Do you feel the need to manage your money properly but often find yourself in a position where all of your resources are exhausted? Does your current financial situation make you feel overwhelmed or depressed?
If so, don’t despair.
One of the reasons why some people are far more financially successful than others is NOT because they hold better jobs, earn more or are smarter than the others.
Two people, often with the same jobs and same experience, can lead different lives financially. One can feel content and satisfied with his state of finances whereas the other can feel a sense of despair and sometimes even suicidal about his financial situation.
The difference lies in how well they manage their money.
Successful and content people may earn the same amount of money, but they spend it in a different way compared to others who lead lives of financial uncertainty.
With that said, here are 5 key money management strategies of highly successful people…
1. Stay out of credit trouble
The idea of ‘free credit’ was invented in our society to keep us as slaves to the financial industry.
Credit card companies, loan companies and all other lending institutions rely and expect us to continually borrow money and thrive on the hefty charges and interest rates they can claim when we miss a payment. And the strategy works well for them.
Every one of us is now required to maintain a credit card or a loan – not because we need it but rather to maintain and improve our credit score so when the time comes for a big investment (such as purchasing a house), we have a decent credit history to get a loan.
If you do not have a credit history and yet hold a job with a moderate payday, chances of you getting your home loan application approved is quite low.
You cannot live your life completely without borrowing. There will be emergencies and essential investments for which you’ll need to borrow. And when such a situation arrives, you have to make sure that you have a good credit history that allows you to borrow the money you need.
So if you’re using a credit card, please continue to do so. But make sure that you never spend more than that which is necessary and always pay the total amount due each and every month.
Do not pay only the minimum amount due. That’s how your credit card bills skyrocket.
The same applies to all other debts that you’ve purchased in the past. Make sure that you’re making payments on time, and are paying them off in full without leaving them for another day.
2. Study your assets
In his book ‘Secrets of The Millionaire Mind‘, T. Harv Eker quotes a powerful truth, “Failures work hard for their money. Rich people make their money work for them”.
The secret to financial success is NOT hard work. Hard work has only little to do with it. Rather, it’s how you use the money that you earn from your hard work.
Rich people always use the money they earn and reinvest them in assets (house, stocks, savings, and a business) that throw off cash flow.
Poor people on the other hand, spend their money purchasing liabilities (car, clothing, gadgets etc.) which decrease in value and require you to spend money on maintenance.
If you continue to keep spending your money on liabilities, you’ll get nowhere and that’s for sure.
Rich people are always thinking leverage. They continually ask questions like ‘How can I use this money that I’ve earned to earn another 5% more’ and commit to doing those things that will make those little subtle differences.
Always make sure that you think leverage and focus your money on buying/investing in assets.
Assets like starting a new business, or buying an existing business and hiring people to manage it for you or buying a house that you can rent out are excellent choices and will only be productive for you in the long-term.
The single greatest asset that anyone has is their earning ability. And your earning ability is directly dependent on how much value you bring to the marketplace. Make sure that you are investing a portion of your money to learn key skills that will improve your earning ability.
3. List out your debt
Many people never ever look at their debt at all. They fear looking at it and have serious trouble confronting the debt they’ve got. And by avoiding confronting the debt they have currently, they are only causing it to grow.
So stop avoiding your debt. Accept responsibility now and act as though it isn’t a big deal.
Tell yourselves that you’ll handle whatever comes and look at your debt squarely. List out all the kinds of debt you have. Any type of debt that requires more than 11 months of payments is considered long-term debt.
Study the debt you have and write down how you are going to manage your earnings to pay back each and every one of these bills.
4. Bucket Theory Budget System
Financial advisors and many other successful people use the Bucket Theory System of Financial Management to manage their money. Bucket theory system involves dividing your spending into 5 categorical buckets. Each of these categorical buckets vary in their priority.
Bucket #1 (Highest priority) – Financial Security and Emergency Fund:
Always make sure that you allocate 10 – 20% of your income each and every month to your financial security and emergency fund.
Even though most people realize the need to save money, they don’t necessarily get to it because they think they’ll only be able to save more money after their income increases. However, this isn’t the case always. Rather, the converse is true.
Parkinson’s Law (http://en.wikipedia.org/wiki/Parkinson%27s_law_of_triviality) of finances states that as your income expands, so will your expenses rise to meet the new income. But the converse is not true.
No matter how much you earn, your expenses will continue to raise either way. Therefore, it makes a lot more sense to immediately put away 10 – 20% of your income as savings.
In case you are not able to put away 10% right away, start with 1%. For the first month, put away 1% of your money for savings (in a separate account or deposit) and try to live on the other 99%.
Keep increasing the number by 1% month after month. In one year, you’ll be saving at least 10 – 12% of your income each month.
Bucket #2 – Spend the money on your needs:
Needs are the essential things that you require to sustain your life on a day to day basis. It can consist of key expenses such as food, shelter; clothing, transportation and so on – all of which enable you to lead your life in society.
Bucket #3 – Long-term security needs:
While bucket #2 consisted of temporal and immediate needs, Bucket #3 consists of long-term security needs such as your child’s education fund, life insurance, health insurance, and disability insurance and so on.
Make sure that you are allocating a portion of your money for such security needs as well to protect and safeguard your existing resources.
Bucket #4 – Quality of life:
Any expense that improves the quality of your life falls under bucket #4. Money that you intend to spend on vacations, holidays, celebrations, gifting and so on will have to directly fall under Bucket #4.
As your income and the ability to manage your expenses around the income that you earn improve, make sure that you are allocating a portion of your funds to improve the overall quality of your life. Do not discard them.
Things such as vacations, celebrations and so on are essential to renew you and help you focus and maintain your level of motivation at work.
Bucket #5 – Investments:
You can now use the remaining money and make it work for you. Begin actively investing your money on assets that will throw off cash flow.
Even if the cash flow returns are small, it’s okay. A simple savings deposit can throw off cash flow of about 5 – 7.5% annually – which is still valuable.
And in case you do not have any money left after allocating your budget to other categories, don’t worry. As you learn to manage your money better, you will have more and more money that you can use to create an investment portfolio.
5. Monitor your spending daily
You may have the best budget/financial management plan in the world but it won’t do you any good if you aren’t actively monitoring your spending. Even though your budget plan may be flawless, there are always chances that the expenses may end up being more than you expected.
This is natural. Don’t beat yourself about it. Just revise your budget plan accordingly and continue to monitor your spending.
Keep on monitoring your spending on a daily basis and try to meet your budget goals. As you do this on a regular basis, you will find it easier to control your spending and make wise decisions.
Money management is not something that is essential, it is everything. Your quality of life is dictated by how well you use your money.
And when you manage your money the right way day after day, you will be able to gain back control over your finances and establish a solid financial foundation for you and your family that will keep you secure no matter what happens.
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