Some Useful Hacks for Effective Money Management

Introduction

Personal finance is a very important aspect of our life. Therefore, money management should be done deliberately and carefully. Failing to do so may have grave implications. In this blog post, I will discuss a few points which should help you manage your finances effectively.

It must be kept in mind that money management is the link between the resources available and your financial goals. If this link is not strong enough, you will not be able to optimally utilize your resources for the attainment of your goals. This is going to create a lot of mental stress.

So, here are some useful hacks that will, hopefully, help you manage your money smartly:

Keep a Financial Journal or Diary

It is very useful to write in a financial journal regularly. Whenever you are about to take an important financial decision, you should transfer your thought process on a paper which you can refer back later. This will help you think clearly. You will also be able to see, at a later stage, whether you were vindicated or proven wrong. It will enable you to learn from your mistakes and your decision-making will improve significantly.

Track Your Income and Expenses

Make it a habit to always log your income and expenses. This way you will be able to track the pattern of your expenses vis-a-vis the income. You will be able to hold yourself accountable and will get some useful insights also.

You can make use of a mobile phone app for this purpose.

Prepare Your Financial Statements

At whatever stage you are in your financial journey, you should learn and start maintaining your personal balance sheet, and annual income and cash flow statements. This is done by all businesses and it is very useful in personal finance as well.

Make use of MS Excel for this purpose.

Financial Decision Making Should be Slow and Infrequent

One should be very slow and deliberate in financial decision-making. It will be better if you have to make only a few financial decisions in your lifetime. The environment around us has a clear bias towards promoting frequent buying/ selling decisions. Whereas our interest should be in sustained ownership of good financial assets. In this context, following is recommended:

Follow the mantra, “fewer, the better”.
Be skeptical about the products on offer.
Play devil’s advocate. Alway think about what can go wrong.
Be risk averse. Don’t jump into unfathomable waters.

Don’t Let the Marketing Work Against You

Never be affected by the phrases like “a golden opportunity”, “a lifetime opportunity”, “limited edition”, “special offer, etc. These are only marketing gimmicks and are aimed at creating artificial scarcity. In this regard, pay attention to following:

Observe how a financial product is reaching you. How strong is the marketing behind it?
Don’t ask about the quality of a product from someone whose interest is linked with promoting it.
Overcome FOMO (the fear of missing out).
“Hot” products are normally substandard or overpriced or both.

“Inactivity” Pays Rich Dividends

A long-term view coupled with infrequent sale/ purchase of financial products is what is required for wealth creation. Major effort should go into identifying quality products rather than daily hassle of getting into and out of the market. The “inactivity” of this kind is going to pay rich dividends.

Have a long-term view. Rome was not built in a day. Nothing worthwhile happens in the short term.

For this purpose, it is better to consume less electronic and social media and spend time in book reading and other healthy activities.

Keep Income and Wealth Creation Initiatives Separate

Income is what you need for fulfilling your recurring needs and wealth creation is meant for eventual financial freedom and retirement. Both are important and should be managed separately. Different skills and financial products are needed for both.

Define Your Financial Expectations Realistically

If you can correctly define your financial expectations, half the job is done and then you can manage your money much better. One way of doing this is to have following expectations:

Preserve your corpus/ principal at all costs.
Beat inflation.
Consistently earn a reasonable return.

Keep Your Financial Objectives Clear

In this regard, do the following:

Set smart (specific, measureable, achieveable, relevant, time-bound) financial goals.
List down your needs and wants and allocate your financial resources judiciously.
Since financial resources are always limited, therefore, laying down correct priority is extremely important.

Err on the Side of Caution

Learn to calculate financial risk correctly. Undue risk-taking can prove to be costly. In financial matters, to err on the side of caution is always better. If you don’t understand something very well but, otherwise, there is a lot of hype about it in the market, remain away from it.

Have a Valuation Mechanism

When you are assessing a financial product and considering it for buying, you have to follow a valuation mechanism. This is essential to know whether the product is rightly priced or over-priced. There are different methods used to value different types of products. Refrain from those products which cannot be valued properly or have an outrageous valuation.

Learn to Compare Various Products

Unless you learn to compare various financial products, you cannot decide which one is better than the other and your buying decision will reflect that error. The principle of opportunity cost cannot be applied without a comparison.

Be Aware of Greed and Fear

Know your fears and greed. If you are motivated by either of them while taking a financial decision, the chances are that it will turn out to be wrong. Always work on these two primordial emotions and do not let them come in the way of following established principles of money management.

Conclusion

Prudent and smart financial management can have a very positive effect on your financial health. While we work very hard on enhancing our income, we do not pay as much attention to managing better what we already have. The measures suggested in this article may look too cautious, too risk-averse but their effect in the long-term can be extremely positive.

How did you find this content? Please comment and give suggestions, if you have any.

My other articles you may find useful are:

How to Make a Personal Financial Plan – Basic Considerations

Personal Finance – A Suggested Checklist

Investment vs Speculation

A Brief History of Money

Why I Started a Blog on Personal Finance

Anatomy of Financial Risk

Debt, Equity, and Real Estate: An Overview

Retirement Planning

How to Compare Equity and Real Estate as Investment Options

How Stock Market Works and How to Work in Stock Market?