8 Tips for Effective Money Management
Upsolve is a nonprofit tool that helps you file bankruptcy for free. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card. Explore our free tool
Managing your finances effectively can save you a lot of money and inconvenience over time. And it’s not as hard as you might think to get your finances in order. It just takes a little planning and foresight along with some self-discipline. Regardless of what your money personality is, here are several tips that can help you manage your money more efficiently and profitably.
Written by the Upsolve Team. Legally reviewed by Attorney Andrea Wimmer
Updated October 1, 2021
Managing your finances effectively can save you a lot of money and inconvenience over time. And it’s not as hard as you might think to get your finances in order. It just takes a little planning and foresight along with some self-discipline. If you are a spendthrift, then sticking to a budget will probably be the hardest part for you. If you are a risk-taker, then it may be easy to invest your retirement savings too aggressively. Regardless of what your money personality is, here are several tips that can help you manage your money more efficiently and profitably.
1. Understand Your Financial Obligations
The first thing that you’ll need to do to get a grip on your finances is list all of your current financial obligations, including rent or mortgage, utilities, car payments, medical bills, insurance premiums, groceries, and fuel. Be sure to include any annual subscriptions you may have and the cost of car insurance if you renew every six months.
This may be a somewhat painful process at first, but don’t get discouraged. Money is a very emotional subject for many people, so don’t try to suppress your feelings while you do this. If you feel shame, you can take comfort in knowing that you are making an important first step to gain control of your finances. You cannot manage your money effectively without knowing what’s going on.
Create an Excel spreadsheet or an accounting on paper that lists out all of your obligations and when they are due, and then create a physical file where you can keep all of your statements. It may be a good idea to create a sub-folder for each type of bill. Once you do this, you’ll be able to see a clear picture of your cash flow.
It is also a good idea to pull a free copy of your credit report at this time to see if you have any outstanding unpaid obligations that you need to catch up on.
2. Make a Budget
This is perhaps the most important step that you can take when organizing your finances. Once you know how much money is coming in and going out, you can see whether you are living beyond your means. Budgeting is not that difficult, but it can be hard to stick to a budget if you are an impulsive spender. Budgeting requires self-control, so be prepared to deny yourself some things in order to stay within your budget each month.
If you dislike using spreadsheets, you can just write out your income and expenses or use one of the many budgeting apps online such as Mint. There are several secure, high-quality budgeting services available online for free. It doesn’t matter which one you use, so long as you have a budget. This is the best way to combat overspending and have money left at the end of the month.
Once you’ve decided how you want to budget, track your information for two or three months and look for patterns. This will help give you a more clear picture of where your money is going. For example, you may be surprised to see how much money you spend on lunches each weekday if you eat out all of the time. You may be able to easily identify one or two areas where you can save money by changing your spending habits. That’s the first step toward financial freedom. Use the extra cash you save to start an emergency fund.
3. Build a Safety Net
Most Americans do not have any type of emergency savings fund set up, so even small expenses can cause them to go into debt. Without savings, you might choose to pay for car repairs or maintenance, unexpected medical bills, vacations, and other types of expenses with credit cards. Then the minimum payment becomes another monthly expense, and you can get further behind as interest builds.
To avoid this, build a savings fund. Start by looking at your budget to see how much you need each month to pay your bills. Then set aside three to six months’ worth of this amount in a savings account. This way, if you lose your job, you’ll still be able to pay your bills.
Of course, this may be easier said than done, but if you’re able to build this fund, it will bring you a sense of security. You’ll have a financial cushion to fall back on if needed. It may take a while to accumulate a sizable safety net, but it will be worth your while in the long run.
Upsolve User Experiences1,765+ Members Online
4. Identify Your Financial Goals
Managing your money more effectively is a good goal to have, but it’s rather vague. Once you have a budget and an emergency fund set up, the next step is to sit down and start doing some long-term planning. You need to be saving money for retirement, paying down your debts, and perhaps working towards other goals, such as buying or paying off a house.
Managing your money effectively might feel like a big undertaking, but it's made up of several small financial decisions, such as how you invest your money or which debt you will pay off first. You will have to decide which financial goals are most important to you.
Money won’t buy you happiness, but it can buy things that you enjoy and help you feel secure. When you know what you want to do with your money, it’s easier to plan where it goes each month. The first step is to divide your financial goals into short-, intermediate-, and long-term goals.
Short-term goals can include:
Paying utility bills each month in full
Eliminating your credit card debt
Taking your family to the movie theater and buying popcorn once a month
Buying new clothes next season
Having a nice dinner out with your partner
Buying a new piece of furniture
Making charitable donations
Paying your car insurance every six months to get the discounted price
Intermediate-term goals can include:
Moving to a new apartment and saving for a security deposit
Taking a family vacation
Getting married or having children
Buying a new car
Paying off student loans
Long term goals can include:
Putting together a down payment for a house
Paying for your children to go to college
Supporting your parents or other family members
5. Pay Off Debt
If you have accumulated a great deal of debt (as many Americans have), then you’ll need to create a specific plan to start paying it off. This is important because once you’ve paid your debt off, you’ll have more money to spend or save for the future. It can also improve your credit score by improving your debt-to-credit ratio.
There is no one right way to pay off your debt, but it’s wise to get it paid off as soon as possible. Some people focus on paying off their highest interest rate debts first. Others pay off the debt with the smallest balance first. There are free online tools that can help you keep track of your debt payments and see the progress that you’re making.
Sometimes it’s easy to see which debt to pay off first. If you have high-interest rate credit card debt, then it’s smart to pay that off before your student loans or your mortgage because the interest on the latter two is often lower and tax-deductible. It’s important to make your monthly payments on all long-term loans like car payments, student loans, and mortgage payments.
If you have credit card debt, consider getting another card that charges a lower interest rate and doing a balance transfer. You may be able to take advantage of a card with a low, introductory rate. Sometimes it’s as low as 0%. In some cases, getting another card can also improve your debt-to-credit ratio. Both lenders and the credit bureaus generally like to see consumers use about one-third of their revolving credit each month. So getting another card may decrease your ratio and improve your credit score.
Too much debt can pull your credit score down, especially if you are making late payments every month. You can check your credit report for free each year to see what’s on your credit history. You may want to consider nonprofit credit counseling if your debt has gotten out of your control. A counselor may be able to put you on a debt management plan. Or, if all else fails, you may have to file for bankruptcy.
6. Save And Invest For Your Future
Your financial goals can help you decide how much you want to save for the future. Having a solid emergency fund in a high-yield savings account is a start, but you also need to think about longer-term investments for your later years. One common major financial goal is to retire comfortably. If you work at a job where you will have a corporate or governmental pension when you retire, you’re lucky. If you do not, then you’ll have to save for retirement.
There are many different ways to do this. Start with your employer’s company-sponsored retirement plan, if they have one. This will be a 401(k) plan if you work for a for-profit organization, a 403(b) plan if you work for a nonprofit organization such as a church, or a 457(b) plan if you work for a state or local government. These plans will give you several investment options and your employer will likely be available to answer your questions about the plan.
These plans are convenient because you can have your contributions deducted directly from your paycheck. The money you contribute grows tax-deferred until you take it out at retirement. Your withdrawals will be taxed as ordinary income.
Your employer may also match your contributions to your retirement plan. You may have to work for a certain period of time before you’re eligible to keep your matching contributions. This is called being fully vested. In most cases, you’ll be fully vested after five to seven years. These matching contributions are essentially free money from your employer, so be sure to take advantage of this benefit if it is available.
For example, your employer may match the first 5% of your salary that you contribute to the plan. If you make $50,000 a year, then a 5% match equals $2,500. That means that your employer will also contribute that amount to your account each year. For all practical purposes, you are getting an instant return on your money of 100% per year.
You can also open an Individual Retirement Account (IRA) if you don’t have access to an employer-sponsored retirement plan. Every bank, investment firm, and most life insurance companies sponsor these accounts, so be sure to shop around to see who can give you the best service. Some IRAs charge annual account maintenance fees of $50 to $100 per year, but many do not. You can deduct your IRA contributions from your taxes within certain limits. You can download IRS Publication 590 for more information about IRAs and how they work.
You can also contribute to a Roth IRA if you prefer to pay the taxes on your contributions now. A Roth IRA allows you to make after-tax contributions and then draw the money out tax-free at retirement. Your employer-sponsored retirement plan may also offer this feature. There are advantages and disadvantages both ways, so be sure to consider how much you think you’ll pay in taxes during retirement versus how much you’re paying now. If you think you’ll be paying more taxes later on, then the Roth option may be best. If you think you’ll pay less in taxes after you retire, then the traditional option is likely the better choice.
Finally, you have to decide if and how you want to invest. It’s a good idea to keep your emergency funds in an account you can get to quickly and withdraw from without penalties or taxes. A high-yield savings account is one example. You’ll also have to decide how aggressively you want to invest in your retirement savings accounts and if you want to make other investments such as in a mutual fund or annuity. A financial advisor can help you decide what’s best for your situation.
If you have a family or other loved ones who depend on you for financial support, then you may benefit from having life and disability insurance. Some life insurance policies offer a complete package of benefits plus tax-free retirement income. They are called indexed universal life insurance policies, and the cash value in them grows tax-deferred until you need to withdraw it. But this type of policy offers life, disability, critical illness, chronic illness, and terminal illness benefits.
The nice thing about these policies is that you generally can’t lose with them; barring some issue with the policy or your eligibility for it, you will either get the cash value or one or more of the living benefits before you die. And if you end up not needing funds from either source, then your beneficiaries will get the full death benefit. You don’t have to depend on an employer to get this type of coverage.
7. Be Consistent
Now that you’ve created your budget and your financial plan, all you really need to do is stick to it. Don’t be afraid to make changes if your circumstances change. For example, if you lose your job, you’ll need to change your budget and use some of your savings for a while. And don’t worry if you don’t always follow your budget to the letter. Everyone is human and makes mistakes. Just don’t let it derail your plan.
Managing money is a marathon, not a sprint. Be sure to use all of the tools you have at your disposal, such as automatic bill payment from your bank account and the free perks you may get from your credit card. Once you’ve got your financial situation in order and have paid off your credit cards, then you can start paying all of your monthly expenditures with the card that offers the best perks and rack up those airline miles or cash back and then pay off your card in full every month. Just resist the temptation to put more purchases on your card than you can afford.
8. Seek Professional Help
If you’re really struggling with your finances and trying to save money, then it may be wise for you to find a good financial planner or accountant to help you budget. A good financial professional will be versed in all aspects of personal finance and can help you do many things like create a budget, invest your money wisely, show you the right types and amounts of insurance, and help you plan for retirement.
The key is to find someone that you feel comfortable with and who you feel has your best interests at heart. Some advisors work on commission, while others charge by the hour or by a percentage of your assets that are under their management. You’ll find good advisors in all three categories, so be sure to shop around for a bit to see which method you prefer. A good advisor is ultimately a smart investment in your financial future.
Budgeting is only the first step to getting your finances in order. Once you’ve done that, you’ll need to think about other goals such as investing and retirement planning. Hiring a good financial advisor may be necessary in order to properly accomplish these tasks. But don’t put these goals off until some later time. Today is the best time to start planning for your financial future.