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Financial independence starts with margin, which is the extra breathing room you have in your budget that keeps you from panicking about money.

But in a sad statistic, Go Banking Rates reports that in 2021 40% of Americans have less than $300 in savings. If you’re in that category and don’t want to be, then don’t worry, you can get out of it. But it all comes down to learning the fine art of how to manage your money.

Since money management has so many moving parts, this article sets out a roadmap that will help you master it.

Managing your money may not seem so mysterious with greater knowledge and a willingness to commit to the strategies below.

Table of Contents:

  • Determine your starting point
  • Make money
  • Budgeting
  • Save money
  • Invest
  • Get out of debt
  • Don't give up!
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Determine the starting point for managing your money

Here’s an equation that serves as the foundation for money management:

Assets – liabilities = net worth

Accountants use it to calculate the net worth of businesses, but it also applies to individuals. You’ll need to be aware of your own personal net worth if you’re serious about managing your money.

Your personal assets include your:

  • bank account ($5,000)
  • house ($200,000)
  • retirement account ($25,000)

After adding all three numbers together, you’ll find that your total assets are $230,000.

But, you also have liabilities that include:

  • mortgage ($180,000)
  • car loan ($10,000)
  • credit cards ($5,000)

Your total liabilities add up to $195,000.

Your financial situation looks like this:

Assets ($230,000) – liabilities ($195,000) = net worth ($35,000)

Net worth is probably the single most important number in your financial life. It indicates your overall financial position. It should be a positive number. The larger it is, the stronger your overall financial position.

However, it’s often negative. The more negative it is, the worse your financial situation is.

You need to determine your net worth before you can get better at managing your money. In order to do that accurately, you’ll need to use actual numbers. Some people cheat by using “ballpark figures” that inflate assets and underestimate liabilities.

Make a list of all of your assets and assign a reasonable value to each. Then, list your liabilities. This is best done by using the latest debt numbers on any loans you owe. Don’t leave any out either!

Once you total up your assets and liabilities, subtract the liabilities from your assets to get your net worth, which will tell you exactly where you’re at financially.

Be prepared to implement each of the following five strategies if you don’t like the numbers you see or any other specific components.

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1. Make money: the most critical step

Before you can learn how to manage money, you first need to earn enough to manage. Barely getting by is sometimes a necessary part of life, but you’ll need to earn more in order to move forward.

Unfortunately, while budgeting can help, your progress will be very limited if you’re not earning enough to cover your bills, save and invest for the future. That will need to change. If your current income is insufficient in terms of paying your bills – as well as paying off debts and saving money – then increasing your income will be your first challenge.

Here are a few ideas on how you could increase your income, which will help you better handle the next steps in money management.

Increase your income at work

Never overlook the obvious when it comes to making money. Look for opportunities to increase your income at work. This can include taking on overtime, participating in bonus programs and even looking into available commission opportunities.

For example, your employer may have programs in place that will pay out bonuses or commission for referring new employees or new customers. If so, take full advantage of both.

Side hustle

The other option is to create a second income. This can be a part-time job, but you should also consider developing a side hustle, which doesn’t need to be anything complicated either. Think about what skills you have, either from your job or your personal life, that you can offer to either small businesses or the general public to generate extra income.

They can be basic skills, such as babysitting or lawn cutting, or more specific skills, such as web design, graphic arts, writing, editing or becoming a virtual assistant. Once you develop a second income, make sure that you dedicate the money to either paying off debt or filling your savings account. You should never use it to increase spending.

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2. How to manage money by budgeting

You’ll need to create and work within a budget if you’re serious about managing money. Budgeting is simple in concept, but more difficult to execute.

The most fundamental option is to rearrange your finances so that you live beneath your means. For example, if your net income is $4,000 per month, then you need to implement a budget that will enable you to live on $3,500 or less. This will give you extra breathing room to pay off debt or save money, which is the whole purpose of a budget.

How to start a budget

Start by making a list of all your regular monthly expenses. Then, track all your expenses from the past several months. This will accomplish two goals:

It will show you exactly where your money is going.

It will help you determine which expenses you need to either reduce or eliminate.

The second of these is particularly important. How effective you are at this step will determine how strong your budget is.

If you’ve never had a budget in the past, it can be a difficult transition, almost like going on a diet. You may need help, and fortunately, you can get that help, often free of charge.

For example, there are free budgeting apps available through Personal Capital, Mint and Trim. You can aggregate all your financial accounts on these apps, and they’ll show you your entire financial picture in a single screenshot.

This will give you a visual representation of where your money is coming from, where it goes and how you can reallocate it toward better money management. The app won’t redirect your money for you, you’ll have to do that yourself. But it will show you where to do it.

3. Save money: it's not how much you make, it's how much you save

This is critical to any attempt at improving your finances. The most basic benefit of savings is that it creates breathing room in your financial life.

For example, let’s say you get an unexpected car repair bill of $1,000. If you only have $200 in your bank account, then you’ll probably panic. However, if you have $10,000 in savings, then the bill may be annoying, but it won’t threaten your lifestyle. Put another way, savings open up a lot more options in your finances. That’s why savings are important.

Savings goals

You should have three primary savings goals:

  • Emergency fund: This is your most basic savings. Ideally, you’ll accumulate enough in this account to cover at least three month’s living expenses. It should be doing nothing more than sitting in a safe savings account, earning interest and waiting for an emergency.
  • Goal-based savings: This type of savings is usually tied to specific spending goals. They’re usually intermediate in nature — say two, three or five years into the future. Goals can include saving for a vacation, a down payment on a new car or replacing your roof.
  • Long-term savings: The main savings type here is retirement. You should begin funding a retirement plan as soon as possible so that you can take advantage of compound investment earnings. You’ll usually get a tax deduction for contributions as well as a tax deferral of earnings. You should take advantage of both to the greatest degree possible. The best way to fund any savings plan is automatically.

You can use payroll deductions to fund all three of the above account types. This is another reason why it’s important to make extra room in your budget through some type of budgeting plan.

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4. Invest your money: the key to managing money for your future

Savings are integral to better money management. It’s certainly fine when it comes to an emergency fund or even goal-based savings accounts. But it’s not enough to simply save money in a low-interest savings account.

For longer-term savings, particularly retirement accounts, you’ll need to invest your money in order to make it grow. The combination of regular contributions and steady investment earnings is how people become retirement millionaires.

For most people who know little about investing, the best way to do it is through index funds. These are something like mutual funds, except they’re based on popular investment indexes (markets) and carry much lower investment fees.

For example, you can invest in an index fund that’s based on the S&P 500 index. That index represents the 500 largest publicly traded corporations in the U.S. It will give you exposure to most industries in the economy. That’s an excellent place to start, because the S&P 500 index has returned over 10% per year on average going all the way back to 1926!

Some of the most popular index funds are available through Vanguard and iShares. You can invest in these funds through popular brokerage accounts, such as Fidelity and Charles Schwab, which are two of the biggest brokerage firms in the industry.

The sooner you begin investing money, the faster your savings will grow. You should start as soon as you have the money available to do so.

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5. Develop a plan to get out of debt

This strategy will depend on what your current debt situation is. If you have a lot of consumer debt, particularly credit cards, then you’ll want to pay them off as soon as possible. The high interest rates they carry make them too expensive to maintain effective money management.

If you have student loan debt, you’ll want to eliminate that as soon as possible as well. It’s unsecured debt and very long-term in nature, which means it can haunt you for years.

Auto loans and mortgages can also be worth paying off. But, since each loan also provides you with a tangible benefit — a car and a house — paying them off may be less of a priority.

As you increase your income and improve your budget, you should allocate some of the additional room in your budget toward paying off debt. Since you also need to save money, you’ll need to find a workable balance.

Debt snowball method

There’s no need to engage in a crash pay off strategy. Just increase your monthly payment on each debt you want to pay off. Be consistent in making those higher payments and patient about the process. Work to pay off your smallest debt first, then go after the next smallest. This is the debt snowball method.

While you’re working to pay off your debts, you should also pay close attention to your credit. That includes monitoring credit activity and regularly checking your credit score, which can help you avoid any fraudulent uses of your credit and help improve your credit score. Higher credit scores mean lower interest rates and the greater likelihood of loan approval. Take advantage of one of the many credit monitoring services available to help you in this effort.

Fortunately, as you pay your debts down, your credit scores should gradually increase. However, knowing what’s in your credit will give you an opportunity to do what’s necessary to correct any errors and avoid future problems.

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The final step: never give up!

When it comes to managing your money, this is both the easiest and hardest step. It’s the easiest because it’s not a specific strategy you need to implement. But it’s the hardest because it requires a long-term commitment.

How to manage your money better isn’t a one-time event, it’s ongoing. It’s even permanent. It’s one of those efforts that fits neatly within the saying “it’s not a destination, but a journey.” While a short-term effort may improve your financial situation a bit, only a long-term commitment will move you toward financial independence.

It helps if you can list your goals — the reasons why you desire financial independence. Think of it as a mission statement and display it in one or more places where you’re likely to see it every day. It will reinforce the reasons why you need to become better at managing your money.

In a real way, managing your money is a kind of psychological warfare against yourself. To make long-term changes, the kind that are necessary to reach financial independence, you’ll have to change your mindset. Focusing on the end goals, the benefits of financial independence, is one of the best ways to get across that elusive finish line.

Money management requires both discipline and sacrifice. You’ll need to find ways to motivate yourself during this process. Creating and frequently referring to your mission statement will help keep you on track.

Constantly reminding yourself why you need to better manage your money will dramatically increase your chances of success with all the various strategies required.

Update: This article has been updated to reflect current statistical information on the average American’s savings and the S&P 500 index.

Disclaimer: This story was originally published on September 24, 2019, on BetterCreditBlog.org. For more information on money management please visit: https://money.com/collection/money-101/.