At the beginning, we have to discuss the money management concept and understand its methods and principles. According to Wikipedia, Money Management is something similar to investment management, and it’s the process of expense tracking, investing, budgeting, banking, and evaluating money. If we look at the logic of this definition, we will see that it can be divided into two parts:
- First is the process of tracking expenses.
- Second is an act of making decisions.
There is also one more step between these two, which is data analysis. This step includes the process of preparing data and reports. So, we need to collect the data of our financial operations and turn it to the information that can help us to decide on how to manage money better.
How to track expenses and assets?
Data collection is a technical part of effective money management. To solve it, we can use a notebook and pen, but this approach can take a lot of time when we face a need for calculations. Computers are better suited for this purpose. There are old but still good Excel spreadsheets and modern accounting apps. Which one of them to use is for your choice. The goal is to collect the data for analysis. This data must include fields like amount, category, and date.
How to analyze financial data and write reports?
After we’ve got the data, we can start to analyze it. First, we have to look at our balance. The balance is a statement of assets, liabilities, and equity. Briefly, we have to take a look at what we’ve got and what we owe. If we have lots of debts, maybe we need to concentrate our attention on them. The opposite situation is when we keep a lot of cash, so maybe it is time to invest it in assets. To get this report, we have to count all the free cash, deposits, and real estate on the one side and count all the debts on the other. If there are no debts, that’s great.
An income statement is a primary report that shows the difference between the received and spent money. This statement can be broken into two parts. First is general income and spending. Second is capital investments like real estate, bank deposits, and marketable securities. These are two different types of money flows because capital ones can be returned. You can buy stock, a car or a house, and you can sell them to get the money back. That’s why capital investments should be accounted for separately from general expenses. They are usually called OPEX and CAPEX in corporate finance.
How to spend money wisely?
The choice of how to spend money is always depends on you, and there is no universal answer for everybody. However, these general principles of money management can help you to make decisions more reasonably:
- Think about Risk and Return. Investing all your money on lottery tickets is not a good idea to get rich. The probability of winning is low, and the risk of losing all the money is high. But it sounds well to buy some lottery tickets to have fun with friends and get a rest from work.
- Budget planning can be the answer to the question of how to manage money wisely. If you planned most of your expenses, then the probability of spontaneous spending becomes lower. You can start with a simple 50/20/30 budget rule and then update it according to your needs.
As you see, it’s not easy to manage money effectively. You supposed to work on data and analyze it to get the result. But, reckless spending of money and ineffective capital management can do much more harm.