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Ben Kingsley Blog post by Ben Kingsley

A Vital Skill for Success – Money Management Strategy

For many people, visions of success include launching high-paying careers, having a multimillion dollar property portfolio or hitting the lottery jackpot. Fortunately, you don’t have to be a surgeon or win a lottery to be successful at managing money. Regardless of your career choice or your income level, you can set yourself up for success by learning how to manage money. Although it may be tempting to jump feet first into asset management, taking the time to follow these 6 tips can help you create a sound money management strategy that will launch you into that that all-important investment portfolio.

Step 1: Evaluate Your Starting Point

Whether you are creating your first budget or managing an existing investment portfolio, knowing your starting place gives you the information necessary to start your journey to financial success.

Managing money effectively calls for a plan and a way to monitor progress but it also requires discipline and dedication. Hence, the humble household budget is a great starting place. To set up a realistic budget, first take a month or more to track your expenditures. Whether you use a small notebook that you carry everywhere or use software to track, be sure to diligently record every expenditure, no matter how small. There are also many tools available that go beyond a simple spreadsheet to give you a fuller picture of your financial progress. If you want a holistic view, consider purchasing mobile apps that not only incorporates budgeting features but also allow you to have quick look at your financial position, essentially your household’s profit and loss statement.

Step 2: Organise Cash Flow and Automate Savings

As soon as you are familiar with your current position, you will be able to have an indication on where you can improve on. To get a clear sense of where you’re starting from, make a list of the following information.

Source of Money – What is your current salary and that of your partner if you have one? Do you have any possibilities for bonuses or overtime? Be sure to separate out the predictable income, like salary, from the variable income, like a bonus or overtime. If you have rental properties or a side business, list those sources of income along with your salary. Don’t forget to list out your savings and equity borrowings as well because essentially, those are your liquid cash.
Committed Money – This might be the most time consuming part for most people because it is easy to monitor where you are getting your income from but to list out where the money goes can be quite tricky. We suggest you to do this in section and start with your fixed payments such as utility bills, mortgage repayments or rent, phone bills, internet, insurances, car registration fees and even membership fees such as gym fees. Most of this would be available via your bank statement and email notifications. Once you’ve got these done, the next one would be your living expenses and this includes groceries, household furniture, fares, donations, parking and tolls etc. You should be able to get these data if you follow the first step mentioned above. Lastly, you will also need to be realistic and provision for discretionary spending.

Money management doesn’t need to be boring and many might think that good money managers cut off on all their entertainment. Well, that is simply not true. A good money manager is one who understand his or her current position and lifestyle spending and makes informed decisions on what type of spending needs to be controlled and what needs to reduced. So, when you are looking at discretionary spending, make sure to include holiday costs, books or newspapers, presents and gifts and even the occasional tickets to your favorite artist’s concert.

Money management strategy – a vital key to successNow that you have a financial inventory, you would roughly have an idea on what’s left or if there’s nothing left, perhaps you need to evaluate your priorities. If there is a mismatch between priorities and spending, look for ways to cut unnecessary expenses in order to shift money into savings that align with your priorities. The end goal is always to ensure you save a portion of your income. A great money management habit in the short term is to set a target savings amount and have it automatically deducted from your account with each pay. Likewise, for longer-term goals like retirement, you will probably need to automate the amounts to go toward your investments.

The old age saying about out of sight being out of mind is true. If you don’t see the money in the account, the chances of you spending them would reduce and in time, your savings will be stockpiling without you having to lift a finger. Once you’ve got it all organised, you are ready to come up with a plan to make your money work for you.

Step 3: Make a Plan

Few people stumble on to financial success. Like most accomplishments, planning is a huge part of achieving financial security. Think of it this way: when you set out on a road trip or plan a vacation getaway, your planning starts at your own front door. You first decide on where you want to go or which hotel/accommodation are you after followed by the best route to the destination, the estimated travel time, possible stops at tourist attractions along the way and finally, where you can stop for refuel and toilet breaks. Managing money is no different. Charting your course will give your money and you a purpose. Here are three questions that will help you develop a plan for your money.

What do you want to achieve? Let’s start with the end goal in mind because that will be your motivation in the long run. So, although stockpiling money is a common goal, it’s not specific enough to be motivating for most people. Think about what you hope to accomplish with that money. Do you dream of traveling the world? Do you want to follow your passion and start your own business without worrying about money? Would you like to aim for early retirement so that you can enjoy a slower lifestyle? What about building a passive income for life? Whatever your goals, taking some time now to flush them out will give you a guiding vision for your journey.

How do you want to get there? Once you know where you want to go, it’s time to plan how you’re going to get there. Your plan should reflect your personal and financial goals. For example, for short-term goals, like having a safety net in place so that you can change careers or saving up for a dream vacation, you’ll want to focus on saving more. Think of areas of spending that you can cut down on such as cooking more at home or changing the monthly holiday trips to somewhere local and affordable. Also, because you’ll be saving this money over a shorter period of time and will need quick access to the money, tying it up in long-term assets doesn’t make sense. For long-term goals on the other hand, like retirement, you’ll want a robust investment portfolio to get you there. At this stage, it doesn’t have to be a detailed plan but you need to at least think of what kind of investment you are comfortable and familiar with and how to get started.

What’s standing in your way? Now that you’ve outlined your goals and thought about how you want to achieve them, you need to identify the obstacles standing in the way of your success. One of the most common obstacles is debt. It’s important to remember that not all debt is equal and here at Empower Wealth, we have 3 definitions of debt: horrible, tolerable and productive. Consumer debt like paying for holidays or clothes or high interest credit cards are examples of horrible debts because it can disrupt your financial progress. While tolerable debt such as home mortgage, is generally considered less risky and its an asset that grows in value, so this debt can decline in value.

Productive debt is all about using leveraged debt sensible to control a greater asset value that delivers you both capital growth and income returns such as property investment. If you are carrying high-interest debt, try to aggressively pay it down or close it down so that you will have more money to put toward your investments down the road.

Step 4: Educate Yourself

By the time you’ve finished steps one and two, you should have a good grasp on your current financial situation and a rough plan for your future. Now the next step is to increase your understanding on your plan and double check if your assumptions and plans stack up. You’ll also need to learn the terminology and explore the different building blocks of a successful investment portfolio. For most people, financial literacy doesn’t come naturally. Instead, it is built either through education or trial and error. Because trial and error can be an expensive way to learn, educating yourself is the far better option as the saying goes, “Prevention is Better than Cure”.

Now, there are two ways that you can embark on this education journey. The first is to Do-It-Yourself and this requires a lot of commitment and good researching skills as you need to know which keywords to search for. With the popularity of web search like Google and Yahoo these days, finding these education materials aren’t difficult but you have to make sure the contents are trustworthy and unbiased. More importantly, try not to overload yourself with information in a short time. Education takes passion and patience so take your time and enjoy the ride.

The other way to finance literacy is identifying experts in the field and learning from them about basic asset management topics. You can rely on their years of experience in the specific field and learn from their mistakes as well! You can do this by joining webinars from experts, enrolling for a course or the best way is to engage then to work for you. That way, you can see them in action and at the same time, they will also be able to help you evaluate the investment options and form a strategy for success.

Step 5: Seek Help and Advice

Once you have money to invest either from savings, superannuation, equity etc you are going to need to make a call on the investments you think are going to best help you achieve your financial and personal goals.

You might have a preference for property over shares because you feel it’s a safe bet, or you think shares are better because they might have a greater growth rate. Whatever the reason, once again, you need to educate yourself or find the right qualified and independent specialist to help you avoid losing your money because you don’t have the level of skills, experience or knowledge the do.

Step 6: Revisit and Review

At some point in your financial journey, your investments will be growing your money and savings will be on autopilot. At this stage, it’s tempting to relax. However, it’s important to measure your progress as you move toward your financial goals. Although automating savings is a great wealth-building strategy, it doesn’t mean that you and personal money is working as hard as it could be. Instead, it shifts your focus from managing details to keeping an eye on the big picture – Wealth Creation.

Be sure to manage and monitor your goals and your strategies periodically to ensure that you are on target for success. As life changes, take some time to rethink priorities and goals. What you identified as a top priority in your 30s may no longer be your goal in your 50s. Adjust your options to reflect your current circumstances and potentially any revised goals. This is also a great time to reevaluate your assumptions. As you get closer to retirement, do those initial income projections seem adequate?

Financial success is something built over time, not something that springs from a lucky windfall. Once you’ve changed your vision of what success looks like, you’ll be ready to learn how to manage money by tackling these six steps. By knowing the pathway of where you want to go and planning how you’ll get there with professional help, you will develop the money management skills needed to help you accomplish both your financial and personal goals.

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