The Sunday Mail
Money is a tool that can help you to achieve your goals. It can provide comfort and stability for your family, make it easier to plan for the future, and allow you to save towards important milestones. But to achieve these things, you need to know how to make your money work for you.
What does it mean to make your money work for you?
Making your money work for you means taking control of your finances, then using that control to continuously improve your financial stability and security.
You may eventually be able to gain financial independence or build wealth through investing. But neither of those things can happen without first understanding where your money is going and learning better ways to use it.
Learn to budget
A budget is a vital tool for changing the way you handle your money.
When you are budgeting, you understand where your money is coming from and are purposeful about where you spend it. You are making your money do what you want it to do, rather than spending without a plan.
The goal of budgeting is to always spend less than you earn. When you create a budget, you assign every dollar you earn to a spending category. You can use a budget to:
Reduce your spending
Understand where your money is going
Identify bad financial habits
Pay off debt
Avoid creating new debt
Prioritise spending on things that are important to you
Save for the future
Budgeting is not a one-time action. It should be something you actively engage in every day. You may need to adjust your budget from month to month to account for large expenses or your own spending habits.
When you know how much income you have, you can decide where to put it. When you are deliberate about where you spend it, you are in control of your money. This is the first step towards making it work the way you want to, rather than feeling controlled by your finances.
Get out of debt
When you are in debt, you pay more than the cost of the original purchase. You also have to make interest payments that can substantially cut into your income.
Debt means your money isn’t working for you, it’s going towards paying that interest. It creates a financial burden and limits the choices that you can make.
Paying off debt, by contrast, allows you to take that money and redirect it toward the things that are important to you.
You can put it toward other financial goals, such as saving for education, creating a retirement fund, traveling, or improving your living situation. You can start a business. You can begin investing it, allowing you to grow your wealth and create more financial stability and independence.
If you have a lot of debt and are feeling overwhelmed, you can use the snowball method to control the debt repayment process.
Pay only the minimum payment on all your debts except the smallest one.
Put whatever extra money you have toward paying off the smallest debt.
Once it’s paid off, move onto the next smallest.
As you pay off your smaller debts, you’ll have more money available to pay off your larger debts. This momentum helps you focus your efforts and get out of debt more quickly.
Create an emergency fund
Surprises are scary when you do not have control of your finances.
An unexpected car repair, a medical procedure, a job loss, or any other financial emergency can quickly send you spiralling into new or more debt, wiping out any progress you’ve made towards taking control of your money.
Creating an emergency fund is another way to make your money work for you because it means you have planned for surprises. If an emergency does come up, you can put the money in your fund to work and regain control of the situation.
Building an emergency fund can take time. Ideally, you should save the equivalent of three to six months’ worth of income.
But every little bit you can set aside will help. If you are still paying off debt or don’t have much wiggle room in your budget, set aside whatever you can in a “surprise expenses” category in your budget. At the end of the month, transfer whatever is in this category to a separate savings account.
Once you are out of debt or have more money free money in your budget, you can set up larger recurring contributions to grow your emergency fund even faster.
Save and invest
Once you have freed up all that extra money from paying off your debt, you can put your money to work through savings and investments. What you save for will depend on your age, lifestyle, and goals.
In addition to an emergency fund, you will also need retirement accounts. You should also consider whether you need:
Education savings, for yourself or your children
A down payment fund for a house
Savings to start a business. – The Balance.