What is financial management? If you just started working, or have been working for some time, or feel you need better management of your money, you’re right where you should be.
In this article, we will discuss what Financial management is, how to create a good financial plan, which mistakes to avoid during the plan and much more.
Your benefit of reading this article will be that you’ll be saving some money and achieving your financial goals faster. If that’s a good reason, keep reading!
Table of Contents
What is financial management?
In the simplest of words, it’s “management of finances” or financial planning and analysis. The way you manage the amount of money you have is called financial management. While it’s often misinterpreted as a “saving plan”, that’s wrong. A financial management plan is also supposed to help you spend better.
The goal of a good financial management plan is to help you save as much money as you can, without having to sacrifice the things you need.
The most common benefits of financial management are:
- Better control of funds.
- Better investments and expenditures.
- Reduced overspending
- Debt management etc.
Put simply, financial management doesn’t exactly increase your income, but helps you better manage the income that you already have.
How to create a good financial management plan?
A good financial management plan consists of a few basic ingredients.
Calculate your net worth
The best place to start is by calculating your worth. How much money/vehicles/assets you’ve got? Then you’ll need to write down all the money that you owe others. This may be credit card bills, EMIs or any other form of payment. The amount that remains after subtracting your liabilities from your assets is your net worth.
This will give you a baseline. You’ll know exactly where you stand in terms of the money race. You’d be surprised how often we miscalculate our own financial worth!
Make a budget
Yes you’ve heard it a thousand times and there’s a reason you’ve heard it a thousand times. Budgeting is like a user-manual for your funds.
So, as far as budgeting goes, you’d need two primary categories. The requirements (needs) vs. the wants (not required, but would make you happy or solve a non-urgent problem).
As an example, rent/bills/ transportation etc. are the needs. You can’t skip them. Dining out, new clothes, or even a better vacuum cleaner are the wants.
The most popular budgeting rule is the 50-30-20.
You should be allocating 50% of your monthly income towards your monthly needs. The remaining 30% goes towards the wants. The last 20% is for your savings.
Of course this isn’t mandatory. Depending on your financial goals, you may adjust the numbers that suit you best.
Track your income and expenditure
You may have a fixed salary and yet I’d advise not to skip this step. You may use apps or even a simple notebook to document the total money you make in a month.
Similarly, calculate the total expenses each month. It’s best if you do it with colour-coded categories (food/clothes/games/family etc.)
The biggest benefit of doing this is you may spot expenses which have become like a habit, but aren’t really necessary.
Financial goals
A major part of any financial plan are the financial goals. You need to know exactly what you wish to achieve.
In fact, this also helps with your budgeting. If you know your goals, you may reduce your wants or even adjust with the needs that may help you reach said goals.
Again, you can have two different goals. A short term goal that’s easier to achieve, and hopefully repeat. An example may be to save $X in 3 months.
You then need a longer-term goal that may require multiple of these short-term goals but will be the most beneficial for you. An example may be “College fund”.
Managing your finances
While a financial plan of course lets you manage your finances better, there are a few direct steps you may take when you start with the plan.
Write down the steps to minimise your liabilities. Reduce wants so you can allocate more of your funds for your EMIs and other payments that will stop once they’re cleared.
You also need to update your financial plan when you change jobs or your cash flow changes for whatever reason. Excess cash may create a problem with your spending habits and the entire financial plan in general.
Mistakes to avoid while creating a financial plan
While we’ve discussed the things to do, there’s quite a bit that you should avoid when creating your financial plan.
- NOT having one: The biggest mistake you may make with financial planning is not having a financial plan. I don’t care how much or how less money you make. Or how good you think you are at managing it. Creating an actual plan is the step where most people miss out!
- Unrealistic plans: Trying to save 90% of your income, or having a $1Million by end of the year goals are what kill a plan. Ensure that the plan is realistic and practical, something that can be followed. It’s possible that at times you realise that you set your goals too high, or too low. In that case, gradually increase or decrease your goals but never simply set them up in the sky.
- Failing to invest: A lot of people confuse “savings” with “investments”. Savings are generally just funds that you store somewhere else for a future date. Investments on the other hand are expected to increase your savings with time. Your financial plan isn’t complete without a proper investment plan on top of your savings.
Conclusion
I hope by now you’ve got at least some ideas as far as financial management goes. Do note that there’s no concrete rulebook to building a good finance management plan. You may remove or add your own sections to your financial management plan according to your needs.
Remember, the end-goal is simply to spend your money better so it either brings in better value for you, or increases over time (investments). Contrary to popular belief, a financial plan can help you achieve a better lifestyle rather than making you cheap.
