In this article you will discover how to manage money,
you will find the 4 critical points on how to manage money that will allow you to optimize your finances
Money management is certainly one of the most important skills in our life
Simply because we deal with money every day and we make the most important decisions of our life taking into account the financial aspect
the problem of money is constantly present in every day of our life
The question arises spontaneously
how come nobody teaches us anything about money?
In this article, you will find out the basics of money management and what everyone should know
WHY IS IT IMPORTANT TO MANAGE MONEY WELL?
Undoubtedly, one of the main reasons for learning how to manage money is the bank of Italy data
Bank of Italy which is the central bank of the Italian republic based in Rome, has carried out two surveys on the literacy and financial skills of Italians
In simple words about how much Italians know about money and how much they know about money management
based on a methodology developed by the OECD (which is the organization for economic cooperation and development)
according to this method, the grade you can get is between 1 and 21 and is obtained with the sum of 3 components;
- Financial knowledge
- Financial behaviors
- Financial attitude
For a population aged between 18 and 79 years
from the research it can be seen that the Italian knowledge on money management changes a lot and especially according to the level of education
In practice, graduates have a higher degree of financial knowledge than people with lower education
26 countries participated in this survey in 2020 and the average score was 12,
our dear Italy had a score of 11.2
This is why it is important to learn money management, unfortunately no one teaches us this subject and this involves little knowledge and great difficulties that can be easily avoided with a few tricks.
Let’s see the most important points
1) STEP – CREATION OF A BUDGET
on a budget your money management will take a leap in quality
Here are the 3 benefits you will get by creating your budget right away:
- reflection on the movements and activities you carry out
- the creation of an income and expenditure program that aims to achieve your goal or desire
- the possibility of collecting data that will allow you to evaluate your behavior
Let’s analyze these 3 points!
1- “reflect on the movements and activities you carry out” we can summarize it in: set yourself a goal
Just buy on impulse !!!
impulse purchase is that unscheduled purchase made on the basis of a stimulus which can be:
- Advertising
- Strong emotions
- Discounts
- Offers
which does not take into account convenience, usefulness and need
impulse buying is always determined by irrational reasons (pride, affection, emulation, fear)
setting a goal allows us to control our emotions and go straight to our goals / desires
2- creating a program, table, diary (income / expenses) that allows us to equip ourselves and go straight to our goal
Once you have determined your goal, the creation of the budget has the final aim of allowing you to reach the goal in the shortest possible time
Let’s take an example:
If your goal is to save $1,200 in a year ( REMEMBER : the goals must always be very very precise)
the monthly goal will be to save $100!!
Here is the budget that you are going to create will have as its final goal to make it possible for you to save $100 per month, adjusting all the expenses you have for this goal
Simple isn’t it?
3-the possibility of collecting data that will allow you to evaluate your behavior
Check your budget on a regular basis, this will allow you to realize where you are and how you are progressing !!
If you are close, if you are halfway there or if you are far from your goal
the data will allow you to decide whether to speed up or slow down all this while maintaining control over your expenses
[other budget articles:]
- How to make a budget
2) STEP – LEARN TO SPEND
the first step is to reduce your expenses, or rather become aware of your expenses
making the difference between what you want and what you need is essential
Have you ever wondered why you buy the things you buy?
come on Jean what questions are you asking? 🙂
Not seriously 🙂
the process of spending money is much more psychological than you can imagine
Now I’ll explain
I’m going to tell you something extremely important
PEOPLE BUY THEIR SOCIAL IDENTITY !!
What do you mean?
I’ll give you an example:
When we buy a Mercedes, we also become the kind of person who owns (or can afford) a Mercedes
And it’s that feeling we really want
we want to be the kind of person who owns a Mercedes
Here is the social identity we are buying!
You understand?
In a world where social pressure leads us more and more to conform to the norm you must be aware of this
And be careful about spending your money on yourself and your goals and not to please others
[other articles on spending :]
- Spend madly on what you love
- Passive Income: a path for a few
3) STEP – SAVINGS
Do you know what is the biggest mistake most people make?
is to postpone the time to start saving!
Saving can help you in different situations of your life, indeed it can be said that saving is one of those things that everyone, absolutely everyone should do
the simple action of saving money can give you tremendous benefits in your management
This allows you to:
- dealing with emergency situations
- starting a business
- invest
- travel
- retire
etc …
To start saving I recommend that you set a monthly savings goal (integrate the savings goal into your budget)
For instance:
“Saving $ 100 a month” can be a great start to your savings plan
Savings targets can also refer to the forgoing of purchases of goods and products that are not necessary and essential
These small sacrifices are the best way to start accumulating savings
Of course, saving must be managed in a balanced way, it must absolutely not become a burden having to save
saving must be a way for you to accumulate money that you can use as a safety buffer when things don’t go your way or as a launching pad towards your goals and desires
[articles related to savings:]
- How to save money every day
4) STEP – INVESTING
Investing simply means “making your money work”
do you know why you have to make your money work?
one word:
INFLATION
Jean what is inflation?
inflation is the general increase in the price of goods and services over a given period of time
I’ll talk about inflation in more depth in another article
Let’s stay on the investment!
In terms of investment in general and in very simple words, what we are trying to do is to find a financial instrument
for example a deposit account that guarantees a good return and low risk
once the suitable financial instrument has been found, an automatic payment of money to this account is scheduled to obtain a profit (an interest) from this financial instrument
Example:
I have $1,000 that I want to invest
I look for and find a fund called “Freenancer” 😉 which promises me an interest of 7% per year
I invest my money in the Freenancer fund !!
at the end of the year I find myself with 1000 + (1000 * 7%) = $1,070
Simple isn’t it?
the advantage of an investment of this kind is that it will require very little work but above all it will allow me to take advantage of compound interest
Jean what are compound interests?
Now I’ll explain
compound interest is interest on interest 🙂
let’s go back to the previous example
the first year I earned $70
the second year, doing exactly the same thing, I earn $74.9
that is 7% of $1,070
The table will allow you to understand more easily
| Year | initial sum | interest | final sum | I earn |
|---|---|---|---|---|
| 1 | $1,000 | 7% | $1,070 | $70 |
| 2 | $1,070 | 7% | $1,144.9 | $74.9 |
| 3 | $1,144.9 | 7% | $1,225.0 | $80.14 |
| 4 | $1,225.04 | 7% | $1,310.8 | $85.75 |
| … | … | … | … | … |
Understood?
I invite you to continue the calculation to see the power of compound interest without you doing anything on your behalf
allows you to increase your earnings every year
Fantastic isn’t it? 🙂
CONCLUSION
You have reached the end of this article where we have seen the 4 critical points to be treated for optimal money management
I hope this article has been useful to you and that you have found food for thought or information you did not know
if you feel you need to add something or comment, feel free to write me below in the comments section 🙂
Soon
Your friend
Jean
