Financial Planning

Five Principles of Money Management That Can Change Your Life

Understanding how to take control of your financial situation is one of the most crucial life skills that often isn’t something taught in school. Many find it challenging to manage their money due to a lack of foundational principles, and since finances can often be viewed as overwhelming and difficult to comprehend, understanding key money concepts will give you a sense of control over your financial future. Here are the five most importance principles of money management to learn and understand.

Importance of Cash Flow (Murray Jean, May 20201)

Cash flow is defined as the total amount of money moving in and out every month. As income and spending occurs, understanding those exact numbers will help you to avoid larger financial mistakes. Plan ahead for reoccurring expenses to ensure your income will cover those expenses to avoid potential penalties. And when planning for each month’s income and expenses, if you notice that the expenses seem to outweigh how much income you will receive, it may be time to reevaluate certain things in your life to avoid debt.

Spending Wisely (Smart Money, July 20142)

One of the most important financial principles is based upon making wise decisions with your money in everyday situations. Whether it’s choosing to save your money by purchasing a secondhand vehicle or setting aside money over time to save up for larger purchases rather than splurging, developing strong spending habits is crucial to a financially healthy life. The small decisions you make on a daily basis will impact your entire financial future, so set a strong foundation early on in life to reap the full benefits.

Face Debt Head On (Biltweath, September 20193)

Balancing your savings while paying down on debt is an important thing to do since debt often comes with an interest price tag. Rather than paying interest fees over a long period of time, repay debt faster and save the additional money you would have spent on interest!

As you pay off one source of debt, compound that monthly payment on to another debt so you can pay things down even faster! Remember: the sooner you are debt free, the more money you will have to save for other things over a long period of time.

Age is an Important Number (Shin Laura, May 20144)

There is some truth to the age-old phrase, “Early bird gets the worm,” especially when it comes to finances. Studies have shown that the sooner you begin saving or even taking control of your finances, the more you will accrue across a lifetime.

If you begin investing, saving, and paying off debt as a young adult, your savings and investments will compound dramatically through the years. Still, there’s no better time than right now to re-establish a strong financial picture, so if you’ve neglected to do so in the past, start today!

Set Incremental Goals (Smart Money, July 20141)

Goals are a great way of measuring your success over time but also great motivation to continue living a financially healthy lifestyle. When first setting goals, it’s important to understand what the main motivating factor is for your financial plan. Are you hoping to retire early? Looking to not stress about finances at any point in your life? Saving to purchase a home?

Once you’ve pinpointed the big picture, set incremental goals that will indicate that you’re headed in the right direction. Plus, this will motivate you to continue on when temptations to skew from the plan come your way!

These five principles of money management are foundational to a healthy financial future. Once you have these key principles under your belt, you can begin to introduce more complex money concepts such as investment strategies. Understanding how to maintain a stable financial situation is something that will benefit you throughout your entire life, but you need to start somewhere today.

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Content Sources
1 - Smart Money (July 2014), 5 Basic Principles of Effective Money Management, retrieved from Smart Family Finances.
2 - Biltweath (September 2019), The Main Principles of Money Management: How to Budget Better, retrieved from Biltwealth
3 - Murray, Jean (May 2020), Cash Flow – How It Works to Keep Your Business Afloat, retrieved from The Balance
4 - Shin, Laura (May 2014), The Only 3 Money Principles You Need To Know, retrieved from Forbes