Money Management skills are very crucial to properly manage your income and cover your expenses. Developing these skills is a continuous process. Money management skills help people to properly track their spending habits as well as to channelize their income to the most productive areas.
“Earning a lot of money is not the key to prosperity. How you handle it is.”Dave Ramsey
Read our article: What is Money Management: Principles of Money Management to know the basics of the money management process.
In this article we will discuss the 7 money management skills that you need to develop to handle your money properly:
1. Diversify your income:
Diversifying your income means earning money from more than one source. It can be through a part-time job, any dividend income, rental income, etc.
But how to do it?
Well first of all let us understand the different types of income. Income can be mainly divided into two categories:
- Active Income: It is the income which you earn from a job or your business. Active income is basically the income earned by selling goods or rendering services. It can be your salary from a full-time or a part-time job, commissions or bonuses, business income, etc. Active income is earned from the tasks that you perform related to your job or career. It requires your time and effort.
- Passive Income: It is the income earned from investments, rental property, subscribed shares of a company, etc. It does not include rendering services. But it does require an initial investment and also a long period of time to generate income. Unlike active income, it doesn’t require much effort. Passive income basically works on the concept of making your money work for you.
Now that you are aware of the two basic categories of income, the next thing is to find out which category suits you best.
Different options to diversify your income:
- If you are doing a 9-5 job and have some extra hours to work, you can start doing a side hustle or part-time job. But do remember that you don’t have to work 24/7 just to diversify your income sources. Prioritize yourself and your health first.
- Also, if you have a regular flow of income you can invest in mutual funds or any other investment options which will generate an additional source of income for you.
- If you have a source of initial investment, you can invest it in the real estate market. The income generated will become a source of passive income for you.
- You can even make use of your hobbies or do some sort of freelancing work to generate extra income.
But why is it necessary to diversify your income?
As mentioned earlier, money management is all about properly managing your income and expenses. There is no surety that your job will always be permanent or your business will flourish forever. Having an extra source of income will make sure that your life does not get hindered in any unwanted situations.
Diversifying your income is a skill that you will develop gradually by trying out different things available for you. These extra sources will help you earn extra money as well as won’t affect your permanent job or business.
2. Stick to the budget:
I have talked about the budget, process of budgeting as well as the purpose of budgeting in my previous articles. The only thing important after creating the budget is to follow it wisely. Also, make necessary changes in your budget as per your present conditions.
Budgeting is a very crucial skill to be developed for proper money management. There is no best budget that suits everyone. But there are certain things that need to be followed as well as certain things that need to be avoided or to say Do’s and Don’ts of Budgeting, to make a budget that suits you the best and you can improve it in every changing situation.
The next most important thing after creating the budget is to follow it wisely and keep improving it according to the changing situations in your life.
3. Improve your knowledge every day:
Learning is a continuous process and it should never be stopped. The habit of acquiring knowledge from anywhere and anyone makes you a knowledgeable person. Improve your knowledge on new developments, innovations, investment opportunities, or any other thing that interests you, just like you are reading this article to improve your knowledge on money management. Such learnings will help you to ace your money management skills.
4. Tracking your expenses:
Though it is a part of the money management process, still many people don’t take it seriously. Tracking your expenses is very important to be aware of where your money is going. You need to develop this skill by practicing it regularly.
Try to note down whenever you spend your money. Also, get a cash memo or bill for whatever you buy or spend your money on. It will help you to track your expenses at the end of the month easily. Eventually a very important step of the money management process will be performed by you without any obstacles.
5. Develop good spending habits:
Spending habits mean how you are spending your money. Money management is ultimately about managing your income and expenses. Managing your expenses or spending habits has a great impact on your financial life.
You should regularly review your spending habits, and try to differentiate between good and bad spending habits. Once you have differentiated, the next step is to get rid of all your bad spending habits. Also, continuously follow as well as develop the good ones.
6. Compare the prices:
All of us buy different products or use different services and pay a price for it in return. But sometimes we might pay more than required for any good or service because of lack of awareness. As a cautious consumer, you need to be aware of the prices of different products prevailing in the market. This will help you to compare all the prices and get the product or service at the best price.
But why is it important in the context of money management?
Well if you are getting the same product at a lower price you can use the extra money for your other expenses and financial goals. Having enough money to invest on your financial goals will smoothen your money management process. So, it is very important to develop the skill of ‘being an informed consumer.’
7. Be consistent:
Money management is a continuous process that requires consistency. You have to follow your budget, track your spendings, spend money on necessities, invest as well as learn regularly. These skills can only be mastered by continuous practice and analysis. It’s the small steps that you have to do regularly to be successful.
“It’s not what we do once in a while that shapes our lives. It’s what we do consistently.”Anthony Robbins
Money management is a normal life skill that you should perform in your day-to-day routine. It helps you to be ever ready for any financial circumstances which come your way.
And congratulations on practicing the 3rd skill which I have mentioned in this article, i.e., improving your knowledge every day. Such a healthy practice of acquiring knowledge every day will build your personality and will also give you a balanced perspective in life. You will be able to interact with people as an informed person with your own opinions and point of view on various matters.