’ll be prepared to intentionally use or save every dollar that comes your way.
By setting your big goals, you’ll also be able to set some smaller goals that act as steps along the way. These small goals are basically milestones that help you to progress further down the path to your financial destination.
If you go back to the illustration of the GPS, these small goals are the little pit stops along the way. While the rest area, the gas station, and the park may not be the place you want to stay, they are helpful for rejuvenating you and giving you a boost of energy to set back out again.
Your goals are also useful for showing you things to avoid. If something is way out of the way or you’ll even have to backtrack to go there, it’s not a step you’re going to want to take. Your goals will give you clarity and vision, helping you make the best decisions for reaching them.
Get Control of Your Money
Money management and wealth is all about accumulation. Many people don’t understand this. They view wealth as making a lot of money and don’t realize that if they’re spending that money, no matter how much it is, and not accumulating it, they’re never going to be wealthy.
This is why you need a way to determine where your money is going. The best way to do this is to track your money to see where you’re spending it. A free budgeting app can be a great tool to help with this. When you are able to see where your money is going, you will then be able to develop a strategic spending plan for using, saving and investing your money more effectively.
Businesses understand the importance of money management in business and focus on increasing their monthly profits. However, increasing profit isn’t the end goal. Using the increased profit wisely to further financial growth is essential. Thus, creating a money management plan that includes investment of the additional profit will increase the wealth of the business exponentially. For example, taking advantage of a retirement calculator, and understanding how much you should be putting into a 401K is a great step to take to get better control of your money.
Whether you are managing money for yourself or a business, the stronger your money management plan, and the more control you have over the flow of your cash, the closer you are to reaching your goals.
Develop an Investment Strategy
Having a long-term investment strategy is often the key to strong and effective money management and wealth accumulation. When you create a long-term strategy, you’re more likely to keep your eyes on the prize and not be swayed by the many things that come your way. There are numerous fads and wealth-building ideas out there that don’t really have a foundation or a proven reputation. However, they sound great, causing many financially undisciplined people to jump on the bandwagon, wasting time and a whole lot of money.
An investment strategy helps people stay focused, moving towards their small milestones instead of veering off in every which way. They are better able to ignore the stepping stones that others are putting in their path in order to keep on heading in the right direction towards their own goals.
Portfolio Risk Management
Poor management of risk is one of the main causes of investment underperformance. You need to be proactive when it comes to risk management, understanding the risk-return relationship and acting on it. In fact, being deliberate with risk actually serves to drive return performance and achieve both short term and long term results.
When you have a seamless money management plan, you will understand the market risks and the likelihood of negative returns. You will be cognizant of the fact that holding your portfolio longer means more negative returns, yet also means a greater probability of a positive annual return.
Money Management & Tax Efficiency
Understanding your taxes is a huge part of money management. While everyone knows that they pay taxes, they’re not really aware of how much they pay. They certainly don’t know about unnecessary taxes and how they can actually hinder the accumulation of wealth.
When you are managing your money, you aren’t thinking of your income as everything you make. Instead, you know that your income is really whatever you make after taxes, enabling you to better allocate your finances.
In regards to investments, you will want to consider your account location, essentially allocating your money based on their tax status. You will then do the same for your various investments, allocating them in the same manner. This will give you a better understanding of your overall wealth, your options for wealth distribution, and will help you accumulate wealth faster.
When you begin to accumulate wealth, you’re opening yourself up to a variety of areas of risk. In fact, one vulnerability can actually destroy your wealth and everything you have worked for. The greater wealth you have, the greater risks you’ll have. When your purchases are larger and more expensive, you experience the potential for risk along with each purchase.
You are putting yourself out there with everything you buy, every trip you take, everything new you try. Every time you use your wealth, you are exposing your finances and dancing around risk. Unfortunately, each and every risk has the ability to bring it all down.
Awareness of the great risks involved with having wealth can help you create a money management plan that seeks to avoid them. A risk management assessment can help you uncover your potential risks in order to mitigate them.
As you create your plan, consider circumstances such as:
- An accident or illness that causes long-term income loss.
- An unexpected, early death of the income provider.
- Property damage or medical expenses due to a catastrophic event.
- Liability claims which expose assets.
- Financial exposure from domestic staff.
- Identity theft or fraud.
- Loss of business.
With awareness of the potential of these and other circumstances, you will be better able to create a money management plan that is prepared for these issues. Preparation can help you avoid great, and even total, loss.
FAQ’s About Why Managing Money is Important
Why is money management an important skill for all of us?
Money management can help people accumulate wealth instead of pointlessly spending all of their money. When you accumulate wealth, you will be able to increase your capital, create security for your family, make positive investments, better your standard of living, and develop a cushion in the form of assets and savings. Overall, money management increases your lifestyle, providing security and greater opportunity for you and your family.
Why is money management important for students today?
Learning the importance of managing money wisely is necessary for students. Most students are merely taught to go to school in order to get a good job so that they can pay for their lifestyle. They don’t learn about debt, savings, or how to use money wisely. In fact, they typically rack up hundreds of thousands of dollars of debt while they’re in school. When they complete it, they have to start paying their debt right away, with interest rates usually impacting their ability to pay down the principal balance quickly. By understanding the importance of money management, students have the capability to get ahead financially before they make poor decisions. Instead of going through the trouble of taking out numerous student loans and going into debt from the very beginning, they are able to make wise decisions and prepare themselves to be wealthy as they move forward.
Why is managing money important in your personal life?
Knowing how to manage money gives you the opportunity to find financial freedom. When you have personal financial skills, you will be able to manage your money well, providing you with the lifestyle you want. With positive personal finances, you will be able to meet the needs of you and your family, manage your cash flow, save the money you need for the future, and provide your family with security. Managing money helps you live the life you want to live without financial stress.
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