Are You Frustrate With Your Money Management Skills (Part 2)?

I shared two secrets in that earliest post. Now I am sharing three more here for your benefit:

Secret#3: Know your financial networth and develop a realistic budget

Have you ever taken a stock of what you own and what is the worth of your assets? If not done ever, it’s the time to do it now. This is a very important step in establishing your financial networth. List down all those items which you own thinking if you have to sell down every thing how much you will get. Be realistic and don’t overestimate any item. Do you remember that you paid $3,000 for your TV but that same TV may cost now $1,000. This means that if you plan to sell your TV today, you will not get more than $500 (appx). The same logic applies to many electronic items. After listing down all the assets, make a list now of your liabilities i.e. your mortgage, your car loan etc. Now list down both your assets as well as your liabilities and deduct liabilities from your assets, the balance is the amount which is your networth. This is called a wake-up call. Why wake-up call? Because many of us are very optimistic and believe that our networth is very high and this makes us happy. In reality it may not be so. So once you do this exercise honestly, you may get a shock because most of luxury items depreciate very fast.

Now it’s time to start the budgeting exercise. Put down your monthly income on a piece of paper. Now start listing down all the expenses i.e. minor as well as major. You may create catogories for your expenses like grocery items, education expenses etc. Establish categories which work for you and start putting your expenses under these categories.

Again be realistic and capture all the expenses. If you have kept a record of your expenses somewhere, it’s time to pull that out. You may like to do this exercise with your partner so that you do capture all the expenses. Based on all this intelligence, you should develop target expenses for each category as this will help you in minimizing expenses for each category. You can use Needs vs. Wants formula where you define your expenses between these two options. Once you have defined all the expenses, you know that you have to spend for Needs expenses to run your home show but you start challenging yourself to review Wants expenses.

Secret#4: Capture all your expenses and don’t allow any expenses beyond your income

During my early career stage, I never used to capture any expenses. I used to think that I do remember my expenses very well and I can control myself. If you are in the similar trap like mine, then it’s time to force yourself to start capturing all the expenses. When I started doing this exercise, I realized how much wasteful expenses I used to do. I started capturing and monitoring my expenses. It worked for miracle for me as I started to realize that I can cut my expenses and I started saving money. That’s the goal for you. You need to keep challenging yourself until you start saving money.

My grandpa gave this formula to me i.e. never spend more than what you earn. He used to tell me that you should always live within your means. I am passing that same message to you. If you start noticing that you are spending more than what you earn. It’s time for a reality check. Sit down with your partner or friend and give them this power to control your behavior that you don’t spend money beyond your means. If you can control your behavior yourself, then that’s great. But this does not work for every one. Many of us need a loved one who can control our behavior. YOu should discuss this with your loved one before you ask that person to control your behavior.

Secret#5: Pay yourself first

So by this time, you have developed a realistic budget for yourself. You have also started capturing all your expenses. You have also started to spend within your means. If you have achieved all of this, give a pat on your back. You have really done a great job. Did you notice that you have started saving money too? How did this happen? By being cognizant of your expenses and income and better control on your behavior, you have done this. Congratulations on this remarkable achievement! If you have done, then you should pay yourself 10% of your saved amount so that you can use this money towards fun activities like celebration, party or movie or any other activity which you enjoy. This is a very important step, so you should not skip this. Have fun!

Some interesting posts from Other Blogs on the Money Management Skills:

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