5 Reasons Why Money Management is Crucial
9 MIN READ
Published July 29, 2023 | Updated December 15, 2023
Money management is a crucial part of life and an important skill that should be taught early. An effective money management plan can help you set the right goals and provide you with the roadmap you need to reach critical financial milestones in life.
Money management is the process of managing your money, including expenses, debt, investments, and income. This includes setting goals and creating a budget that will allow you to avoid debt and save for your retirement.
Read on to learn more about why money management is important, its benefits, how to create a plan and valuable tips for managing your money better.
Why is Money Management Important?
Whether you are a business owner or an employee, the right money management plan can set you up for success. But why is money management important? Let’s explore the top 5 reasons.
1. Better Ability to Manage Emergencies
Financial emergencies can happen at any time. Having an emergency fund can act as a safety net in such situations. Whether it is a medical emergency or car repairs, planning and saving for these unexpected expenses in advance can help you avoid turning to predatory lending products like payday loans and auto title loans.
2. Financial Discipline
Money management is all about being consistent with tracking your spending, budgeting, and saving. When practiced over time, it can equip you with better discipline so you can curb overspending and put aside money for the important financial goals in your life, such as buying a home or a vacation.
3. Helps You Grow Wealth
With a firm understanding of your earning and expenditure, you can plan your budget to put aside some money every month. After saving up an emergency fund, you can explore investing. Invested money can grow over time, so you can earn better returns and grow your wealth.
4. Better Equipped for Retirement
One of the biggest benefits of money management is that you’ll be able to plan better for your future. You can avoid retirement debt, and if you start early, you can have enough money saved up for a stress-free retirement that you can enjoy.
5. Helps You Achieve Goals Faster
Whether your goal is to save for a down payment on your first home, buy a new car, or have an adequate college fund for your kids, money management can help you achieve those goals faster. Only 30% of households in the U.S. have long-term financial plans. Having a plan and creating a budget that aligns with those plans is one of the best ways to achieve your goals.
Benefits of Money Management
The benefits of money management are several, and they can impact many areas of your life. Here are some of the advantages you’re likely to experience once you start managing your money better:
- It can reduce anxiety and stress. 52% of U.S. adults say that money causes stress and has a negative impact on their mental health. Having better control over your finances can ease this stress.
- Effective money management will allow you to reach your financial goals faster.
- It allows you to save an emergency fund so you won’t be caught off guard in case of an unexpected expense.
- Money management allows you to save and invest wisely so you can grow your net worth over time.
- It allows you to avoid bad debt and save thousands of dollars that you would otherwise pay toward interest charges.
Role of Money Management in Budgeting
Money management is all about ensuring that you can meet your expenses, save money for emergencies and for your future goals. Budgeting will give you a clear idea of how much you are earning and how much you are spending so you can cut your spending where needed to achieve those goals. Money management and budgeting can both help you enjoy your life better by ensuring that your financial needs are taken care of.
Why is Money Management Important for Budgeting?
Understanding the significance of money management can help you meet everyday expenses as well as unexpected bills. It can put you in the control seat of your finances, reduce stress, and providing you a feeling of security. It helps you identify your short-term and long-term goals so you can create a budget that helps you achieve them.
Money management allows you to decide how to allocate your resources so that you can sustain your family’s needs and meet some of your wants. Communicating with family members and deciding on what your needs and wants are will then help you create a budget that covers all your needs. It also allows you to assess if you need to increase your income through a side gig or a second job.
How To Develop a Money Management Plan as a Part of Your Budget
Now that you understand why money management is important, let’s talk about how to create an effective plan that is right for your goals:
- Start by setting financial goals that align with the priorities of your family. Define your short-term as well as long-term goals, such as buying a house, saving up for a large purchase, and creating a retirement fund.
- Determine how much you’ll need to allocate each month to save towards these goals.
- Identifying your expenses and income sources. This will provide you with a clear idea of where you are spending your paycheck each month. Make a budget based on your income and set aside money for your necessities such as mortgage or rent, transportation, groceries, and utilities.
- Check to see if you have enough funds left after your expenses to allocate towards your goal of saving. Adjust your budget if needed.
- Track your expenses each month and review your budget at the end of the month to make the necessary adjustments. You can use software tools or apps to monitor your spending effectively.
“Like anything in life practice makes perfect. Adhereing to a budget is something that should be started at an early age and become habit forming,” advises Teresa Dodson, a debt relief expert and the founder of Greenbacks Consulting.
“I don't care if you make minimum wage or 200K per year. You should always be on a budget and avoid overspending,” says Dodson. “Focus on what you can save and build stability.”
Examples of Successful Money Management Strategies
If you find yourself living paycheck to paycheck or have a lot of credit card debt, it’s worth your time to learn strategies that will give you a firm handle on where your money is going. Here are a few strategies that can help you manage your money more efficiently.
Track Your Spending
One of the most effective money management strategies is to track every dollar you spend. Use a notebook, a spreadsheet, or a budgeting tool to note down every expense. Keep track of how much you are spending, where you are spending, and what you purchased. This will help you identify unnecessary expenses, subscriptions or services you rarely use, and expenses that you can easily eliminate.
Having a monthly budget is an important skill for everyone to learn and implement. There are several types of budgeting systems to follow, such as the envelope budget and the 50/30/20 budget, where you allocate 50% of your income toward your needs, 30% towards wants, and 20% towards savings.
Determine the right budgeting method for you and take control of your finances. Start noting down your monthly income. Subtract your regular bills so you’ll know how much money you have to spend on food, discretionary spending, and saving.
Manage Your Debts
Tackle your debts so you can become debt-free and have more money available to save each month. There are several debt repayment strategies to explore. With the debt avalanche method, you can start by focusing on your most expensive debt first and then moving on to the next most expensive one. With debt snowball, you start by paying off your smallest debt first before moving on to the next. Also be sure to determine if it makes sense to use your credit card to help manage debt or if it poses further risk. For example, you need to weigh the pros and cons if you're deciding to pay your mortgage with a credit card or use your credit to tackle other expenses. If you have a lot of debt, consider debt relief strategies such as debt management, debt settlement, or debt consolidation.
Money Management for Students
Knowing basic personal finance skills such as budgeting and managing finances is important for students. The fundamentals of managing debt, saving, and budget, can help students avoid getting trapped in expensive unsecured debts and live a life of prosperity.
Why is Money Management Important for Students Today?
Only 17% of high schoolers in the country are required to take a personal finance education semester. Many young individuals have minimal money management knowledge, which can leave them with debt they can’t pay off. Teaching students about personal finance at an early age can help them make better decisions.
Additionally, it can help them resist temptations even in the face of convenient online shopping. Money management skills are also crucial because they help students understand the value of delayed gratification and saving. A fun way to help them learn can be by picking a money-saving challenge to work towards together.
Ways to Teach Children About Money Management
Providing children a solid sense of good money habits and financial knowledge can help them in adulthood. Here are several ways you can teach children the basics about spending, earning, and saving.
- Start giving your kids an allowance at an early age. A common guideline is to provide up to $1 for each year of age as an allowance each week. Raise the amount of money they get each year and encourage them to plan for their purchases in advance.
- Provide them opportunities to earn money by giving them extra chores. Help them make decisions about how they can use that extra money.
- Teach kids how to make wise purchasing decisions while still giving them some financial freedom. Show them how to compare items based on quality and prices. Also, teach kids to think if they really need something before making a purchase.
- Teach your child early how to save money. Set them up with a piggy bank or a bank account where they can save money. Monitor their savings regularly and talk to them about what they can use their savings for.
- Involve children in your family’s budgeting and money management. Show them how you budget for your bills and expenses. Allow them to participate in financial decisions in an age-appropriate way.
Negative Consequences of Poor Money Management
With a clear understanding of why is money management important and the benefits of starting financial literacy early, let’s move on to the potential negative consequences of poor money management.
- Without money management skills, you will be ill-equipped to deal with real life situations. Many adults make poor financial decisions because they don’t know how to save, monitor their credit scores, plan their purchases, or invest money for financial success.
- You may accumulate a lot of debt, or worse, get into a cycle of debt with online payday loans for bad credit. You may find yourself with a lot of credit card debt at high interest rates and may find it difficult to pay it off.
- Your credit scores may be lower, and you may find it difficult to secure loans in the future. Poor money management often results in late fees and delinquencies, leaving you with subpar credit that will make any future borrowing difficult and expensive.
The earlier you start developing money management skills, the better. There are several resources available online to learn more about budgeting, saving, and investing. You can also work with a personal finance expert to learn more about these concepts that can set you up for a happy, prosperous, and a stress-free future with financial stability.
Start small with steps like reviewing your bank statement or paying off the outstanding balance on your credit card. If you are finding it challenging to pay off your debts, consider working with an experienced debt professional at TurboDebt. Get in touch with our team and take advantage of our free consultation to see how we can help you find the right debt relief option for your unique financial situation.