How to manage your money better, especially when life hits.
When it comes to managing your money, it seems like once you think you have it all figured out, something always seems to come up. Or as the saying goes…stuff happens!
You know exactly what I am probably referring to:
- You get your tax return and the washing machine goes out.
- 2020 is supposed to be your year than all of a sudden Coronavirus hits.
- The credit cards are finally back to $0 and a pipe bursts.
- It's raining outside and you hit a pothole, now your rim is bent.
- Your dog eats chocolate and her vet bill is $4,300.
While the list can go on, maybe something like this has happened to you, maybe it hasn't. However the likelihood of something occurring in your life that requires your attention and some finances is likely.
So when life hits, it is probably a really good idea to know how to manage your money better. Here is a list of 6 steps to help you, but first…
Why you should manage your money better anyways?
Life always seems to hit us when we least expect it…
- In 2017 it was my car’s engine, followed by the washing machine.
- Back in 2012, it was the passing of my mom that made it a financially stressful year. In 2014 it was my own stupidity of buying a brand new truck.
- And just this year, my dog decided to eat some chocolate resulting in a $4,300 vet bill.
You catch my drift… but I tell you all of this because something is bound to come up. We couldn't have ever imagined our dog eating chocolate while we were at work or having a $6,000 student loan interest bill in 2018.
But it happened. And no matter what happens in your life, you don't want to be caught with your pants down when it comes to your finances. So the first step in making sure you are prepared for life events is knowing how to manage your money better.
Step 1: Shift your mindset about money.
In order be prepared for the things life throws at us, we have to first shift our mindset about how we tackle our finances.
Creating financial goals, having short term financial targets, and managing your money are all key elements to shifting your mindset. Keeping this all in mind, it is important to put your financial goals out in front, even when life is going great.
Step 2: Budget your money.
This might sound redundant, but to manage your money better, you need to have a budget. LIKE a really good budget that you follow and track.
Start with a budget: No matter what your financial goals are when life happens living off a budget is still a must. You just might have to shift around money from one category to another.
Track your budget: Make sure you track your budget. Making a budget is great, but if you never follow it or actually see where your money is going, what's the point? Use apps like Mint, Personal Capital or YNAB to track your money.
Manage your money and adjust: Depending on what kind of budget you decide to use, make sure you are making adjustments. For example, when the dog ate chocolate, our student loan pay off focus shifted temporarily to replenish our emergency fund.
Step 3: Make an emergency fund.
From 2010 to 2016, a $4,000 vet bill would have set us back for the rest of the year financially. Even making $400 monthly payments would have taken 10 months, not factoring interest.
But luckily for us, we created an emergency fund in 2016 for the moments just like these. Now that you know you should manage your money better, start your emergency fund by following these steps:
- Learn to pay yourself first, AKA reverse budgeting.
- Set up a separate saving account not attached to your checking (Try Ally 2.2%)
- Have a goal to save 1 month of fixed expenses
- Double your emergency fund, then double it again, thus saving 4 for months
- Decide on what you want to do next:
See Also; this step by step “Create An Emergency Fund Guide.”
Step 4: Make Savings a Habit
Managing your money better goes further then just having a budget.
Remember, the purpose of having better money management skills is to make sure your prepared – dig your well before your're thirsty. So in that case, savings needs to be a habit.
But what money management habit should you focus on?
Make savings a monthly habit if you're not sure with what you want to do with your money long term.
Start by just saving a small amount each month like $200 and have a goal to increase it by 5% each month.
Tip: Use apps like Acorns that can automatically do this for you.
If you have an established emergency fund and you don't have a lot of debt, next on the docket should be investing.
Work to max our your 401K contributions, diversify your money, and work to a 20% savings rate.
Tip: Use apps like M1 Finance to help with investing to avoid high planner fees!
Pay Off Debt
If you have debt, after you create a 1-6 month emergency fund, focus on paying down your debt, 1 item at a time. Start by lining up your debt and attacking your smallest balance first, using the pay yourself strategy!
Tip: Use a strategy like the snowball!
Buy a House
Managing your money better can help you buy a house. Just be sure to have all your other bases covered.
Buying a house can be a burden with a 30 year loan. Keep in mind, over the course of 30 years something might come up.
Tip: Look into 15 year mortgages.
Step 5: Have Cash Handy
When life happens, it is best to have some assets such as cash, handy.
Sure this falls in line with your emergency fund, but in general just having the ability to say YES is comforting for you and your family. While money might not buy happiness, managing your money better will help you in those tough situations.
Truth be told though, most simply can't pay cash. Overall, Americans are currently saving just 2.5%. As Alex W. of Whitehouse Wealth Management in Vancouver Washington puts it,
“Having cash in a savings account is important because life happens. Companies lay off employees, cars break down and people get sick.
Whitehouse went on to say that Without savings, unexpected spending forces people to take on debt, frequently using credit cards. At 16 percent or more interest, credit cards become a very costly way to handle sudden expenses.”
Just managing your money better and having cash handy separates you mightily as roughly 8 in 10 currently live paycheck to paycheck and another 50% don't even have $1,000 in savings.
Step 6: Listen to the wisdom from before.
Want to know has a unique perspective on managing money and tough times?
Someone who grew up during the great depression era. For good or worse, depending on what you're talking about, change is good. We can order an order a car air filter from our phone for $8.00 instead of being told it costs $45 by a service salesman. That is a good thing.
Yet, we can also grab something off Amazon that we don’t really need and have it shipped to our house in less than 24 hours. This is sometimes a bad thing.
So revisiting how our grandparents lived isn't actually a bad idea. Here are a few tips the older generations used to better manage their money and avoid bigger financial issues:
- They drive cars they could afford, typically paying in cash.
- Assessed wants vs needs with every purchase.
- Bought what they needed when times were tough
- Avoided credit card debt
- They lived below their means
- They practice delayed gratification
- Used cash
Manage your money so you can have options.
Following these simple steps will help you create options.
Options are really the only thing we can strive for when life throws challenges our way.
Having the option to pay cash for the new rim that hit the pothole or being able to endure a layoff is vital. Life will happen to all of us, it's not a matter of if, but when.
Unexpected expenses will come up, things will break, and emergencies will occur. Instead of having a, “Oh it will all work out” mentality, it might be better just to prepare ahead of time.
In general have a long term perspective when you manage your money.
My takeaway to better money management:
The biggest reason for being focused on managing your money better should revolve around your family and happiness.
Whether you want to pay off debt, save more or you're just looking to create options, you have to be a good steward of money. Want to know what makes a crisis worse?
Not having the ability to pull through because of finances. Remember, the reason to better manage your money boils down to being able to endure hardships that might arise.
- Realize that things will happen in life.
- Have a plan, but be aware that it will never go as planned.
- Figure out WHY you need to become more fiscally responsible.
- Realize that at the end of the day, like it or not, money will dictate most of your choices.
- Start an emergency savings and have a goal to get to 6 months.
- See about removing wasted actions and spending from your life.
Q: What is something you can implement to manage your money better?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎