How to Manage Your Money Better

Think budgeting sounds difficult or tedious? It doesn’t have to be—and even if it takes you a while at first, it’s well worth the effort. Creating a budget is among the best ways to bring your finances under control. It will help you manage your money wisely. It will help you to stop spending money you don’t have, and to spend the money you do have on things that will make a real difference in your life.

The envelope strategy. There are many ways to make a budget, but one of the simplest and most effective is to label an envelope for each category of your monthly spending (e.g. food, rent/mortgage, auto payments, cell phones, nights out, etc.). Then take the total amount of money you have to spend that month and distribute it among the envelopes. When the cash in an envelope is gone—that’s it. You can’t spend any more money on that category until the following month. This will make you keenly aware of how you spend your money and encourage you to stay within your limits.²

The 50/30/20 plan. With this approach to budgeting, you spend 50% of your funds on necessities, 30% on things you want but don’t have to have, and the remaining 20% on savings or paying down debts.³ This method is a good way to set your spending priorities and then make progress toward your financial goals.

For a deeper dive into how to create a budget, read “How to Make a Monthly Budget, One Step at a Time.”

Want to live within your means and stay out of debt? Pay each bill in full as soon as it’s due. If you commit to that approach, then you won’t spend money you don’t have, won’t need to borrow, and will save significant sums on interest charges and late payments. Plus, your credit score will likely improve, making it easier to apply for a credit card, lease a car, take out a mortgage, and manage your money in general.

But most Americans (55%) spend everything they earn and sometimes more each month, according to The 2018 National Financial Capability Study,⁴ pushing them into debt and giving them very little leeway in the event of an emergency or unexpected expense. Setting a realistic budget and then staying current on your bills is a good way to avoid this trap.

Followed by paying your bills on time and creating and staying within your budget, the third key component of smart money management is to grow your savings.

Saving money is your way toward living a more comfortable life. It allows you to obtain the things you really want and to prepare for the future. There are four key steps to growing your savings:⁵

1. Pay off your debts: Whether they’re credit cards, student loans, or auto payments, these debts can cost you extra money each month in the form of interest payments and fees. Before you can begin accumulating savings in earnest, you have to pay down your debts and—at the very least—get them to a manageable level. So, whenever possible, it’s a good idea to pay an additional amount over your minimum monthly payment to help reduce your debt faster.
2. Start an emergency fund: To weather any storms that come your way, you’ll need money in the bank. Having a small emergency fund helps you roll with the punches. A good rule of thumb is to sock away three-to-six months of living expenses. If that’s too ambitious for now, feel free to start smaller—the key is to start.
3. Invest for the future: Need a down-payment for a house? Hope to send your kid to college? Want to retire comfortably? These goals can be within your reach if you begin investing in them early. To make this easier, many employers offer a variety of savings accounts to help you put aside money regularly on a tax-advantaged basis. The best known are the retirement plans such as 401(k)s. But there are others—like Coverdell Education Savings Accounts and 529 savings plans that will help you pay for your children’s higher education.
4. Persistence: Your savings may not seem like much at first, and the temptation is always there to spend more on life’s immediate pleasures. But by staying the course each month, your savings can grow quickly and bring your dreams closer to reality. When that happens, you’ll feel like one of those wise money managers who has taken control of their future.