Module 06: Understanding Money Management

Topics to Be Covered:
 Managing Your Money
 Understanding Financial Emotions
 Setting Goals
 Make a Budget
 Paying Bills
 Build an Emergency Fund
 Pay Off Debt
 Understanding and Managing Credit
 Auditing Financial Institutions
 Saving Enough for Retirement
 Getting Insured
 Summary
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Managing Your Money

 Spend less than you earn

 Save slowly and steadily

 Prioritize tax-advantaged accounts

 Pay down debts reliably

 Get adequate insurance

Understanding Financial Emotions

Before you bust out the calculator and start tabulating numbers, contemplate your feelings about
money.

 Do you presume that being concerned with money will make you materialistic? That enjoying it
will make you self-indulgent? Do you associate money with stress and anxiety? Do you fear
there won’t be enough of it? Or assume there always will be? Do you know how much risk
you’re comfortable with?

 Once you have a better sense of your internal relationship with money, you can take steps to
make managing your money a more positive—and ultimately successful—process.
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 Be honest with yourself. It’s very normal to have tumultuous, confusing, and negative emotions
related to money. You learned these associations in your earliest years as you absorbed how
your family discussed, spent, saved, and used money.

 “The common denominator that I've found over my more than 30 years in financial services is
that, when it comes to money, we are often gripped by our emotions,” says Jill Schlesinger, a
former Wall Street trader and current financial advisor. “There’s no getting around that we are
human beings; we’re not always rational.”

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Setting Goals
Once you’ve uncovered what's making you tick internally, it may be easier to break through the noise
and figure out some goals with a clear mind. Knowing how to approach managing your money depends
on what you need it for, which requires planning. The answer will be different for every person and
household.

If you'll need all your money in the short term, saving is probably the best course of action. But if you
have funds you don't need to access for a long time, you can invest it and reap the potential rewards of
the stock market. Knowing what goals you have for your money will dictate how to balance these two
strategies.

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When setting your goals, think broadly about all the things in your life you'll need to spend money on.
A good strategy is to write out all of the things you want to accomplish in life, from buying a house to
sending your child to college to visiting Tahiti.

Here are some questions to pose to yourself:

 Do you want to buy a house?

 Do you want or need further education or training?

 Do you want to save for your children’s university education?

 Do you want to take nice holidays every year?

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 Do you want to pursue particular hobbies or activities?

 Do you want to start a business?

 Do you need to set up an emergency fund?

 When do you want to retire?

Write down any life goal you can think of—from the major to the miniscule. Try to estimate the
amounts you’ll need to reach each of these goals. This will give you a sense of the total universe of your
needs over the course of your life, giving you a better handle on how to approach your money
management.

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Make a Budget
If you’re going to save money, it’s essential to spend less than you earn. And it’s very hard to know how
much you can safely spend without putting together a budget. Your budget will guide you as you
manage your spending on a daily basis.

The first step in setting up your budget is to add up all your expenses. Be specific and thorough. Look at
the exact amount on each bill and figure out an average monthly expense based on those numbers.
Estimate things that you aren’t able to be exact on, but try hard not to low-ball yourself.

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Write down all of your numbers on a spreadsheet so you can see exactly what you’re dealing with.
Some of the numbers will be fixed and others may be able to vary widely depending on your behaviour.
Don’t forget to add line items for various types of savings, such as retirement and university savings, if
those are part of your goals.

Once you’ve got your numbers and know the spending you can handle, it’s time to figure out how to
match that with your income.

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Paying Bills
Paying your bills on time is an essential part of money management. Letting bills go unpaid means
wasting money on fees, letting expenses pile up so they become insurmountable, and—with some bills
like credit cards—potentially damaging your credit score.

Knowing whether you can pay your bills on time requires tracking how much you will owe and when
during each monthly cycle.

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If you know that you'll come up short on paying your bills, prioritise whichever expenses are essential
and cut back on the rest until you get to a better place. If you know you won’t be able to pay a given bill
on a certain month, contact your lender or service provider ahead of time to discuss the situation. They
may be willing to extend the due date, cut off service temporarily, or put you on a payment plan of some
kind.
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Build an Emergency Fund

Having a chunk of change stored away means you won’t go “underwater” when the washer breaks
down or, worse, someone in your household loses their job.

 An ideal emergency fund consists of three to six months’ worth of living expenses. But
amassing that amount of cash can be extremely difficult.
 Start with a number that's realistic for you to save over time. It may be a certain number of
months of expenses or it may be a flat amount—say, £10,000—that would allow you to weather
a personal crisis.
 The trick to saving up that bundle of money is to take it slow and steady. Keep directing a small
amount into your savings each month.

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Pay Off Debt

Don’t make the mistake of thinking you can’t get an efficient money-management plan in place until
you’ve paid off all your debt. Steady debt repayment should be an essential part of your financial
management plan.

In fact, paying off debt should be a top priority among your goals. That doesn’t mean you should focus
on it to the exclusion of your other goals, but paying back your debts steadily—and reliably—is a must.

There are various strategies for paying off debt. Two of the most popular are the “debt snowball”
method and the “debt avalanche” method.

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 With the debt snowball method, you pay off your debts from smallest to largest, a strategy that
gives you fast wins to keep you motivated but ends up with you paying more over time (unless
the smallest debt has the smallest interest and so on).

 The debt avalanche method involves paying off your highest-interest debt first and working your
way down to the lowest-interest debts, which results in your paying less money overall but
doesn’t necessarily provide quick wins.

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Understanding and Managing Credit
Understanding your credit profile—that is, the information that the credit reporting agencies track on
you—is a crucial part of managing your financial picture. The agencies use this information to calculate
your credit score, an important metric that dictates whether various institutions will grant you access to
credit to pursue your goals such as buying a house or opening a business.

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If you’ve had trouble paying off your debts in the past you will likely have a low credit score, which
will affect how you can manage your finances. It will be essential to improve your credit score in order
to set yourself up for a strong financial future. Doing so requires consistently paying off your debts and
resisting taking on new debt until your situation has improved.

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Audit Your Current Financial Institutions

The institutions managing your investment accounts, like retirement accounts and mutual funds, are
likely to be charging you fees for the work of managing the money. It’s important to know what fees
you're paying and assess whether they are too high in comparison to how much the managers’ guidance
is benefiting you.

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Do your fees seem too high for the amount of return your accounts are showing? Are you getting good
support in exchange for the fees you’re paying? Do you have access to smart technology for managing
your accounts? Are your accounts rebalanced automatically as your life circumstances change?

Shop around if you think you’re being charged too much and getting too little for the money. Financial
management is a competitive field; there are many options.

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Saving Enough for Retirement
Saving for retirement is a key part of money management, since that is savings you will
definitely need to have in place at some point in your life. If you are employed full-time you likely have
access to an employer-sponsored retirement plan, but you also have the option to invest in individual
retirement plans.

 Employer-sponsored plans. In the U.K., employer-established retirement plans are pension

plans. Your employer sets up a plan into which employees’ can invest pre-tax income. In many
cases employers will match employee contributions up to a particular amount.

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 Individual plans. In the U.K., individuals can invest in a self-invested person pension. SIPPs
provide the same tax benefits offered by other types of pension schemes and tax relief from the
government.

The earlier you can start investing in your retirement, the better, since the power of  compound
interest will help your money grow over time. If you haven’t started yet, don’t panic. Just get enrolled in
a plan as soon as possible and start putting money away on a regular basis.

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Getting Insured
Insurance may seem at first glance like a drain on your finances, but it's an essential piece of effective
money management. There will be nothing more devastating to your carefully constructed financial
stability than a true emergency that you don’t have insurance to cover: a house fire, a medical crisis, the
death of the family’s breadwinner, etc.

Look at your coverage in the following areas and make sure you feel it's sufficient in case the worst
happens:

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 Life

 Health/dental

 Homeowners/renters

 Car, if applicable

These forms of insurance are essential for almost everyone. Your employer may well supply you with
medical and dental insurance, as well as short- and long-term disability, and possibly some minor
amount of life insurance. If not, you can buy them on the individual market. You may also want to look
at other types such as pet insurance or business insurance if they apply to your situation.

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