What is Money Management?

If you want to move forward from “earning money” to “making money” and becoming wealthy, you must think of ways and strategies to manage your money more effectively. Money and personal finance management can help you keep expenses within budget and invest your money such that you achieve your financial goals.

Money management defines how you handle your money, right from budgeting your expenses to investing, depending on your goals. It helps you make the most out of your hard-earned money. Money management focuses on reducing debt, investing for your future, and optimising your expenses.

Without effective money management, your personal finances could go haywire. You may end up overspending and struggling to make ends meet even if you earn well. Money management can help you build a better grip on your money so that you can be financially healthy. Learn more in this blog.

What is the Principle of Frugality?

Starting from scratch and getting things done at the least expense is an indication of being frugal with spending. Putting off expenses that can be postponed and trimming expenses that are not required can save money that can be spent more productively.

When you work with constraints, the existing resources are optimally utilised. The money thus saved can work hard in parallel and grow with time. Some pro tips of frugality:

1. Avoid spending for vanity, snobbery or to join the trend
2. Choose the most cost-effective option
3. Spend on interest-bearing avenues
4. Have a clear ROI or a cost-benefit matrix for any desired expenditure

Process of Money Management

Effective money management begins with regularly reviewing your investments and tracking how much you contribute from your income each month. Put a budget in place so that your spending is under control and more money is invested in building your wealth kitty. A clear process like the one given below can help:

1. Set A Budget: A budget is the foundation of money management. It frees up a lot of money that you would have otherwise spent on unnecessary stuff. While it does not take much time to prepare a budget, what needs effort and dedication is always sticking to that budget. You may initially find it a bit difficult, but you will eventually develop the habit.
2. Keep Track of Expenses: Preparing a budget is only scratching the surface of the money management process.
   • You must maintain a clear and comprehensible account of expenses. What is not measured cannot be monitored.
   • Spend some time each month evaluating your expenses. 
   • Ordering food every weekend may look cool, but how much are you paying for the food, taxes and delivery? “Long drives” may seem fun to unwind, but is the fuel bill burning a hole in your pocket?
   • Summing up these expenses will give you more clarity and draw your attention to where it is needed the most.
3. Plan Leisure Spending: This should ideally be part of your planned budget. However, you can give yourself a small leeway by spending some amount outside your budget. Go and spend occasionally, and let this be “outside the budget”. However, let such amounts not be too extravagant.
4. Avoid the Debt Trap Situation: Banks will offer you loans and credit cards. You don’t have to take them even if you can afford to repay them. The only exception could be emergencies. If you are availing a loan to buy an asset, try investing in an asset that appreciates over time. Buying depreciating assets using loans and credit cards could soon push you into a debt trap.
5. No Impulse Buying: Evaluate options before you buy anything. Spread the buying decision process over a few days or weeks. Walking into a random shop, while in a mall to watch a movie, and buying something without a second thought is not a financially prudent decision.
6. Invest First, Spend Later: Income - Savings = Expenses should be your financial mantra. Save money from your income each month. The rest can be used for your monthly expenses. The amount you save should be a well-thought-out and calculated amount. It should align with your short- and long-term goals of reaching a certain corpus.
7. Mitigate Risks: Risk management is a critical part of money management. Get yourself covered with:
   • Life Insurance for your family’s security
   • Health Insurance to avoid out-of-pocket medical expenses
8. Plan your Taxes: Improper planning can cost you loads of money in taxes. If you explore the right investment avenues, you can save taxes on three fronts, namely:
   • At the Time of Investment: For example, if you invest in an endowment plan or ULIP, the invested amount is deductible from taxable income, u/s 80C. So, you save tax on the amount invested.
   • At the Interest Accruals: Accrued interest in the investments could be taxable, as is the case with some of the most popular fixed income options. However, the best tax-saving investments will enjoy a tax-free interest accrual.
   • At the Time of Maturity: No TDS is deducted on maturity because insurance maturity amounts are exempt from taxes in line with the provisions, u/s 10(10D), of the Income Tax Act. Such investments are also referred to as EEE investments, which stand for three levels of tax exemption.