How to Manage your Money (even if you’re bad at numbers)
Money makes the world go ‘round. We use it to determine how we move through life — how we choose to earn it, what we choose to spend it on, or what we go without when we don’t have it. It’s important to make your money work for you. If you have it, it’s a huge responsibility! If you don’t have it — well, it’s still a huge responsibility. Knowing how to manage it is one of the keys to successful adulthood. Money is a tool for you to use. Use it wisely!
1) Have the right perspective.
Your perspective toward money must correspond with your perspective toward work. This is the key to money management. Money and work have an immutable relationship. It may morph over time, but will never, ever go away. In order to manage your money well, the value you place on the things you spend money on MUST match the value you place on the resources you use to earn that money.
Let’s say you earn $10 an hour at work (we’ll ignore taxes etc. for now).
A shirt that costs $20 costs 2 hours of work.
If a tank of gas is $30, that’s 3 hours of work.
Dinner out at $15 is 1.5 hours of work.
Or consider that the shirt costs the same as ⅔ of a tank of gas.
Two dinners out is a tank of gas.
Once you start thinking about 2 hours of your job, plus the fact that those 2 hours can either buy you enough gas to last a week or a shirt that you might wear once a year, then you might not want the shirt. But if you think of these comparisons and you’re like, “This is a one-of-a-kind Star Wars shirt that I will never have another chance to buy and I will literally love it and wear it to death,” then this shirt is probably worth it to you and you should buy it. Only you can decide!
One day, you’ll earn a lot more than $10 an hour and the number of hours you’ll need to work to afford things like houses and boats will be manageable. But for now, use the small numbers to build the good habits.
2) Start saving money.
Open a savings account as well as a checking account. Choose an amount you can consistently put in savings each time you get paid. It can be $20, $10, even $5 if that’s what you can do. The important part is to do it EVERY time. Your first goal is $500. When you reach it, celebrate! Drop us a note so we can celebrate with you! Buy something fun as a treat for yourself (don’t take the money out of your $500 though) or throw yourself a tiny I’m-financially-responsible party! Your second goal is $1000, which is a real adult-sized emergency fund. When you reach this goal, make SURE to drop us a note. After that, make your own savings goals! Save up to buy that pair of really expensive shoes you’ve always wanted. Save up to upgrade your car. Anything you want! But start by saving up $500 and then $1,000. It’s easier on your brain to set the smaller goal and then the second one. Make sure to celebrate when you reach your goals!
The emergency fund is important to maintain, because if you need it, you’ll have the freedom to use it. If you get a flat tire, you will have the freedom to get it fixed without sacrificing your bills, your eating-out money, or any of the other money you want to spend on things that are not flat tires. Good habits bring freedom.
3) Do not get into debt.
If you’re already in debt, there’s no need to despair. Do work on getting out of debt though. If you’re not in debt, don’t get into it. Debt will tie you to your past and your money will be spent before you even earn it, which is not a fun place to be. You may have heard of Dave Ramsey who has great advice on financial freedom, including this article on getting out of debt.
There are no tricks to spending less than you make. I’m sorry to break it to you. You just need to do it. Only spend money you have already earned. You’ll need to make some hard choices in the beginning. You’ll need to say no to eating out; no to getting drinks; no to a weekend shopping trip. It will be hard. The better you are about making the hard choices in the beginning, the sooner the hard times will be over.
NOTE: “spend less than you make” does NOT mean “spend less than your credit card limit.” Only spend money you already have in the bank.
Spending less than you make allows you freedom to spend your money on what you want. You already have your emergency fund, so you are free to save up money for a vacation and then take that vacation without worrying about regretting having spent it when you get a flat tire next week (but hopefully your tires will be fine).
4) Have some kind of budget.
When discussing money management, one must mention a budget. Some people like a strict budget and some (me) like a looser one. Your budget needs to be practical, functional, and generous. If you try to spend 70% on rent, 5% on savings, and 15% on bills and 10% on fun spending money, you will feel overwhelmed and discouraged at the end of each and every month. Be generous with your expenses, and conservative with your savings. That way, at the end of the month when the power bill is $80 instead of $100 you will have an extra $20 to save (or spend on new shoes…but ONLY if it’s extra money!). It’s better to feel good about saving an extra $20 than to be completely discouraged because you had budgeted $50 for the bill and now are having to dip $30 out of your savings goal. We will do a whole article on budgeting next, but remember that a budget is mainly a plan for how you will tell your money what to do. That’s it!
Use these steps to build good money management habits. You may not be good with numbers, but you can still understand the value of your money and similarly the value of the work you do each day to earn that money. Work hard. Use your money wisely. You’re adulting! Yay!
