How To Manage Your Finances Wisely

Do you want to how to manage your finances wisely? Many people find it a mystery why they always seem to be over drawn and/or in debt but then spend frivolously whenever they feel it’s appropriate – justifying it away with many reasons which they believe to be true. On the other hand there are those who never spend any money and budget for everything but still find themselves in the same situation.  Why is this?

Incoming Money is Finite Outgoing Money is Infinite

It takes self control to not spend money on things you don’t need. After all you’ve earned it right?! The irony is that sometimes people spend money to ‘blow off steam’ for the hard week they’ve had! Making their financial situation all the more stressful and leading back to a need to ‘blow off (even more) steam’! Living below your means is hard, especially when you know there is money in the bank. It only takes a little spending to drop into your overdraft, a little more to build up some credit card debt. As the interest kicks in you get caught in a downward spiral. The last thing you want is to budget and live less well than you have been – especially if you’ve been ‘enjoying’ yourself.

It’s Not What You Earn It’s What You Spend

Learning how to control your spending is a better (and easier) option than continually looking for new ways to earn more money. If you trade your time for money, which most people do, you only have a finite amount of it. For someone who is rich, to lose all their money is more of a tragedy than for someone who is used to being poor. The poor person can manage on little, whereas the rich person cannot. Learning to live below your means is a key ingredient to learning how to manage your finances wisely, whatever level of income you may be on.

how to manage your finances wisely

Paying Off Debt

Paying off debt is the first thing you should do – especially debt with high interest attached to it. If you can’t do this straight away you should attempt to have your interest rate reduced. This can be done in some circumstances. Once you have paid off debt avoid going into debt again.

How To Manage On Less

Managing on less is the first step towards becoming more financially stable. No-one wants to live below their means, but equally nobody wants to fall into debt either and feel stressed continually with a mounting debt they can’t afford to pay. Managing on less is a good solution, once you have paid off your debt.

Set up a standing order or direct debit to a savings account which comes out every month from your normal account. Don’t send it to an account which is easily accessed or you may be tempted to use it. Use an account where you have to go to the branch if you want to get at it, or better still a limited access account. Many of us judge our spending by the amount we see in our account. By taking a small amount out to pay ourselves first before any of our other bills, we soon get use to living on a little less, and build a buffer savings account.

How to manage your finances wisely

Know That You Are (sometimes) Your Enemy

If you have struggled with money for a while it may be that you keep creating the same problems due to patterns of behavior. Have you any expensive habits? Do you often treat yourself to things you can’t afford? Do you try and fit in with people who have more money than you? Your habits and particularly spending habits become part of your personality and you will feel ‘wrong’ for not doing them. Keep a notebook and list everything you spend money on for at least a week.

The Latte Factor

how to manage your finances wisely

In the book The Automatic Millionaire by David Bach he talks about something which he calls the Latte factor. This is a great book on how to manage your finances wisely.  The latte factor is that factor of your life which drains away your finances without you noticing. As par of a talk Dave Bach got people to come up to the stage and state what they spent money on on a daily basis. For one woman it was a morning Latte with a cookie or biscuit. This came to around $5 a day. It doesn’t seem like much and most people are happy to spend this. But based on a daily latte and biscuit coming to $5 a day this costs her $1820 a year.

What’s Your Latte Factor

Find out your latte factor by taking a notepad out every time you purchase any item for a week. You will soon discover how much you are needlessly spending. Cigarettes and alcohol also make up a large chunk of a lot of people budgets. By giving up, even for just a short time, they are reducing their financial burdens. What else have you bought recently which you didn’t need? Adding these items up should give you some ‘slack’ if you give them up and instead set up an automated payment to a saving account for this amount.

Paying Off Mortgage Early

Most people’s biggest outgoings is their mortgage or rent payments. If you do have a mortgage consider upping your monthly payments instead of spending the money on yourself. You will soon learn to live with the shortfall and you will pay less and have your mortgage paid off quicker.

Get A Pension Plan

The idea of a  pension plan always bored me. I wanted it now, now, now. It wasn’t until I read The Automatic Millionaire that I decided to get one. A pension plan is subsidized by your employer in many cases which means you are effectively saving twice the amount you pay in – depending on your circumstances. In addition you don’t pay tax on your pension plan and you save the amount of tax you would have paid on the earnings. If you don’t have one you will pay a tax anyway on the difference in your earnings, making the shortfall more insignificant.

How To Manage Your Finances Wisely

Here’s a quick recap on what we have covered in this article “How to manage your finances wisely“:

    • Pay off debt – the highest interest debt first
    • Stay out of debt
    • Manage on less
    • Track Spending habits with a spending diary
    • Find your latte factor and cut it out – use the money for a automatic savings payment every month
    • Pay off mortgage early – start increasing your payment amounts
    • Get a pension plan
    • Get David Bach’s book:

Of course there are other practical things you can do to learn how to manage your finances wisely. Shop in cheaper grocery stores, get a better paid job or work on a part time extra income. You can even start your own internet based business and work it around another job. Wealthy people have multiple income sources and don’t just rely on one income source alone. See steps for starting an online business.