The Three Pillars of Money Management

Unsplash/Olga DeLawrence

Money management is perhaps the most important of all life skills. Everyone, whether rich or poor, needs to understand how to manage money. Unfortunately, many people think financial literacy skills are only crucial for business people. Nothing could be further from the truth. Everyone everywhere needs an understanding of financial concepts. From how to earn money to how to save it to how to invest it properly, money management skills are a must.

Even teenagers should know specific financial concepts such as interest rates, stocks and bonds and why different types of income face different types of taxes. While some financial institutions such as Blue Trust Loans and the occasional credit union make it their mission to lay out the terms and conditions for consumers to understand easily, this kind of customer service is unfortunately rare in the financial world. We have to learn much of these things ourselves. Understanding fiscal concepts is the best way to avoid unnecessary debt, keep to a budget and prepare for some of life’s most important events such as getting married, buying a house and eventually preparing for retirement.

Creating a Budget

Perhaps the most important of all skills is creating a budget. Budgets are the foundation of everything else. Businesses create budgets. Individuals can do the same. An individual may not be aware of where their hard earned salary is going. This is why it is imperative to create a budget. One of the best financial literacy tips is to use a spending diary for a period of time. The spending diary can help the individual determine where their money goes in a given time frame. For example, they can write down all they spend for a week. Just as business people are acutely aware of the daily flow of cash, the same should be done for any given person. People can then examine their expenses in greater detail.

Saving Money

Once an individual is aware of what is being spent during a given time frame, they can then decide where their spending priorities lie. Business owners do the same. They carefully examine their expenses. Then, they decide if cuts are needed and if they have earned a profit. The same should apply to people. Each person should know what they’re spending money on each month. They can save money by cutting out the excess fat and keeping to lean budget instead. Just as business owners invest in capital improvements, any given person should have money set aside for savings. Many business owners aim for a given rate of return on their capital. People should look at their salary the same way a business owner looks at their capital: as a means of savings that can be used to aim for other goals.

Investing Funds

While many lessons can be learned from business eople, the most important of all such lessons is that of investing funds properly. People today need to take their cue from the business world and see their savings as capital. Part of understanding capital is knowing how the world of investing works. Many business owners are aware of concepts such as inflation. People who are not in business may not understand that saving money is not enough. The value of a dollar today is not the same as a value of a dollar ten years from now. Just as business owners choose to look for investments that will hold their own or even beat inflation, the same should be true of people who do not own a business. They should treat their savings as a form of working capital that can be used to generate valuable returns.

The business world has many valuable money management lessons to impart to people from all walks of life. But in the end, it’s up to us whether or not to learn them and put them to use.