A Detailed Guide On How To Manage Money Effectively
Are you struggling with your finances regardless of how much money you earn? Are you having a hard time knowing how to manage money effectively?
Whether you earn $2,000, $4,000 or $8,000 a month or more, you struggle to pay for your bills and barely have enough money to save. Sometimes, you even think about asking for a raise, getting a second job or an extra freelance work so you could make ends meet. Then you realize there are people earning less than you that are doing much better with their finances than you are.
How could that be?
The reality is that it doesn’t really matter how much you earn. Managing money is a responsibility and if you can’t manage $1,000 effectively, you can’t expect to manage $1,000,000, either. You have to be able to handle the small ones first before you can take on bigger, more challenging tasks.
Why is it important to learn how to manage your money?
Think of money as a person.
If you treat someone poorly, you don’t give them the respect they deserve and you take them for granted, would that person stay? Chances are they won’t.
On the other hand, if you value a person, you take care of them. You do absolutely everything necessary to make them stay and keep them from leaving you.
I am not suggesting that you value money over friends or family. What I am saying is that it deserves your attention, time, and effort so you can improve your financial situation.
If you badly want to get out of debt or if you want to build a fortune and provide a better life for your family, you have to learn how to use money to your advantage instead of letting money take control over you.
How do millionaires handle their money?
According to T. Harv Eker, one thing that’s similar between all millionaires (and billionaires for that matter) is that they all manage their money very well.
With enough practice, anyone can master how to manage money effectively. I find that a simple yet valuable concept shared by T. Harv Eker in his book (The secrets of the Millionaire mind) is pretty helpful when it comes to keeping your finances in order. It’s called the jars concept and here’s how it works:
Whatever amount of money you earn (net, minus the tax), divide it into 6 jars or bank accounts if you like. I personally like using envelopes.
- 10% of your money goes to your FFA (financial freedom account)
- 10% to LTSS (long-term savings for spending)
- 10% to your educational account
- 55% to your utilities
- 10% to your fun account
- 5% to your give account
So, let’s say you earned $3,000 net for the month. This is how you should divide your money:
- FFA – $300
- Education – $300
- LTSS – $300
- Utilities – $1,650
- Fun – $300
- Give – $150
If you are married and you have a common bank account, you can combine your money and divide the total amount into the jars.
It doesn’t matter if one person is earning more than the other. Keep in mind that in a relationship, money is just one aspect.
The amount of money you’re budgeting is not important, too. What matters is that you get into the habit of managing your money. This way, as your capacity to earn money grows, so does the money that you put in the jars.
How do the jars work?
FFA (Financial Freedom Account)
People like to call this a savings account, but we like to call it the FFA. Why? This is not just your savings. It’s actually your golden goose.
This is the first account you should put money in because this will set you up for financial freedom.
The money that goes into this account will only be used if you’re going to spend it on something that’s going to make you money.
And since this is your golden goose, you don’t want to kill it. If you are going to invest money from this account, make sure not to use it all up.
Long-Term Savings for Spending (LTSS)
This jar works in a variety of ways.
We use the money in this jar to pay for things we want to buy but might need to save for first. It can be a house, vacation or new car.
In case you are in debt, use the money in this jar to pay it off.
If you want to get over your debt, shift your mindset into thinking of ways to make money and your debt will be paid off.
You can also use this account if an unexpected expense arises. Let’s say you got invited to a birthday and need to buy a gift, you can take money from this jar.
The most successful people are the ones who continue learning so it is important that you invest in your continued education, too.
For context, Warren Buffet claims to read 500 pages a day. It’s not a coincidence that he’s one of the richest men in the world.
If you want to learn a new skill, go ahead and attend that seminar you always wanted to go to. Buy that book that might help you improve your mindset. Use this money if you want to go back to school.
The money from this account is for the purpose of improving your skills and knowledge.
This is also known as your budget. This is where you get money to pay for your rent, house mortgage, car loans, and other bills.
Now, sticking to the example salary above, let’s say you’re on a $3000 paycheck and are supposed to allocate $1650 to pay for your utilities. You might be saying, “That’s too little” or ” It’s not enough”. This is the part where you have to learn to be creative and think of ways to save money or think of the bills that have to go.
For example, if you’re paying for a monthly gym membership of $50 which you don’t frequently go to, it’s a good idea to cancel that membership. Find an alternative activity that might not cost as much. This can be biking, yoga or hiking.
If you’re paying for Netflix but are not watching anyway, cancel it.
The key to living a happy life is balance in everything.
So, if you are saving all this money to invest in the future, it’s just fair that you enjoy your money as well. Use the money in this account to go to that really nice restaurant or get a massage.
Blow the money and leave nothing. If you want, you can save the money in your fun account for up to 3 months if the treat you’re thinking for yourself costs more.
However, if this account is already empty and you still want to have a good time or there are still things you want to buy, do not take money from the other accounts just to satisfy your urge.
Don’t borrow money and don’t take our your credit card. It only means that you cannot afford it anymore. You either have to save for it first or you can think of ways to make more money.
I believe that giving back, especially to the people who won’t be able to repay you, is a magnet for positive karma.
It also sends a signal to your brain and the universe that there is an abundance of money in this world, that there is more than enough for you. When you send signals like that to the universe, I guarantee you that the universe will send more money your way.
If you want to take it a step further, give something that is more important than money. You can choose to give your time as well. Giving money is great but giving your time is just as valuable.
I read about this guy who gives free haircuts to homeless people. It doesn’t take much money to do what he does but by giving his time to cut their hair, he’s able to give back their self-respect and confidence which can help them find new jobs.
What do I do from here?
Managing your money takes effort, patience, practice, and trusting the process.
The first month I tried the jars method, I was absolutely shocked to discover that I spent too much money footing restaurant bills for my friends, treating them to lunch, dinner, and the movies.
By learning the boundaries as to what I can spend and on what, I managed to control my spending.
It was uncomfortable at first but after the next few months, I saw how much my savings has grown. I felt more motivated to manage my money.
So, give it a shot. You have absolutely nothing to lose and everything to gain.