In today’s world, it is increasingly common to hear about the importance of financial literacy, which largely boils down to sound money management. And many might think that in order to achieve financial independence it is necessary to increase income. It is undoubtedly very important, but as practice shows, it is much more important to manage money wisely. It is management that largely ensures a surplus of finances in the future.
The earlier one begins not only to think about competent personal money management, but also to implement quite simple principles in his budget, the faster money begins to reciprocate, coming in larger and larger amounts. See Banker’s opinion
Money management rules
The most important principle of money management is planning and a clear understanding of the current financial picture. Naturally, it is impossible to foresee everything, but it is not necessary either. After all, the more a person manages his financial well-being, the more he stays in it. At the same time, a certain percentage of expenses is set aside for unforeseen situations, which makes them more foreseeable financially. It’s worth noting that managing money wisely doesn’t mean denying yourself everything when achieving a goal. It is difficult to stay in this mode for a long time, and the goal achieved in this case may bring less joy. Money management in many ways comes down to streamlining cash flow, maximizing cash surplus and managing it.
Let’s take a closer look at how to learn how to manage money. First, it’s worth understanding how much money comes in on average per month (not all areas of activity have equal cash receipts), taking into account bonuses, part-time jobs, additional employment and other bonuses. Next, you should rationalize your spending by thinking about what and how much you need during the month in financial terms. In this column you can enter food, clothing, car maintenance, utilities, home furnishings, entertainment, and contingencies.
Next, you should think about how you can rationalize your spending items. For example, buy clothes out of season when they are much cheaper. In this way, expense items will be reduced in terms of spending while maintaining their quality content, which can free up some money from expenses to maximize the cash surplus, which is the basis for financial independence.
But the most important thing is not just to understand these truths, but to translate them into reality. And this is where an ordinary planner can help. It should record the receipts and expenditures, as well as plan the financial expenses and investments. On weekends, you should take 10-20 minutes to think about what you should buy next week. Moreover, it is better to start planning in the format of a month, and then little by little to be more specific at the level of weeks. This minimizes the effect of chaotic shopping, and spending and income becomes more and more organized. At the end of the day, you should briefly write down the actual cash flow, assessing how it corresponds to what was planned. At first glance, this process may seem somewhat boring, but gradually you will realize that it is what organizes financial discipline and ensures the realization of financial goals.
In this way, the amount of money that can be directed toward financial goals and financial independence will gradually increase. If before optimization these funds went nowhere, after optimization they will be optimized without reducing the quality of life, even with its improvement, which once again confirms the truth that financial planning is a process of rationalization, not cutting yourself in everything.
But managing personal money competently is not everything. It’s important to make the financial surplus work by bringing in more money, otherwise inflation will begin to slowly reduce the purchasing power of the accumulated cash reserve. To find the most profitable options for investments, you should start mastering the science of investing, on which a lot of webinars and master classes are held these days. Improving your own financial literacy will help you better understand the nature of money and calculate upcoming economic events in advance. The most important rule in the process of increasing money is to “pay” yourself first. Which means that you should set aside a portion of your money every year to ensure your financial independence. You must make this process not a one-time event, but a continuous one. It should be understood that the equivalent of 3-4 salaries should be available in case of a “rainy day”, as a kind of a safety cushion. Part of the surplus that is being set aside should logically be used to make major purchases, understanding the order in which they should be prioritized. And another logical part of the surplus should be allocated to building up financial security for yourself in the future, because money, if properly managed, begins to bring in more and more money.
Preserving and augmenting your financial surplus with the help of investment instruments based on exchange-traded assets is a sound way to manage your money. These may include various mechanisms of trust and consulting management, investment in bonds and shares, formation of one’s own investment portfolio.
As practice shows, exchange assets protect money from depreciation very effectively. But in order for investments in exchange-traded assets to be profitable, they should be competently managed, which requires certain experience and qualifications. These days, brokerage companies have a number of schemes where an investor invests in a predetermined money management strategy that has its own historical performance and a clear mechanism of operation. This kind of approach allows the investor to receive an increased income without any distractions from the main activity. But it’s worth mentioning that often the result of managing investors’ money will be the best in large companies with the most qualified and experienced money managers.
There is also a consulting relationship where an investment professional contacts the investor and offers the most promising options for investment, based on the investor’s stated wishes for money management. This kind of approach allows you to gain skills in managing an investment portfolio and gradually understand how market professionals think. Later on it will help to make independent transactions and gain profit.
More often trust and consulting management is based on stock market assets, the most popular of which are shares and bonds. Moreover, the so-called dividend stocks, i.e. shares of those companies on which stable dividends are paid, begin to attract more and more attention. Their yield is often higher than the average bank deposit, to which, naturally, is added the yield of the share itself.
As for bonds, their yield is comparable to a bank deposit, but often exceeds it, which makes this instrument very interesting for investment. Bonds also allow you to diversify your risk across industries. It is necessary because in the periods of license revocation the banking sector can be more risky, and investments in bank deposits a priori belong to one sector of economic activity. Thus, by professionally managing an investment portfolio, an investor increases his financial literacy. In addition, he can participate in the most interesting economic events, bringing higher returns, which will allow the invested capital to grow and contribute to the achievement of financial objectives.
To manage money competently, one should streamline financial flows and invest financial surpluses in investment assets while constantly improving one’s level of financial literacy.