There is no question that you need to use money better if you want to get ahead in life. One reason is that your finances play a crucial role in helping you reach your goals. There are a lot of other things you need to reach your goals but your finances is a bit contributor to your success. The better you manage your money, the higher your chances of reaching your target.
When you have a goal, you also need a certain level of commitment to see your plans through. There are times where you might pack up and quit at the first sign of adversity. You have to remain committed and push through your goals. Your goals do not really care about the challenges you face so you have to keep at it.
Of course, if you use money better, you instantly increase your chances of getting to your goals. If you wish to retire early, you have to manage your finances in a way that will allow you to save more for the future. If you live as if there is no tomorrow and spend more than you need, you will have a challenging time in retirement.
Dangers of wrong money management
Before you go in and delve in the importance of using your money better, it is important to have a picture of what can happen if you mismanage it. This can be very helpful especially when you start veering off your financial track.
Getting in debt
Believe it or not, debt is actually not a bad thing. There are other highly successful individuals who also have debt under their name. In fact, even big companies have a lot of debt payables they make on a regular basis. This shows that debt is not detrimental to your finances. There are even some types of debt that helps you reach your goals.
It becomes a bad thing when you start mismanaging your debt situation. For one, you might be taking in more debt than you can pay for. Once you do, it is possible that you begin to miss payments because you do not have enough to cover your obligations. This results in bigger payments in the succeeding months. You end up paying more than what you planned for which will also ruin your budget.
Low credit score
You have to use money better because it can also affect your credit score as well. As mentioned earlier, you run the risk of making late payments on your obligations. Once you do, that will negatively affect your score already. This is because your payment history affects as much as 35% of your score according to FICO.
If you also tend to take out loans and use your credit card when you have an emergency, this can also go against your score. This is because one other component of your score computation is your credit utilization ratio. Simply put, the more you use your credit, the lower your score can be. That is why you need to make sure that you pay down your credit cards at the end of the month.
Not saving for the future
If you do not have any concept of how to use money better, you will find it challenging to save for the future as well. With the examples above, you know how important it is to have an emergency fund. You also need to save for retirement. It is not a life event that might happen, it is a reality you will face sooner or later.
If you do not use your funds well, you might also put college savings in jeopardy. You have to understand that student loan is one of the fastest rising debt accounts in the country. Forbes shares that at present, it is a $1.5 trillion on average for 44 million borrowers. The student loan debt is even bigger if you combine credit card and car loans together.
What to do to get out of it?
Now that you have an idea of what can happen if you do not start to use money better, you need to start to put in the work. Money management is not going to happen overnight. You need to make sure that you start paying close attention to how you use your money.
Budget your money
One of the key aspects of being able to use your money more effectively is to have a household budget you can work on. If you do not know how to create one, you can start with a simple list. You do not have to jump on the more advanced budget list. It might only confuse you and you can end up not creating one.
If you are just starting, you basically need two lists. One for your income and another one for your expenses. For your income, you need to jot down all your sources of money. If you rely on one job, this step would be fairly easy. You just have to write down how much your net earnings are each month. If you earn some extra money from a part-time job, you need to list that down as well.
WIth your income set, you need to focus next on your expenses. If you want to use money better, this list has to be comprehensive. It is a good idea to jot down every single expense item from the biggest to the smallest item every month. This means writing down your mortgage payment all the way to that avocado toast you buy every day.
With your budget, make sure that you are able to meet all your payments and have enough to save for future needs. If your expenses total to more than your income, you need to make adjustments. One is trying to lower your expenses. The other is looking for a way to earn more each month. Either one will work but doing both will be a big help.
Keep a close eye on what you spend
With your household budget on hand, keeping a close eye on your expenses will help you use money better. The more you monitor your expenses, the easier it will be for you to make the necessary adjustments when needed. If you already know that you will be short on a specific month, you can cut down on some expenses and just put it back in when your finances can support that expense.
Have a goal and work towards it
A lot of people belittle the importance of having a goal to aim for. Without it, you are like a ship out in the sea with no heading or direction. You just wander on day by day not knowing where you want to be. Having a goal in life puts some perspective to your daily actions. It gives you some direction and a reason to work hard.
It is not easy when you start to talk about how to use money better but that should not stop you from trying to manage your finances better. You have to understand that if you choose to forego proper money management, it will lead to a multitude of financial problems most of which are completely avoidable.