The Journey to Financial Freedom - Money Management
What is Money Management?
Money management is the process which you track your expenses, investments, and budget. The purpose of money management is to make money yield the highest interest-output value for any amount spent.
In order to properly manage your money, you must control your cash flow by setting goals, creating a budget plan, and having a decision-making process. I will briefly explain each topic below and include an activity for practice. Please ask a parent or guardian for assistance for better understanding.
Why is Money Management Important?
Money management is important because it is an essential component for achieving your short-term, medium term and long-term financial goals. Managing your money properly allows you the opportunity to save effectively, create your dream lifestyle, buy a house, start your own business and much more. Money management could have a positive or negative impact on your life. If you properly manage your money, you will be able to afford a high-quality lifestyle which includes the best house, luxury car and designer clothes. Unfortunately, poor money management doesn’t offer the same opportunities.
Financial Goal Setting
Financial goal setting are the reasons you choose to save and spend your money. These goals should include things that you want to achieve short term, medium term or long term. The terms are self-determined which means you can decide how long want each term to last.
Your short-term goal is something you want to accomplish in a short timeframe. For my example, I will make my short-term goals obtainable in less than three months. Remember you can change your time frame to fit your needs but should not be more than a year (three months, six months, nine months).
Short-term (one month to three months)
Create a budget
Create a savings account
Save for an outfit
Your medium-term goal is something you want to achieve but it will take longer than your short-term goal (I would suggest that this goal should not take longer than two years).
Medium-term (three months to year)
Follow a budget
Create an emergency fund (money to be used in case of an emergency)
Save for a Christmas gift
Spending money for Spring Break trip
Your long-term goal is something that is desired, but it will take you a longer time to financial plan and save. This typically takes more than a year to acquire.
Long-term (one or more years)
Become an entrepreneur (start your own business)
Save for college
Buy a cash car
Activity: You will need a poster board for this activity. You can use pictures, words or whatever will motivate you during the activity. On your board, you will create three sections. In the first section, you will create three short term goals. Under each picture write three action words that will help you to create healthy saving habits in order to reach your goal. Under the second column, create three medium term goals. Beneath the medium-term goals, write three statements on why you deserve to achieve your goals. In your last section, you will list three long-term goals. Write four affirmations around each goal. (Each goal should have an affirmation on top, below, on the left and the right). Example of an affirmation: I will take actions towards my goals every day, I have the power to achieve my goal, etc.
A budget is a plan that you create to determine how you will spend your money. The term budget plan allows you to decide how you will spend your money in advance. To properly understand how you should spend your money, you need to evaluate your income and your expenses. A budget is important because your goal should always be to have more money than you spend.
Monthly Budget Plan Example
Income Income Amount Expenses Expense Amount
Allowance $100.00 Savings Account Deposit $75.00
Cutting Grass $100.00 Entertainment $75.00
Grandparents $40.00 Meals $75.00
Bake Sale $50.00
Total $290.00 $225.00
Remaining Balance $65.00
Activity: You will need a sheet of paper for this activity. On the paper you are going to create your monthly expenses. You are going to make five sections: Items (necessities), Food, Entertainment, Transportation, Other debt. Under each section create your list. Next to each item make two columns: Budget Amount and Amount Spent. You will also create a column to include your monthly income, total expenses and total savings. Please see example below.
Budget Amount Amount Spent
Snacks $20.00 $13.00
Drinks $25.00 $11.00
Total $45.00 $24.00
Concert $75.00 $50.00
Video Game $50.00 $50.00
Total $125.00 $100.00
Loan from parent $125.00 $125.00
Clothes $200.00 $119.00
Nails $100.00 $55.00
Total $425.00 $299.00
Grand Total $595.00 $423.00
Monthly Income Amount Spent Savings Amount
$650.00 $423.00 $227.00
Decision Making Process
Financial decision making is the process in which you take responsibility on how you spend your money. During any purchase transaction, you should determine the pros and cons of each item. You should question yourself such as is this item a need or a want or is the purchase necessary now or can I find a better deal elsewhere? If the item is not included in your monthly budget, you should ask yourself why you are choosing to buy the certain product. The decision-making process is very important to money management because it determines how you spend your money. This process controls your long-term growth success or downfall.
Activity: You will need to containers for this activity (shoe box, bowl, bag, etc.). Label one container “wants” and the other container “needs”. Create two list. On the first list write down everything you bought within the last two weeks. On the second list write down everything you plan to spend in the next two weeks. Once you have successfully completed both lists, cut each word or phrase out and place it in either the want or need container. Now determine if the needs are truly need and why was it necessary to purchase the wants currently.
Need: Something that is required because it important or essential necessity.