Managing your money is no harder than organizing your toolbox. The only reason that it sounds so complicated for many people is the misconception that money is just a number in your bank account. Actually, money is different from money, just like a piece of tools is different from each other. Also, money is not just something so you can exchange for stuff. It is your tool to organize your life, and your bank account is like your toolbox. Once you realize this, managing your money is as easy as organizing your toolbox.
Managing money easy way step 1 - categorization
This step answers what you need.
Just like organizing toolbox, we need to find out how many tools we have or need. Anyone can list why we need money, including shelter, food, living expense, emergency reserve, family protection, liability, retirement, children's education, entertainment, charity, your dream. The list can go on and on and on...
Managing money easy way step 2 - prioritization
This step answers what you need first and how much you need.
How you prioritize your money says a lot about who you are. This part should be unique to you. Don't let your neighbours, your relatives or your financial advisors take away your value in life. The common suggest is:
1. Emergency reserve
At least 3 months of your living expense is recommended. Cash is the best for this purpose. It should be highly accessible, such as savings account in a bank without being locked in for long term. An alternative way is to have enough personal line of credit or credit card limit, but be aware that you will have to pay interest if you have to use it when circumstance arises.
2. Insurance
This is to protect the most precious you have, yourself and your family, against unexpected event like death, critical illness and disability. The main purpose for insurance is to replace your income, so that you or your family will not suffer from dramatic financial setback due to any disastrous incidents.
3. Living expenses and financial liability
This section should be strictly necessity of living only, including rent/mortgage, grocery, clothes and other living rated bills. It should not include your takeout food or movie tickets. You will have a pretty good idea how much it would be by adding up all the bills you receive every month. The money should come out of your daily chequing account. If you would like to use credit card, make sure you pay the balance before the due date. A easy way is to setup auto payment schedule so you don't have to worry about it.
4. Plan ahead
This is the things we label as very important but not urgent. It could be your retirement, or your children's education. Depending on amount you need and when you need it, you can put them in conservative or moderate investment vehicle for longer term. The main purpose should be maintaining the purchase value against inflation and gaining decent return without taking on too much risk.
5. Your lifestyle
Movies, restaurants, hobbies, or some causes that dear to your heart. Life should be joyful. Again, you should prioritize your life in your own way. Some people decide to put certain cause on the top, and live the other part of their lives around it. In some culture, parents would put their children's education before their own food. You are the decision maker of how you should live, as long as you are fully aware the consequences of your decision.
Managing your money easy way step 3 - Action
The final step requires your action.
Once you have finished the first two steps, this one is rather simple. All you have to do is to arrange the things that you need, just like you put the tools in the appropriate section in the toolbox. Setup accounts with different purposes with your bank or investment institution and shop for needed insurance.
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