Simpleology Blog

Recently the news has been dominated by stories of uncontrollable debt and government bailouts. It seems that there is a crisis in how people use and manage money.

Money management is a skill that could take a lifetime to truly master--but the basics are quite simple.

Here are eight basic tips that everyone can use to improve their money management skills.

1. Create financial goals. At any moment, you should have one or more financial goals. For example, a short term financial goal could be to save up enough for an emergency fund, and a long term financial goal could be saving for retirement. Write down your goals and be clear about what you want, and work towards them day by day.

2. Figure out how much you have. Surprisingly, many people are not quite sure about how much exactly they have in their bank accounts. This could lead to bank overdraft fees and debt. You do not have to know the exact amount of your net worth at any given moment, but a monthly checkup of all your assets may be quite helpful in combating late fees and impulse shopping.

3. Know how much income you have. Most people I know could tell me their gross income right away but are not quite sure how much they take home. Knowing your exact income is the first step in setting a budget and figuring out a savings plan.

4. Track your spending. If you have never done this before, you should try recording your actual spending for a few months and come up with a monthly estimate of your expenses. Make sure that you are detailed in recording where the money went. You can do this in expense tracking software such as Mint or just use a notepad. Once you know where your money goes you would be more aware of where to cut back.

5. Work on your most expensive debt first. If you have debt, make sure to tackle the debt with the highest interest rate first. The logic behind this is simple math. If you eliminate the debt with the highest interest rate, you will end up paying less interest.

6. Keep an emergency fund. Once you have tracked your spending and know how much you need per month, you should save up an emergency fund that you could survive on for three to 12 months. An emergency fund should be kept in a readily accessible account, but you will need to have the discipline to not spend it for anything other than an emergency such a medical crisis or loss of employment.

7. Be prudent and skeptical. As the old saying goes, "if it sounds too good to be true, it probably is". When it comes to financial products, such as mortgages or investments, you should make sure you do your research before plunging in head first. Read the fine print and consider all the risk before you stake your money on anything because some financial products can be quite horrible.

8. Make your savings automatic. Deposit your checks into a 401k, IRA, or individual savings account automatically. Pretty soon you will see that you don't miss the money at all and when you do need the money you will be covered.

Ultimately, the basics boils down to knowing how much money you have and how much money you can spend and save. As long as you know the basic financial facts about yourself you are more likely to make wiser decisions about your money and achieve your goals. Once you have managed the basics of saving money and controlling debt you will also have more power to invest and make your money work for you.

The author writes for the popular personal finance blog Wise Bread and also blogs at The Baglady.

Credits: Photo by Petr Kratochvil, courtesy of Public Domain Pictures.

Suggested Resource: Simpleology 102: The Simple Science of Money (Lesson 1: "The Grand Law of Wealth: Increase Your Incomings and Decrease Your Outgoings" will help steer you towards the right financial path.).