What Is Money Management?

Time To Read 3 MIN READ

Money management refers to how you handle all aspects of your finances, from making a budget for where each paycheck goes to setting long-term goals to picking investments that will help you to reach those goals. Money management is not just about saying "no" to any purchase, but developing a plan that allows you to say "yes" to the things that are most important to you. Any amount of money can prove to be too little if you don't have good money management skills.

Knowing Where You're At

The start of good money management requires you to know where you're at in terms of assets (things you own) and liabilities (amounts you owe). Your assets include your bank accounts, investment accounts, retirement accounts and property, like your house and car. Your liabilities include your credit card balances, student loans, car loans, mortgages and other debts. When you subtract your assets from your liabilities, you get your net worth. If your liabilities are more than your assets, your net worth is negative. But, with good money management, you can change that.

Setting Your Goals

Your goals dictate how you manage your money. It's easy to overlook your long-term goals in favor of just trying to figure out which bills get paid today. However, by setting goals, you can give clarity to which expenses are necessary and which ones you can cut out. There isn't a universal "right" and "wrong" when it comes to your spending goals, but it takes effort to attain them. If it's your dream to have a car that costs $25,000, you have to make more spending cuts than someone who only wants to spend $10,000 on a car.

Creating and Adjusting Your Budget

Creating a budget helps you stay on top of managing your money because you earmark certain amounts for certain expenses. For example, you might limit yourself to $200 for entertainment each month after accounting for other basic necessities and debt payments. However, your budget can be a moving target over time. If you realize you can buy groceries on sale and save $50 a month, you might increase your entertainment budget to $225 and add $25 to your savings budget. Alternatively, if you get a pay raise, budget that raise into your savings rather than adding it to discretionary spending amounts.

Managing Multiple Accounts

As you save for different goals, you will likely have money in multiple accounts. For example, you might keep your emergency fund in a separate savings account so you aren't tempted to tap it for an impulse purchase. Also, you can use an IRA or 401(k) plan to keep your retirement nest egg separate from your other money. You'll also use different strategies for goals with different time horizons. You might be able to be more aggressive investing in stocks and bonds with funds in your retirement account if you won't need the money for 30 years. On the other hand, you will want an account with out any risk, such as a savings account, for your emergency fund because you could need that money at any time. A software program, such as Quicken, can help you keep track of your various accounts to make sure you're staying on track with your spending and savings goals.