5 Step Framework for Effective Money Management

It is common knowledge that financial awareness is not equitable for all, and for those of us who did not grow up with wealthy or financially knowledgeable families, it has to be an acquired skill that can often require extra time and effort. Though you may have a loose idea of what it takes to save and budget, often the concepts can be daunting and you may not know where to start.

I’ll be diving deep into how to best make your money work for you and give tried and tested tips for saving and investing, but I wanted to build out a general framework for approaching money management. This really helps you narrow down your focus areas and rather than being stressed and pulled in ten different directions, you’ll have a plan in place to get started to achieve your goals, big or small. 

1. Budget for necessities: It goes without saying that in order to be savvy about your finances, you need to have a budget to begin with which is based on how much you earn and how much necessities such as food, rent/mortgage etc. cost for you. This really depends on your living status (whether you live with partners/roommates/have kids etc) but it is imperative to ensure that you set an appropriate percentage to budget for your necessities; in my opinion ideally budget to spend 60% or lesser for the non-negotiable though that percentage can be more or less based on how much you earn and if there are multiple incomes in your home.

2. Identify goals: Outside of spending on your living expenses, it is especially important to identify what big money goals you have and how much you need to save for each. It can range with paying down debt, building up short term savings, saving for retirement, buying a home, or even something like a big vacation. Most people tend to have multiple goals simultaneously, but ideally, it makes sense to build financial stability by building up emergency savings worth at least three months of living expense and paying down debt, especially high interest debts. 

3. Automate deposits: I have found that in order to achieve any financial goals, it really helps to set up automatic deposits in separate accounts than your checking account. It really helps to have the money out of spending sight, yet growing steady over time. It also helps with the first aspect of budgeting, as you know what amount is leftover after spending on necessitates and saving and work with that to spend on other expenses. Bonus points if you have separate accounts for each individual goal.

4. Invest: There are numerous books that talk about the power of investing, but I find that many people don’t harness investment to its full potential. My family never knew how to or invested in the stock market and I do feel that despite having strong budgeting and saving practices, that set them behind significantly. I’ll be talking in depth about how and where to invest money depending on your goals, but ultimately the point of any investment is in the long run to make your money grow for you, rather than sitting stagnant in a bank account; investment can be in the stock market, real estate, precious metals etc, but knowing your goal and then investing money based on the time horizon of that goal is imperative. 

5. Assess: Lastly, once you have a plan in place, it makes sense to consistently re-evaluate (once every quarter seems ideal). Take analysis of your spending, where do you appear to be spending more and can cut back and budget for any unforeseen expenses. If you fall behind on your goals, these personal check-ins are a great way to identify areas to cutback or build on and then adjust your spending accordingly. 

So there you have it, my very basic framework for building a money management plan. I’ll be diving deep into each of these steps in much more detail, but I wanted to start by establishing a framework that’s easy for anyone to follow.