Money Management Skills – Goals and Expense Management

If your parents, or you on your own, developed the habit of putting even a coin regularly in your piggy bank, then be assured, that you are already on the first step of Money Management. Money Management is managing your own money so that it lasts till the end and you can live a stress-free and relaxed retirement life. As you grow older you have to develop refined Money Management Skills, because there are additions in responsibilities to take care of. In this article, we dwell on the skills and means required for managing money intelligently and getting back maximum returns.

Introduction-

The general outlook till the 1990s amongst the older generation was to secure a government job for the only beneficial reason of “Pension”. Any government job placement ensured a stress-free retired life.

By the year 2000, the IT industry had already started booming, and pay scales were blown to hefty heights. As the salary packages increased, so did the spending habits of the masses. With the introduction of credit cards and consumer loans, the spending pattern changed vastly.

No longer was the notion of waiting the whole month or months to save money for that beautiful watch or that big-screen TV in practice. But people have now started buying things first with the help of a credit card and loans and thinking about how to pay them later.

Saving which remained a notion has become a reality now with the maximum population opting for private jobs where long-term stability is achieved by a handful of loyalists.

Money Management term started gaining traction when the working class started understanding the importance of managing their hard-earned money judiciously to ensure they have a stress-free retired life without any compromises.

People started developing Money Management Skills on their own,  or they took help from professional money managers and used their Money Management Skills to plan and invest wisely.

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Budget and Planning-

Budgeting is the first skill in the list of efficient Money Management Skills. Budget in simple terms is a spending and saving plan based on the monthly income and the monthly expenses. This is the same concept that even businesses follow. Here are a few effective steps on how to start making a personal budget :

• Calculate Income – The primary income is the monthly salary that an individual gets every month after the deduction of all taxes. Additional income to be included in the budget is monthly rental income and any monthly income being received from dividends, shares, or any other investment instruments. Any yearly income generated is also to be made a part of the budget.

• Calculate Expense –  The expenses incurred can be categorized under two heads. The fixed expenses are monthly rent, mortgage loans, any personal loans, household expenses, childcare expenses, house help salaries, phone bills, electricity bills, credit card bills, annual or semi-annual taxes, insurance fees, etc. The variable expenses are restaurant food bills, entertainment bills, travel, and groceries to name a few.

• Adopt a Budget Strategy – There are three types of individual budgeting strategies that one can choose from: 

• • The 50/30/20 strategy – In this strategy, 50% of the income goes into managing the fixed expenses, 30% to managing the variable expenses, and the remaining 20% into savings.
  • The 80/20 strategy – This is a simple strategy where 80% of the income goes into the expenses category and 20% is saved.

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• The Envelope Strategy- One physically has different envelopes marked for all the expenses and savings. The money is then allocated according to the need. 

• The Zero Budget –  In this type of budgeting all the income is allocated to the expenses and the money saved after the expenses are allocated for expenditure for the next year. 

• Reverse Budgeting – In this strategy first, the money is allocated to savings and investments and then the remaining amount is used for expenses.

 

Financial Goal Setting-

The financial goal-setting skill is another important Money Management Skill. The financial goals can be divided into two types.

•  Long-term goals – These are retirement plans, education expenses for children, buying property, or any other goal that is set over a period of 10 years. 
• Mid-term goals – Any financial goals set to be achieved within a period of 5 years are mid-term goals. These are higher than the short-term goals. Collecting money for the downpayment of a car or any expensive household commodity, paying off credit card bills or some short-term loans, and planning for an expensive vacation can be termed under mid-term financial goals.
•  Short-term goals- The financial goals which can be fulfilled within a year are termed as short-term goals. They can be buying a car, travel plans, and any expensive household or personal item like a cell phone, etc. 

Experts urge to set up a financial goal as they carry a set of advantages which are as follows : 

• Clarity- Setting up a goal gives you clarity on what results to work towards. Once the purpose and direction of your efforts are clear then staying motivated and focused is easier.

• Priority Setting – A goal helps in prioritizing things. One can list out things based on importance and then decide to allocate the necessary resources accordingly.

• Measuring Progress – With a goal in mind and regular tracking of the progress toward the goal, an individual can remain focused and motivated.
• Long-Term Vision – Setting up financial goals changes the perspective of an individual from accounting for more on short-term immediate goals to focusing more on long-term investment and saving goals. This not only leads to personal growth but also helps in systematically achieving financial freedom.

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Expense Management-

Expense in layman’s terms is the cost of all the goods bought, services, and resources utilized by either an individual or a household. Expense Management is among the important Money Management Skills which is always emphasized. Expenses can be classified into these heads :

• Fixed or Recurring Expenses – These expenses are fixed to occur every month and the amount is generally stable. These are mortgages, loans, rent, insurance premiums, and monthly bills.
• Variable Expenses – These expenses which occur may or may not occur every month and the amount is not fixed, as it depends on the frequency and consumption of the services or goods used. These are groceries, traveling, fuel costs, repair and maintenance, and other entertainment expenses.
• Essential Expenses – These are expenses incurred every month for basic amenities like food, clothes, transportation costs, and other utility expenses.
• Discretionary Expenses – These expenses occur at the discretion of the individual. The expenses like subscriptions and memberships, short trips, the cost of learning or indulging in a hobby, and any luxury goods or services bought.
• Nonrecurring Expenses – These expenses are unpredictable and may occur or may not occur and are known as nonrecurring expenses. Sudden expenses like medical emergencies, sudden repair and maintenance work, sudden travel plans, special events, and heavy loss in assets or valuables.

The following steps can be followed to manage expenses effectively : 

• Track Expenses – All the expenses can be tracked either manually, on a simple Excel spreadsheet, or with the help of many apps and software available on the internet.
• Prioritize – Set a priority list for the expenses in which the fixed expenses and basic utility expenses should take priority. The goal of prioritizing should be to reduce the expenses on unnecessary discretionary expenses and balance the expenses in such a manner that they do not impact the savings and investment portion.

 

Debt Management-

Every individual has debt in one form or the other. Debt management is reducing the number of debts, minimizing the interest being paid on them, and implementing plans to systematically eliminate debts in all forms.

Money Management Skills like debt management can be also done by taking professional help. Let’s first identify the types of debts one can incur :

• Secured Loans- Loans that are given by pledging assets to the lender are known as Secured Loans. The interest rates for such loans are lower. In case of non-repayment of the loan, the lender has the authority to seize the asset. Car loans, two-wheeler loans, mortgages, and retail loans are examples of secured loans.

• Unsecured Loans – Loans that are only given based on the creditworthiness of the borrower are known as unsecured loans. There is no collateral pledged to the lender, but in cases of nonpayment, the lender can take the borrower to court. The interest rates on these loans are much higher compared to secured loans. Personal loans and lines of credit are all unsecured loans.

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• Revolving Debt – These debts have a certain credit limit given to the borrower who can use only until this limit. These are open-ended. The amount the borrower pays back monthly is added back to the credit limit and this limit is carried forward to the next month. The borrower can borrow as many times depending on the credit limit available. Credit cards and lines of credit fall under this category.
• Installments – All close-ended loans where there is a fixed amount paid every month in lieu of a lumpsum amount given to the borrower, the repayment method is known as installments. Mortgages, personal loans, and auto loans are all repaid in installments.

Now that we have identified the various steps, the next step is how to manage these debts which are as follows : 

• Take account of Debts – Assess all forms of debts like mortgage, personal loan, auto loan, loans on any commodities, credit cards, and any outstanding payments to be done. Focus on the interest rates, monthly payments, and repayment terms.

• Credit Report- Check the credit report which is available with a credit rating company. This can help identify any forgotten outstandings or any misinformation. It also helps in maintaining a good credit score.

• Plan Interest Costs- Check the interest rates being paid on all debts. Prioritize which loans to be paid first depending on the term and interest rate. Consolidate all high-interest rate loans and transfer to other repayment methods, possibly one single loan, which has a lower interest rate. Transfer the balance outstanding amounts on credit cards with higher interest rates to credit cards charging lower interest rates.

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Savings Plans-

Saving plans are an integral and vital part of  Money Management Skills. They help in ensuring financial security and prepare for any unforeseen sudden expenses. There are two types of saving plans, which are:

• Short-Term Plans – Investment plans made for returns within a year or even a shorter period of time are known as short-term plans. These are generally done by individuals who want early returns for the surplus money while maintaining liquidity. The maturity period of these investments lies between 3 to 12 months. These are as follows: 

• Recurring Deposits- Investments can be done for a period of 6 months or multiples of 3 months up to 10 years.  

 

• Money Market Accounts–  These are short-term investments that can be made for the shortest period of 91 days. They offer high yields but the rates keep fluctuating according to the market.

• Short-Term Bond Funds – These short-term funds offer low risk and high yields. They are government bonds, municipal bonds, and corporate bonds.

• Fixed Deposits- Bank fixed deposits can be made for a period of 7 days to 10 years. The amount deposited attracts a fixed interest rate and the deposit offers high liquidity.

• Large Cap Mutual Funds – Large Cap mutual funds are short-term investment plans in shares and stocks of large corporate firms. The investment period ranges from 3-5 years and starts getting returns within a year. 

• Certificate of Deposits – These investment plans are governed by the government and yield higher returns than bank-fixed deposits. Although the risk is a little higher with CDs than Fixed Deposits.

• Treasury Bills – These are the safest investment plans issued by the Government. They do not offer any interest yield but offer the shares at a discounted value. The price of the bonds at the time of repayment is the current face value.

• Money Market Mutual funds – These are short-term investments done in short-term debt instruments that are high quality. They are low in risk and yield lower interest rates.

• Long-Term Investment Plans – Investments that span for 5 years or more are long-term investment plans. Good Money Management Skills require a good portion of the allocation of income in these plans to reach goals like children’s education, retirement plans, or plans of buying real estate. The risk in these plans is high but so is the rate of interest. The following are options for long-term investment : 

• Stocks and Bonds – Stocks are issued by publicly traded companies and offer higher rates of return over a longer period of time, although the risk is also high for long-term investment. Bonds are issued by the government and are thus, low in risk. They pay a fixed interest amount monthly or annually.

• Mutual Funds – Investment Managers with excellent Money Management Skills ensure that an investor has a diverse portfolio in mutual funds to mitigate the risk and balance the share in such a manner to yield growing returns.

• Pension Funds – Pension funds are long-term investment plans where the time period, chosen by the investor starts yielding either a monthly return or a lumpsum amount.

• Dividend Reinvestment Plans – In this DRIP plan the interest gained from shares, mutual funds, or bonds is automatically reinvested by further shares or bonds. This yield compounded growth over a longer period of time.

• Long-Term Certificate of Deposits-  These investment plans range for a longer time period of 5 years and more. The risk is low and the rate of return is fixed, thus, one knows the exact amount to be earned through these plans.

Emergency Planning-

The Covid pandemic brought the entire world down to its knees. Not only was the business world affected, but on the personal front people endured a sudden huge shock from which some are still recovering.

This was the time people realized the importance of having a backup plan, an emergency fund as an important aspect of their Money Management Skills. Let’s take a look at a few crucial steps in building toward a sound emergency fund:

• Planning an Emergency Fund – Review your monthly household expenses over a period of three months and reach an average amount. An emergency fund should have a minimum of 3 months to 6 months of this amount saved.

• Set Priorities – While making a budget prioritize the necessary expenditures. Try saving from the variable and discretionary expenses to add as much as possible to the fund.
• Review Policies- Track all your premiums and policies, especially health-related policies, and keep them updated to ensure that the times of emergencies one doesn’t have to run from pillar to post to get help.

 

Retirement Planning–

The job scenario has seen a big shift post the year 1990s. Maximum people prefer to be employed in the private sector as the pay parity between the government and private sector is huge and there are more growth chances in the private sector.

The major downfall of private sector employment is no cushion of any pension or retirement benefits. Thus, to ensure a comfortable old age one has to develop skills for retirement planning as a part of their Money Management Skills. Let’s discuss a few steps to keep in mind while you are still employed and young :

• Retirement Planning – Begin with assessing the current financial position. Evaluate the monthly expenses, debts, assets, savings, and income. Fix an age for retirement. Calculate the amount that would be required to maintain the same lifestyle post-retirement keeping inflation in mind. This should be the goal with a definite timeline to aim for.

• Invest in Investment Plans – There are a plethora of retirement and pension saving plans available in the market. The earlier one starts investing, the easier it is to contribute to this fund with an assurance of healthy benefits. Investment in National Pension Systems and Public Provident Fund should be considered.

• Employer Sponsored Plans – In the private sector the employer also contributes to the PF or other forms of retirement plans. One should increase their contribution accordingly to reap maximum benefits.

• Investment in Real Estate- With the shooting prices of real estate, it might be possible that by the set age of retirement buying even a small flat in the prominent cities be out of the question. Thus, one should consider planning to invest in real estate till it is affordable.

Tax Planning-

Money Management Skills are a subset of skills that have been discussed earlier. Another important skill set to add to this is efficient tax planning to ensure your capital protection and savings. Tax planning can be done individually or the help of a professional for adequate guidance can be sought. In this section, we take a brief look at some important ways to save tax:

• Calculate Taxable Income – The first step in calculating tax is calculating the Gross Income which is the annual salary and income from all other sources. 

Invest in Tax Saving Plans-

Investing in the following extends tax relief : 

• National Pension System
• Unit Linked Insurance Plans
• Pension Funds
• Public Provident Fund
• National Savings Certificate
• Post Office Deposits
• Senior Citizens Saving Schemes
• Tax Saving Bank Deposits
• Housing Loans
• Student Loans
• Donations to Charitable Trusts

Depending on the tax bracket under which one falls, tax exemption can be availed when investing in either of the above-mentioned schemes. 

 

FAQs

Q. What are Money Management Skills?

Money Management is the art of effectively managing financial resources and planning strategies to strive toward financial security and financial freedom. This involves setting a realistic financial goal, preparing a budget, investing in savings and retirement plans, managing debts, and creating a pool of emergency funds to be prepared for any unforeseen circumstance. This motivates an individual to be more financially responsible in their spending and saving habits and build a solid foundation for a financially secure future. 

Q. What is debt management and how can I plan it?

Debt management is taking cognizance of all the debts that you have, for ex, housing loans, personal loans, loans on household commodities, two-wheeler, and auto loans, student loans, credit cards outstanding, and any other repayments to be made. The debts with higher interest rates should be prioritized for making repayments and all the higher interest rate debts should be consolidated and transferred to a single loan which charges a lesser interest rate. Credit cards with high interest rates should be transferred to cards charging lower interest rates.

Q. Which type of investments one should focus on?

A healthy mix of short-term and long-term investment plans should be the focus. Now depending upon the risk-taking capacity of an individual, the surplus amount, and the need for liquidity should one choose the kind of funds one wants to invest in. Short-term funds that bear lower risk have considerably lower interest rates as compared to long-term funds which have a higher risk factor but the yield is much more than short-term plans. Short-term investments like fixed deposits, recurring deposits, post office plans, treasury bills, and large-cap mutual funds are a few choices available. Provident Funds, Pension funds, long-term deposits, and mutual funds are long-term investment plans to choose from.

Conclusion-

The Covid pandemic threw the entire world off balance. The financial insecurities that arose during this time reinforced the need for Money Management Skills in every household. Making this article a medium, a strong message is being conveyed to invest time and efforts to build a secure financial future.

The steps described here for making a budget, planning expenses, investing in different saving plans, planning a retirement fund, and most importantly creating an emergency fund, require complete dedication. Professional help should be sought out for planning, investments, and tax savings.

A habit of regularly monitoring all the given steps should be inculcated as that keeps one motivated to set a financial goal, measure the progress, and work diligently towards it. In conclusion, if you want to enjoy peace of mind not only after retirement but even now, it’s very important to start inculcating Money Management Skills at the earliest.