Money management can seem like a daunting overwhelming task. And let’s be honest, very few of us feel confident doing it or look forward to it. That’s because, like most essential things, we’ve made it way more complicated than it needs to be. But there’s nothing wrong with starting with the basics! And we’ve even found a way to simplify the basics to make it even easier for you to manage your money with confidence.
4 Key Components of Money Management
In my experience there are 4 components to money management, mindset, income, expenses, and habits. You can get pretty advanced or granular on all of these topics. But in order to get started with money management you really only need to know a few simple things.
The very first place we need to start is with your mindset. Setting the stage to confidently manage your money begins with believing you can. And creating confidence and a positive mindset always begins with an affirmation. The one I’ve used for changing my mindset is “I can control my money”.
Listen, I get it, you may find money management to be challenging. You may have tried before, but that doesn’t mean you can’t manage your money. Whether you have a little money or a lot creating intention about where it goes and prioritizing where you spend it enables you to gain control over your money. And anyone can do that. I was managing my money while eating peanut butter bread all week so I could pay the electric bill. And I was also managing money while investing to enable me to retire prior to the age of 50. It isn’t about how much money you have. It’s about being empowered to make choices about where your money goes (or doesn’t).
Income is any money that is coming into your household. This is often from a job but could also be from tax returns, child support, or a side hustle. Understanding where your money is coming from can help you understand how to get more. In my Money Workshop I explain all the different sources of income including which are active and which are passive. You can check that out here.
One important thing to consider regarding income is the cost of acquiring it. Thinking about how you’re trading your time for income and ensuring that you’re making financial choices that reflect your time / income priorities is vitally important to creating a fulfilling life. In addition, if you do have a side hustle be sure to consider the expenses associated with that income. Ensure it’s paying off the way you hope (or will in the future).
There are 4 different types of expenses. Understanding each of them is essential in creating a budget that will work for you. They are essential fixed, essential flex, comforts, and what I like to call fun money. Creating intention about what’s going out is often one of the most challenging things about learning to manage money. So, let’s get into some detail about what each of these are and how they fit into your budget.
Essential fixed expenses are the bills you pay every month that stay the same and that you can’t give up. Things like insurance, house payments, and car payments fit in this category. Sure, you can give up these items, but it would be pretty tough. The best way to manage essential fixed expenses is to be aware of them BEFORE you commit. Can you really afford that house payment? Will you be able to for the next 30 years? What about that new car?
While you may need a house or a car you may also want to consider whether you want to commit that much of your income to this particular item. Selling after the fact can be done but tends to be challenging and time consuming.
There is a lot of variation from person to person between what fits into this category versus what goes in comforts. For example, most of us would consider groceries, heat and electricity to be essential. But it gets more complicated when we talk about cell phones and wifi.
To determine what fits into this category ask yourself what you truly can’t get by without. Do you use your internet connection and cell phone for work? Are they important for your mental health as ways to help you stay connected?
Until about 2 years ago I would’ve likely put both my cell phone and wifi in the comfort category. At least for myself, though not necessarily for my household. You can always start with one and move to another if you find that any items fits better somewhere in your budget.
The important thing to remember about essential fixed is that these aren’t expenses you’re going to eliminate because you need them. But they are flexible. That means the amount of the bill is often unpredictable or you can do something to impact the amount. This is an area of your budget where you have more ability to easily save some coin.
I consider Cable TV, Amazon Prime, and streaming services like Netflix to be comforts. These are things I definitely like having but, in a pinch, I could scale them way back or even eliminate them all together. This category is highly discretionary but should include anything you regularly spend money on. You should definitely budget for them but they could be eliminated if necessary. For you this might also include monthly gifts, vacations, or eating out twice a week. The biggest difference between comfort and fun money is that your comfort items are predictable enough to be put into your budget in advance.
A word of caution… be careful about what you move from fun money to comforts. This involves creating a buying habit that you may have to break later. Comforts give us a lot of wiggle room to decrease our expenses. But it is harder to eliminate or minimize something we’re used to having.
This is the category where most people struggle. It isn’t the money you’re planning to spend that’s the problem. It’s the nickel and dime you spend without thinking about it.
Be aware of spontaneous spending and minimize it. The more you can predict your spending and be intentional about it the easier it will be to manage your money well and achieve your financial goals.
The simplest way to do this is to budget a specific amount of fun money each week. Put that much cash in your wallet and do NOT spend more. That means don’t use your debit or credit cards for anything you haven’t previously planned.
When you first start doing this you may notice that you run out of your fun money fairly quickly. But over time, you’ll find you have some left over at the end of each week. You can roll it over into the next week, save it up for a little splurge, or put it towards paying down debt or into savings. The first week you get to make this choice will feel decadent and triumphant.
My #1 Money Habit
If you were to ask me what the most important money habit is, I would definitely say tracking your money. Did you think I’d say saving, or debt elimination, or budgeting? Nope! That’s because everything you do with your money is based on understanding where it’s going to begin with and how that lines up to your priorities. You can’t make a budget, save, or eliminate debt without tracking.
The easiest way to track your money is to carry a small notebook with you and write everything you pay for in it. Whether that be a 25-cent gumball or your latte every morning, write it down. For how long, you may wonder, well, until you know exactly where your money is going. And if you start to feel like you’re losing track at any point, do it again. I know plenty of people who always track their money and there’s nothing wrong with that.
Bringing it Together
Once you understand how much income you have, all your expenses, and you’re tracking where your money is going you can make intentional choices about your money. And that is the very cornerstone of money management. You are in control of your money! Congratulations!!!