Why Is It Important To Manage Money & 5 Ways of Doing It

Whether you’re an entrepreneur who needs a regular cash flow, a corporate worker who wants a new house, or a freelancer who wants to enjoy life, one crucial thing that will get you there is money management. After all, money is an integral part of our daily lives. This article will explain why is it important to manage money and how you can do that by following 5 actionable tips. Let’s ‘dollar’ in!

What is money management?

Money management is strategically handling finances to achieve financial goals and long-term stability. It encompasses factors like budgeting, investing, saving, and making informed decisions to optimize financial health and increase wealth accumulation over time.

Let’s understand money management with an example:

Suppose Ben is making $10k/month working as a sales executive. This is what a basic effective plan might look like.

Budgeting: Allocating 50% ($5000) for necessities like rent, utilities and groceries. 20% ($2000) for wants like dining out and traveling. 30% ($3000) for financial goals like savings and investment.

Savings: Establish an emergency fund worth 6-8 months of living expenses, and set aside 60% of the savings in a savings account.

Investing: Contributing to retirement accounts like IRA and stocks.

Reviewing and analyzing: Regularly tracking spending habits and investment returns. Adjusting the money management plan as needed.

And that’s pretty much it.

According to a CNBC report 2024, 77% of Americans are anxious about their financial situation. One big reason is the lack of proper financial education and money management. Therefore, it’s essential to understand why money management is important and its benefits.

Why is it important to manage money?

There are mental benefits.
There are monetary benefits.
There are personality benefits.
The importance of money management in life is gigantic. Let’s see some of the reasons.

1. Helps you grow wealth

Salary and revenue are one thing. Wealth is another.
Wealth means owning assets; you can’t reach that level unless you manage your finances. To grow wealthy, you need to invest and to invest, you need to have some money aside from your expenses.

You can only have that money monthly if you’re smart about spending. And knowledgeable about where to invest and how much to invest. There are so many different investment options.

· Mutual funds: You put money into stocks owned by multiple companies. The famous financial advisor Dave Ramsey suggests dividing mutual funds into four categories: growth and income, growth, aggressive growth, and international.

· High-yield savings account: These accounts offer higher interest rates than traditional ones. You earn profit by depositing funds into the account, where they accumulate interest over time.

· Dividend–paying stocks: These are the stocks of established companies that pay regular dividends to you, which provide income for long-term growth.

POWR30 Stocks Under $10

Allow me to introduce you to POWR30 Stocks Under $10. With this new service, we screen the entire market for the thirty top-rated stocks under $10 per share. Then we deliver that list to you every week. We’ve seen incredible results with this approach. 

Historically, this list of under-$10 stocks has delivered over FIVE TIMES the returns of the S&P. And we’ll send it to you, fully updated, every week. 

Click HERE to learn more and lock in this deal, and get the market-beating POWR30 Stocks Under $10 portfolio.

2. Gives you financial security

One of the biggest benefits of money management is that it prepares you for emergencies. A dedicated emergency fund, for example, ensures you can pay for a sudden car breakdown or health emergency without asking for a loan or borrowing money from your family members.

3. Provides you control over your finances

That’s quite important. Financial planning allows you to make sound decisions that keep your financial health thriving. That way, you become in control of your spending and saving rather than falling prey to them.

For example, if you want to purchase an iPhone, you’d first calculate whether you have the necessary amount in your “wants” column of spending and then move forward with the decision.

4. Brings you closer to your goals

When you know how to manage your hard-earned money, you can easily decide how much to invest in your short-term goals and long-term aspirations.

For example, the average age of a first-time homebuyer is 36. You may have to save and invest more while earning extra cash to get there faster. The earning part can be achieved by working on a laptop, doing extra shifts, or developing a partnership in a running business…

The saving part can be achieved by holding back the temptation to get a new dress, bike, or phone. There could be other goals that you want to achieve as well, like:

 ·         Buying a new car.

·         Getting retired before 50.

·         Investing 20% of your income every month.

Good financial planning gets you there.

5. Reduces stress

Let’s be honest. Constricted financial health is a big source of stress. A Bankrate survey in 2023 revealed that 52% of U.S. adults complained that money was harming their mental health.

If you know how to manage your money smartly, you’ll take calculated risks, plan your expenses, build your investment portfolios, and have an emergency fund. The result? Your stress levels will drop significantly. Even when you encounter unexpected circumstances, you’ll have peace of mind knowing you’ll handle it.

6 helpful money management tips

Now that you have understood the significance of money management, let’s not leave you hanging in thin air.

Here are 5 actionable money management tips to improve your chances of achieving financial independence and stability. 

1. Develop a fixed budgeting plan

There are 3 components of budgeting.

1.    Your earnings: Salary, bonuses, freelance work, etc.

2.    Your spending on needs: Utilities, grocery, health.

3.    Your spending on wants: Dining out, purchasing a phone, self-love, etc.

The money left after this will make up your spending and investment.

Sticking to a fixed budgeting plan is easy if you’re a salaried worker. The day your salary gets credited into your account, you must divide it into the following parts.

·         60-20-20 ratio where you spend 60%, save 20% and invest 20%.

·         70-20-10 ratio where you spend 70%, save 20% and invest 10%.

·         50-20-30 ratio where you spend 50%, save 20% and invest 30%.

You can change the percentage, depending on your needs and the nature of work, but stick to it for most months of the year. If you’re a businessman, however, things can be a little bit tricky.

Depending on the cash flow, you have to manage your budgeting.

2. Create an emergency fund

Mando Sallavanti, a financial planner for SaaS professionals, teaches this religiously. He advises having an emergency fund that can look after your expenses for at least 6 months in case you get fired from the job or your startup shuts down.

It provides a safety net in case of financial challenges. An easy way to set it up is to contribute 25% of your savings (discussed above) monthly. You can also choose to have a savings account to improve the health of your emergency fund even more.

3. Develop a frugal mindset

If you can learn to live frugally, it’s almost guaranteed that you can save a lot of money for your investments. I would love to quote the 6 Frugal Habits by Warren Buffet, the Oracle of Omaha.

But before that, keep in mind that frugal living doesn’t mean you become miserly. It means you only spend on the right things that you “actually” need.

·         Ditch the lure of brand names.

·         Don’t invest with money you don’t own.

·         Opt for practicality rather than luxury.

·         Avoid the trap of unnecessary spending, e.g., baby products (choose cloth diapers instead of disposable diapers), decoration items, bedroom amenities, etc.

·         Stop lavishing your children with endless material possessions.

·         Pay with hard cash rather than credit cards everywhere (you can pay through cards if you’re getting discounts).

These habits are complete rules in themselves. 

4. Invest in yourself

One golden money management tip is to invest in yourself and continuously upskill. Why is this integral?

Because you can’t keep competing with others if you’re not improving, focus on developing high-paying skills, reading finance books, developing the art of networking, improving your health and fitness, etc.

Understand this, 80% of wealth is psychology (Tony Robbins explains this in this article), and when you invest in yourself, you’re, in reality, shaping up your ‘winner mindset.’

5. Use financial tools and apps

In today’s world of digital innovations, numerous financial apps can help you manage your money. This includes stock investing apps, budgeting apps, and even tools to stop you from overspending.

When you first start using these tools, they may seem like a hassle, but once you get a handle on them, they’ll become a necessary part of your life. Over time, you’ll notice how helpful they have been for your financial health.

Now, it’s time to put the tips discussed into practical use and see your life transform. Best of luck.