As a high-earner, you may wonder if you’re making the most of your current financial situation. Questions like should you be saving more, spending less, or investing better might constantly circulate in your head. And that’s mainly because most of us find money management tricky.
Money management can be pretty simple as it mainly focuses on how an individual handles finances. Everything falls under this category, whether it’s budgeting or saving, investing, or selling. And like any other skill, you can learn this as well, simply by practicing a few basic strategies.
However, before getting into what works best for managing money, it’s important to understand that most wealthy individuals start with just a small nest egg. Instead, what they do with it and how they handle their assets makes all the difference in their subsequent profits. Additionally, for every individual, the reasons to learn smart money management may vary. But whether it’s concern about not having enough saved up for retirement or wanting an emergency cushion, certain tips have always worked for finance gurus. And to help you learn from them and act as a guide, we list the top six here.
1. Consider different compensation plans
Compensation refers to any form of payment an employer gives for work and services. Compensation plans can differ depending on the type of company and employer you work for. Some examples include hourly wages, salary, bonuses, or commission. However, another kind of remuneration plan you must study is trying to figure out deferred compensation. So, what is deferred compensation, and why should you consider it? It is a form of agreement that allows you to hold back some portion of your salary, which gets paid later. It has several benefits, like lower income taxes and an opportunity to save up for your retirement fund without getting a chance to spend it.
2. Avoid frequent credit transactions
The first rule in smart money management is to exercise patience and control. Only make purchases when you have the relevant funds, and avoid regular credit card transactions to buy products. As convenient as they seem, becoming dependent on credit cards can quickly throw you into a vicious cycle of debt. Interest charges, credit card fees, and cumulative loans can all collectively become the downfall of your financial stability within no time. Frequent credit card use also makes it challenging to keep an eye on your budget and makes it easy to overspend. Therefore, as a ground rule, use debit cards or cash to purchase something and only use a credit card in emergencies.
You must also understand that besides putting a strain on your financial resources, excessive credit card transactions may also negatively impact your credit scores. This can ruin your chances of mortgages, investments, loans, or other potential financial opportunities in the future.
3. Track your expenses
Even if you earn a lucrative salary and have excellent job benefits, tracking your expenses is a fundamental practice for money management. It allows you to control your money instead of letting it control you. You’ll better understand your financial situation with physical evidence of all the purchases and transactions you made recently. And while there are several ways you can track your expenses, the primary objective must be to record and categorize each purchase diligently—no transaction—no matter how minute—is irrelevant and must be noted. At the end of each day, you can write down all the expenses or use an app to record them. Later when the month ends, you can pinpoint trends and areas where you’re spending the most and identify unnecessary or non-essential purchases.
4. Prioritize your spending
Once your expense tracking app or notebook shows you a daily record of your transactions, you can start prioritizing purchases. Understanding financial priorities is an excellent strategy for allocating your money to the right place while leaving plenty for savings. These priorities can vary from individual to individual. Therefore, you must identify and write your goals beforehand. Recognize areas where you’re fine overstretching your budget and those payments that are unnecessary and potentially draining for your finances. For example, if you have credit card loans or any other debts, paying these off should be your top priority. Utility bills and additional overhead costs can be next on the list since these are essential life necessities. Other expenses like a Netflix subscription, music, travel, etc., can be placed lower on the priority list. Knowing these priorities helps make informed financial decisions on where to cut back or spend, preventing any surprising blows in the future.
5. Set a realistic budget
While many people understand the need for setting a budget, very few succeed in following the limit. This is because individuals need to set realistic goals, guaranteeing an over breach and beating the purpose of establishing a budget in the first place. You must first write down your income, expenses, and saving goals to create an ideal budget. Next, set aside the amount to cover necessary purchases like food, transport, utilities, or housing. Then write down your short- and long-term financial goals. For example, your short-term financial plan could be paying down your credit card bill, and your long-term goal may be to save up for your child’s schooling. Once you know your objectives, plan how to divide your income to cover these expenses. One popular technique is the 50/30/20 rule, where you use 50% of your income on essentials, 30% for luxuries, and contribute 20% to savings or debts. If your financial budget doesn’t seem to work or you have unexpected expenses, it’s better to revisit and adjust your budget rather than ignore it completely.
6. Acquire financial knowledge and skills
By acquiring financial knowledge and skills, you can equip yourself with powerful tools that help with smart money management. You can better control your finances by educating yourself on investments, saving, or financial planning. Financial literacy helps individuals understand how interest rates, inflation, and recession can affect the economy on a personal and regional scale. It keeps you from hiring finance advisors since your skills and knowledge can help you secure a solid financial position. If you want to seek extra earning opportunities, you can advise others or help them with financial planning at your desirable rate.
While money management may seem complex and tricky, it doesn’t have to be that way. Start by identifying your financial goals, then use these tips above to know the dos and don’ts of saving. Even if life throws you off track sometimes, don’t worry. Your finances will remain secure if you stick to your budget and follow the proper money management steps.