The ABCs of managing your money effectively

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Managing money is important because cash helps to solve many problems and open up opportunities for you. If you earn, it is guaranteed you have bills as well. Then you have to invest while trying to beat inflation; that is a lot to do.

Like you reading, I have struggled with managing my own money; everyone has; we struggle because we are human and thus irrational. Good money management starts with changing our behaviour towards spending and making better decisions with our money. So I want to share with you the money hacks I use in making prudent money management decisions.

Good money habits to adopt

First, Identify all income sources and pay to the bank. Money management starts with ensuring you account for all income. Automate your income receipts. Pay salary directly to the bank account. If you earn passive income, don’t accept cash; instead, pay to the bank. If you make passive income from shares or bond holding, automate your dividends and coupon payments directly to your account, not your post office.

You can have two collection bank accounts, one for active and another for passive income. All that is required is that you track where your income comes from. Pooling revenues is an essential first step. For technology, I use the Personal Capital® and Mint® to track my incomes and balance sheet.

Next, pay yourself first (PYF). It is essential that your first spend out from your earnings should go to you. Thus select a minimum percentage of your earnings that goes towards your emergency fund and your investment portfolio.

Your emergency fund is three to six months of your non-discretionary expenses (expense not within your discretion to decide if to pay, e.g. rent). Contribute to this first. Maintain your emergency fund in cash or near cash; returns are not a significant factor here, but how quickly you can access your fund in an emergency. The following deduction under the Pay Yourself First is your contribution to your investment portfolio. Keep in mind this is not the deduction taken at source from your Gross Income by your employer but the additional sum you wish to contribute to your portfolio.

Again, automate these disbursements. As soon as your income is in your bank account, debit your bank account and credit your dedicated emergency fund investment accounts.

Next, you pay your non-discretionary expenses. These expenses will include rent, insurance, school fees etc. Automate these payments from your bank account, so you are never late in making payments. If you have a credit card, pay from your card, then immediately pay back the credit card. Using your credit card allows you to maintain a good credit score because you take and repay credit. It is advisable also to get a card that offers your perks for usage. Thus as you make payments, you earn either cashback or even miles from the card issuer.

Next, you pay yourself a salary. Your salary is not your gross amount paid by your employer. Instead, I consider your salary as your gross amount less your scheduled PYF and Non-discretionary expenses. I pay myself a salary by loading my Acorn® card with my daily spend on food and gas, and I try not to use cash. This allows tracking of all expenses but the Acorn® card also rounds up my loose change and automatically invests in my stock portfolio.

Next, I pay my discretionary expenses. All other spendings within my direct control, including things like holidays and new shoes, are discretionary. This is where I can spend to my discretion, knowing I have met all necessary expenses. Even though the expenses are not automated, you must use a card, not cash, to track your spending categories.

Do not try to pay your expenses manually. Automate as much as possible. Automation removes the emotions from your money, and it eliminates irrationality as well. If you have an emergency, you can access your emergency savings, but you can’t delay your expense payment.

What automation also helps you do is provide data from you to prepare a cash flow forecast. By reviewing your incomes and expenses, you can see surplus and deficits in your payments. A deficit in making your Non-Discretionary expenses is a critical red flag and must be addressed immediately. To mitigate a short term deficit may mean you need a short teem drawdown of savings, or you borrow cash today.

However, if your deficit is not short term in nature, borrowing is not advisable. The resolution should be either increasing your income or reassessing your expenses.

In summary, if your income cannot cover your non-discretionary expenses, don’t borrow cash over the long term, as you may be falling into a debt trap. Instead, reassess your overall situation.

There is a tendency to be disciplined with managing money, and it does not always work. It is advisable to use technology to manage your cash, avoid debt and track expenses. Technology keeps you honest and promotes better money management.

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