5 Easy steps to manage your money effectively

Money is something that everyone wishes that they had enough of. But in reality, we often see people trying too hard to earn it and putting little effort to grow it.

I have been working in an organization for some time now and have a steady if income but managing the money becomes an important task when you have only one source of income. Getting through the month with the same amount of money is a difficult task if we do not have control over it.

That is why I have formulated five simple steps that help me manage my money and decided to share the same with you.

1. Categorize your expenses

The first step that I would suggest is to categorize your expenses. Start looking at your finances like a company’s financial information. This means just like a company has a set of fixed and variable expenses we as an individual will have them too. The period for these fixed can differ. The period can be monthly, quarterly, or even yearly but we need to consider them for financial planning.

Fixed expenses constitute expenses which are constant and mostly out of our control. These may include your hose rent, loan (home loan, vehicle loan, etc.) repayment EMI, school fees, tuition fees for children. Firstly just note down all the fixed expenses that you have.

After noting down the fixed expenses move towards variable expenses. These expenses vary in frequency and can be controlled. These can be voluntary expenses incurred for leisure. The list of such expenses differs from individual to individual. Hence it is best to note down all such expenses that you are incurring.

You can use Microsoft Excel to maintain track of fixed and variable expenses. It is a simple tool which can help you get started with the basic of maintaining your financial information.

2. Manage your expenses

Once you have categorized fixed and variable expenses, you need to formulate a strategy to minimize them. As mentioned above, fixed expenses are out of our control and hence difficult to minimize but you can put maximum efforts to manage the variable expenses.

The simplest way to manage the variable expenses is by trying to avoid them in every possible situation. This may sound difficult and undoable but once you start taking little steps to avoid variable expenses you will notice that the savings are eventually increasing.

The amount saved from managing these variable expenses can then further be invested smartly.

3. Have an investment and saving plan

So by now, you have categorized the expenses and have put possible measures to minimize the variable expenses. After doing this, you have saved some more money than usual and now its time to decide on how much of that saving needs to be diversified into investment. Investing your money smartly will provide a cushion in worse phases of life.

You should have a ratio between savings and investment. If you are doing this for the first time then you can have at least a 90–10 ratio for saving and investing. As time progresses you gain knowledge and then you can revisit the ratio and modify it.

There are numerous modes to invest your money and every mode is associated with its risk. Now depending upon your risk appetite you can choose the mode of investment. You should always keep some amount in saving which can be utilized in case of any emergency. This saving can be considered as ‘Cash In Hand’ that you see on the balance sheet of an organization.

Having an investment and saving plan will definitely help you in shaping your financial structure.

4. Review your performance

Let’s assume you have followed the first three steps for quite some time now and want to see what results have you achieved. The best way to analyze this is to start with your bank statement. When was the last time you had actually analyzed your bank statement? so once you start following the above steps you will notice a significant difference in your bank statement.

Have a look at your expense categories and try to find further measures to minimize expenses. Secondly, start looking at your investment portfolio and what returns are you getting considering the period of investment. If you have invested in a long term investment plan then have patience but if it is a short term investment plan you are not getting enough return then probably you can look for alternate modes of investment.

Setting a goal or expected returns before investing will help you in reviewing the performance of your investment. Reviewing your performance periodically will help in establishing the trajectory of your expected goals and enable you to take corrective actions in case if the things are not going as planned.

5. Consult a professional once in a while

We can earn money, we can spend money but we need experts’ advice to manage our money and I do not deny that. Professional financial planners have both the knowledge and experience in managing money. But, going to an expert with reference points is better than going with a blank slate and by reference point I mean all the efforts you have taken till step four mentioned above. Going with the blank slate will lead to an increase in time taken to assess your current situation and formulate plans accordingly.

Visit a financial planner once in a while but do not completely rely on them for your investments. Engaging with them and questioning them about the strategy will boost up your knowledge and help you decide to select the best option.

If you go to them with the results achieved from the last four steps, it makes their task easier to assess and provide you the best consultation.

If we have to consult a professional then why not do it in the first step? Because in that case, you will be completely reliant on them and not pay much attention to other options or worst case scenario you will have no idea where and how much money is invested. To inculcate that behavior, you need to start paying attention to your finances.

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