Managing and using your money effectively isn’t so hard.
Money isn’t a resource you guard with your life. Rather, it’s a tool that can help you live a life of freedom and fulfill all your goals.
Knowing how to manage your money can give you the freedom to invest in a stable and comfortable life for your family, as well as help you plan for the future and save for important milestones.
When I first started earning in 2016, I was terrible with my money. I lived from paycheck to paycheck and thought anything with the word “investment” in it was a nightmare and too hard for me to understand.
Since then, I’ve spent hours engrossed in several courses, read books about personal finance, and attended talks from financial experts to improve my saving and investing habits. From everything I learned, I’ve come to realize that when it comes to making your money work for you, there are three basic principles.
If you follow these, you can slowly work your way towards financial freedom without having to spend hours trying to decipher complex financial statements.
Making your money work for you is not a complex skill. Rather, it’s a habit that can be broken down into three simple principles.
1. Learn to control your spending habits.
The first step towards being financially secure is learning how to budget. This includes knowing where your income comes from and understanding how you spend it. When you budget properly, you’ll also be able to understand bad financial habits, pay off debt, and avoid creating new debt. You’ll learn how to prioritize spending on things that are truly important to you.
Before we get into the details, understand that budgeting is not a one-time action. It’s more a habit that you indulge in every day.
As you become mindful of the breakdown of your income, you understand where most of it is spent. Then, you can figure out how best to spend it, so you don’t have to live from paycheck to paycheck anymore.
Now, you control your money and it no longer controls you. This is the first step towards making your money work for you.
Tools I used:
- An expense tracker made on a spreadsheet that I kept updating on my phone each time I purchased something or invested anywhere.
- The Walnut app on my phone to help me understand a monthly breakdown of where my money went and include any expenses I might have missed adding on the expense tracker.
2. Build an emergency fund.
The next step to knowing where your income is spent is making sure you have enough saved for unforeseen circumstances.
That’s where an emergency fund comes in.
Investopedia calls an emergency fund “a shock absorber for the bumps of life, one that’ll keep you from adding to the load of debt you most likely already carry.”
Once you’ve safely built an emergency fund, you can invest the rest of your savings for the upcoming months without worrying whether or not the money will be available when you need it.
The money you invest in stocks or mutual funds might take a few days to reflect in your bank account after you redeem it. But if you have an emergency fund, you don’t have to worry about liquidating your assets all at once and then spending sleepless nights wondering when you’ll be able to use the money.
Tools I used:
More than a tool, here’s the process I followed:
- I tracked my expenses over a period of three months (pre-pandemic) and figured out my average monthly expenditure (AME).
- Every month, I put aside a small portion of my savings into a different bank account that offered higher interest rates than my usual savings bank account.
- Once that amount crossed 10x my AME (meaning I had enough money to last for ten months if push came to shove), I stopped saving more and didn’t tamper with this bank account at all.
- Every quarter, whenever some interest was credited to the account, I withdrew the amount, always making sure the total amount in the bank equaled ten times my AME.
3. Save and invest your money.
When I first started on this journey of becoming financially independent, I always thought saving was enough. Only recently, I learned that most banks in India offer interest rates on savings account ranging from 2.5% to 6% per annum. Whereas, the inflation rate in India for 2019 was 7.66%, climbing steadily higher with each passing year.
If you keep your money in the bank, it will eventually decline in value.
These rates will be different in different countries, but the basic idea is valid no matter where you live. Just saving is not enough. You need to invest. You need to make your money work for you so it can grow.
But how can you invest when you barely know anything?
The whole prospect of buying mutual funds and investing in stocks feels so daunting, that you might give up even before starting. Here are some books and newsletters that helped me and will surely be beneficial to you as well.
Tools I used:
- The Average Joe: a newsletter for keeping track of market trends. It simplifies the stock market for the 99% — market trends, news, and analysis. It’s the most convenient way to receive trending stocks and investments in your inbox.
- I Will Teach You To Be Rich: No Guilt. No Excuses. No BS. Just a 6-Week Program That Works by Ramit Sethi.
- Unshakeable: Your Financial Freedom Playbook by Tony Robbins.
The Bottom Line
When you start saving or investing your money, always keep your short and long-term goals in mind.
What are you saving for? How much risk are you willing to take? What’s your expected return from the investment?
These are some questions you can ask yourself before going down this route of making your money work for you. Knowing what you’re aiming for will keep you motivated, help you focus your spending, and also help you decide what types of investment work the best for you.