Old wisdom says that money can’t buy you happiness. But in a realistic world, money can buy you peace of mind and ensure a sense of financial security.
The precondition to this is that you must know how to manage your money.
Poor handlers of cash are always barely one step away from the precarious financial cliff.
Here are five fundamental money management tactics that will help you regain your footing.
Keep track of where your cash goes
Trying to manage your money without knowing where the cash is going is akin to driving a car blindfolded. A crash is imminent in that situation.
When you clearly identified where the cash goes you are in control and you can decide whether any course correction in your lifestyle is required.
It will take the guesswork out of saving and you will know which expense holes to plug.
Save every month, no matter how little
Everyone has a hundred reasons for why they are unable to save from their monthly income. It’s always possible to save a little bit every month and you must if you are determined to spend less than you earn.
The habit of saving a little during tough times will give you a mindset where you will be able to save big when your income improves.
In the long run, it is the habit that will pay off, not how little or how much you can currently save.
Harness the power of compounding
Einstein famously said that compound interest is the eighth wonder of the world, and those who understand it earn it, and those who don’t pay it.
Your income can only work to make you rich, but it is the compounding of your savings that will make you wealthy.
Compounding truly works only over long periods of time. Strong money management skills will help you save and invest and compound your wealth enormously over decades.
Remember the rule of 72
The simple rule of 72 makes it easier for your mind to understand the advantage of saving and how it builds wealth. The rule of 72 says that divide the interest rate you earn on your money by 72 to know how many years it will take to double it.
For example, if your invest you a compounded rate of return of 8% annually, your money will double in 72/8 = 9 years.
Financial advisors teach this rule to clients because knowledge is a powerful motivator. When you know that your money will double every nine years, imagine how much you will be worth in 40 years — if you start saving early.
Be mindful of your credit score
Your credit score is something that is going to follow you like your shadow throughout your life. You ignore it at your peril.
Your borrowing rates will be influenced by your credit score; landlords will look at the score while you are negotiating lease terms; even employers may check it before they offer you a job.
To manage your credit well, pay your bills on time, do not spread your finances too thin, limit your debts and pay the loans on time.
Strong money management skills will help you build a good credit score which will you pay you off in the long run.