5 Steps to Managing Your Money Effectively in 2021

5 Steps to Managing Your Money Effectively in 2021

Understanding your personal finances and knowing where you want to be with your finances is a very important step in your financial journey.

We often hear a celebrity or a serial entrepreneur being described by their net worth. You do not have to be a millionaire or a celebrity to work out what your net worth is.

Do you have a financial goal you want to achieve i.e.; do you know where you want to be with your finances?

What is your net worth?

Is your cash flow positive or negative?

If your answers to the questions above are No? Then it would be a good thing to start thinking seriously about your finances and become intentional with them if you are going to make any changes to your financial circumstances.

Let’s dive in!

Learning how to manage your finances is an education in itself. It takes time and effort to do so and most importantly, you have to be intentional with it. Choosing to read this write up, means you have already started looking at managing your finances well and you are on the right track.

Organising your personal finances is a necessary first step to achieving financial freedom, if your desire is to achieve financial freedom.

5 Steps To Managing Your Finances Effectively

1) Know Your Financial Goals

What are your financial goals?

Effective management of your finances begins with setting financial goals. If you don’t know where you want to go, how can you begin finding the way to your destination?

The actions you take on your financial journey depend on what goals you have in place. These goals would then be visited more often and additions or subtractions made as you progress along your journey.

• Do you want to pay off debt?

• Do you want to save money in your financial freedom fund?

• Do you want to retire early?

• Do you want to pay your kids school fees?

Write them down.

If you are wondering where you can start with setting your financial goals, check out my post Top 7 Financial Goals That Everyone Should Have For 2021 here.

2)  Identify Your Assets and Your Liabilities

Now that you know where you want to go with your finances and have written it down, write down your assets and your liabilities

What are Assets and What are Liabilities?

Assets:

Assets are the things that add value to you, that is, the things that put money in your pocket, for example, savings, shares, bonds, the equity on your home etc.

Liabilities:

Very simply put, these are anything that take money out of your pocket. Living our daily lives is full of liabilities reason why it is easy to accumulate them than assets e.g., your mobile phone – is it generating an income for you, of not, it is a liability as you pay the period bill for using it, your car – is it generating any income for you, if not, it is a liability. So, car loans, personal loans, student loans, credit card balances, overdrafts etc. These are all liabilities.

3) Work out Your Net Worth (Draw up your house hold Balance sheet)

The balance sheet is the document that shows the net worth of a person. It is not difficult to come up with one. All you do is subtract your total liabilities from your total assets- that is,

Total Assets – Total Liabilities = Net Worth

Using a notebook with a pen is the easiest place to start. If you are Excel savvy, you can use an Excel spreadsheet.

4)   Work out your Income Vs Expenses for the Month (This is Called Budgeting)

Learning to create a budget is the number one skill that will help you manage your finances effectively. A good budget is very essential for good financial management.

What is a budget?

A budget is simply a breakdown/estimate of your income verses your expenses for a specific period of time.

Income:

Write down all your income from all sources for the month. This will include your salary, income from your side hustle, property, etc.

Expenses: 

Write down all of your expenses for the month. These can be split into two categories:

Fixed Costs

There is a group of expenses called fixed costs. These are expenses that you cannot do without and have a fixed amount, month in and month out, like your, council tax bill, your rents/mortgage payments, insurance, personal loan and student loan repayments, internet and telephone bills, etc. It is easy to pick these out as they are fixed each month and most often are direct debits.

Variable Costs

The second category of costs are your variable costs. These are expenses that change from one month to another, hence the name variable. Write these down too. These include utilities – water bill, electricity/gas bill, groceries, miscellaneous expenses, etc. These expenses are not fixed and may be difficult to place a value on them, but reasonable estimates based on previous month spend will do the job.

5) Work out your monthly Cash Flow

Cash Flow is money moving in and out. Writing down your income and expenses, will provide a clear picture to you of your cash flow position, which is really very important in this journey to effective money management.

Cash Flow = Income – Expenses

You have probably heard the saying that ‘cash is king’. That is because, cash is the most important element of everything we do when it comes to money management.

Your overall goal here will be to increase your income and reduce your expenses as much as possible. This will be the point where you will know that your efforts towards managing your finances are yielding good fruits.

Conclusion:

To summarise this topic, understanding your personal financial statements (Income statement, Balance sheet and Cash flow statement) is the best skill you can learn that will help you manage your finances effectively, help you create good budgets and eventually help you manage your cashflow effectively.

Income Statement                                                Balance Sheet

• Income Assets                                                    Assets
• Expenses                                                             Liabilities

If you understand where your money is going, you will understand what the problem is and you can work towards fixing it.

if you haven’t already done so, grab out free financial success guide by clicking on the link image below to get the tools that will help you manage your money effectively, pay down debt and set and achieve new financial goals.