3 Ways Money Management Can Go Wrong
Sound money management is, for most of us, a goal that we hope to achieve. Unfortunately, it’s also a goal that can take a long time to develop; we have to learn from our past mistakes, constantly amend the way we address certain issues, and update our patterns of behavior as our income and outgoings change throughout our lives.
It’s easy to assume that if a person struggles to maintain well-managed finances, they have simply not placed enough focus on the need for money management. In actuality, this is rarely the case: many people want to achieve good money management – and are willing to go to great lengths to achieve this – but find that their efforts are nevertheless unsuccessful. Below, we’ve put together three reasons this situation can develop, so you know what to look out for when managing your own personal finances.
Related to money management:
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- Money Worries? Here’s Where Your Business is Going Wrong
Continually postponing future-focused financial measures
For the majority of people, managing their finances right now is time-consuming and difficult enough. For these people, the future is a long way away, and starting future-planning financial management – such as planning for retirement, buying life insurance, and making a will – doesn’t seem like a pressing demand by comparison. With people already stressed or struggling with their day-to-day finances, it’s natural to effectively park the idea of planning for the future, hoping to deal with it at a later point when they have more time and energy.
If the above sounds familiar, then you’re far from alone – but it is nevertheless an issue that requires further attention. Unfortunately, there is a high chance that the perfect moment when you’re ready to tackle long-term goals such as saving for retirement and finding the right life insurance product, may never come. Life is busy, and there is no guarantee that you’ll one day find the time to plan for the future as you intend – the issues you’re experiencing right now may resolve, but new time-consuming problems can arrive in their place.
If you have always pushed future-planning essentials into the background, seek to tackle the issues in one fell swoop. Spend a single day doing your research and making arrangements; check how your retirement savings are coming along, learning what you need to know about life insurance and then purchasing a policy, and making a will. The good news is that when these future-related financial elements are in place, they stay in place, with relatively little modification required – leaving you free to return to your day-to-day financial management, safe in the knowledge that your future is looking bright.
Assuming money is not an issue thanks to a higher-than-average income
It is often assumed that people who are in debt are earning relatively little, relying on debt to meet their living costs and provide the occasional treat.
However, this is not always the case, and there is a huge number of people who appear to be doing very well financially but are actually struggling with debt. In most cases, this is due to lifestyle choices: if someone earns over $100,000 per year, it’s tempting to assume that their finances are secure. This, in turn, means that they will live like they earn $100,000 a year, opting for the finer things in life, treating themselves, and viewing what most people see as luxuries – such as the ability to send their children to a private school – as necessities.
Unfortunately, this line of thinking is incredibly damaging in the long term, and leads to stories like the story of “Tom” and “Kate” that garnered a huge amount of attention this year.
So, what’s the solution to such an issue? After all, there is a middle ground here to consider – it is simply not realistic to expect people to live as if they have very little when they are earning a relatively high amount. It’s only natural for people who are earning well to want to enjoy themselves, after all. The middle ground is thus found in a “20% rule”; when you live, and spend, as if you earn 20% less than you do. With practice, you’ll soon make the adjustment automatically, always deducting 20% from your budget and making purchasing and lifestyle decisions accordingly.
There is the question of what you should do with the remaining 20% of your income, and rather predictably, the best answer is to use it for two primary purposes:
- Pay down any debts
- Build your savings
It’s worth noting that these two options should be completed in order; it’s not advisable to seek to save money if you are in debt. Why? Simple: you will always pay more in debt interest than you will earn in savings interest, so clear your debt first, and then look to build your savings.
Seeing savings as impregnable
First, let’s be clear: saving money and building your savings pot is positive, and is something that anyone looking to accomplish good money management should seek to achieve.
However, some people fall into the trap of treating their savings as impregnable – never to be used, even if they have to take on temporary debt to afford a large purchase. This tendency can be hugely problematic, resulting in a scenario where someone lives as if they don’t have any savings at all – which can be ruinous for your finances.
So, while you shouldn’t dip into your savings constantly, it’s actually healthy to use them every once in a while if required. This fact is all the more true if the only alternative would be debt; your savings are there to make your life easier, so if you need to use them, don’t be afraid to do so.
In conclusion: What great money management looks like
Money management is an ongoing, long-term goal, and one that does not necessarily come naturally to the majority of people.
By avoiding the errors above, you should hopefully be able to ensure that your financial management is always sound, and you can enjoy greater financial security – both now and in the future – as a result.