What is money management?

Money management refers to how you handle all aspects of your finances, from making a budget for where each paycheck goes, to setting long-term goals, to picking investments that will help you to reach those goals.

Money management is not about saying “no” to every purchase, but developing a plan that lets you say “yes” to the things that are most important to you. Any amount of money can prove to be too little if you don’t have good money management skills.

  1. Taking inventory of your assets
    The start of good money management requires you to know where you stand in terms of assets (things you own) and liabilities (amounts you owe).

    Your assets include your bank accounts, investment accounts, retirement accounts, and property, like your house and car. Your liabilities include your credit card balances, student loans, car loans, mortgages, and other debts.When you subtract your liabilities from your assets, you get your net worth. If your liabilities are more than your assets, your net worth is negative. But, with good money management, you can change that.

  2. Setting goals
    Your goals dictate how you manage your money. It’s easy to overlook your long-term goals in favor of just trying to figure out which bills get paid today. However, by setting goals, you can give clarity to which expenses are necessary and which ones you can cut out.

    There isn’t a universal “right” and “wrong” when it comes to your spending goals, but it takes effort to attain them. If it’s your dream to have a car that costs $25,000, you have to make more spending cuts than someone who only wants to spend $10,000 on a car.

  3. Creating a budget
    Creating a budget helps you stay on top of managing your money because you earmark certain amounts for certain expenses. For example, you might limit yourself to $200 for entertainment each month after accounting for other basic necessities and debt payments. However, your budget can be a moving target over time.

    If you realize you can buy groceries on sale and save $50 a month, you might increase your entertainment budget to $225 and add $25 to your savings budget. Alternatively, if you get a pay raise, you might budget that raise into your savings rather than adding it to discretionary spending amounts.

  4. Managing your accounts
    As you save for different goals, you will likely have money in multiple accounts. For example, you might keep your emergency fund in a separate savings account so you aren’t tempted to tap it for an impulse purchase, and you’ll porbably have an IRA or 401(k) plan for your retirement nest egg.

    You’ll also use different strategies for goals with different time horizons. You might be more aggressive investing in stocks and bonds with your retirement account if you won’t need the money for 30 years. On the other hand, you’ll want an account without any risk, such as a savings account, for your emergency fund because you could need that money at any time.

    Software like Quicken can help you keep track of your various accounts to make sure you’re staying on track with your spending and savings goals.

Pros to money management: it makes life easier

Though “money management” might be a scary term for some people, it doesn’t have to be. In fact, taking the time and investing the effort to get your financial house in order can actually make your life much easier — and less stressful — because you put systems in place to account for life’s “what ifs.”

Peace of mind from understanding your finances

When you have solid money management skills, you know where your money is going — or at least the vast majority of it. That gives you the raw data you need to make changes, whether you’re single and setting up your own financial plan or in a relationship and need to have an informed conversation about spending.

While you might still have to hash out how much in any given category is too much, when you know where your money is going, there’s no way to argue that you’re spending only $50 on coffee each month when the numbers add up to $150. If you have a hard time tracking receipts with paper and pen, consider investing in financial management software.

Limiting surprise expenses

When you start managing your money more carefully, you learn where all of your money is going — and you can compare that to how you want to prioritize your spending.

“People are usually surprised by things like eating out, where each individual purchase never feels that big,” according to Matt Becker, a financial planner practicing in Pensacola, Florida. “It’s only when you look at a monthly total that you’re really able to see how much you’re spending.”

For example, if you start tracking your spending and realize that you spend twice as much each month eating out as you do on your car payments, you might consider whether you want to spend more time in the kitchen so you can divert those eating-out funds elsewhere.

Better communication

If you’re part of a couple, good money management can improve your communication with that special someone.

“Having your finances under control makes for a much less stressful relationship, especially when there are kids involved,” says Becker. “Not only is there one less thing to worry about, but when you’ve proactively worked together toward such a big common goal, it’s just easier to feel like you’re rowing in the same boat.”

Enabling long-term financial goals

Good money management helps you set and achieve long-term financial goals, whether that’s as big as buying a home or planning your retirement, or as routine as building an emergency fund so you aren’t stressed out over every unexpected expense that pops up.

When you start managing your money, Becker advises starting small. For example, if you want to build an emergency fund, Becker suggests figuring out how much you want saved — he recommends three to six months’ worth of expenses — and how quickly you want to reach that goal. Then you can simply divide to get your monthly savings goal. From there, he advises that “you can go back to your budget and see what kind of changes could be made to fit that savings in.”

Automate your bills

When you have your money management running smoothly, you can automate many of your expenses so you can focus your time elsewhere. “You can send money from your checking account to a savings account or retirement fund so that your savings are growing every single month without you having to worry about it,” says Becker. “This kind of automation accomplishes the goal of budgeting without all the stress of worrying about how every single penny is being spent.”

Quicken Bill Manager can also automate your bills, so you can track, manage, and pay them using one simplified dashboard.

Top money management tips: getting started

Create a budget

Money management software typically comes in a stand-alone version — to be installed on your computer — or an online package that requires Internet access. Either way, the software includes a budgeting section that allows you to plan income and expenses on a monthly, weekly, and yearly basis.

Sheri Stuart, education manager of the nonprofit financial consulting agency Springboard, explains that the first step is to “set up a spending plan. Start by thinking about how you’re going to spend money before you get your paycheck.” The structure of a regular budget makes spending decisions easier.

Automate your bill payments

Very few people want to spend their time writing and mailing checks to pay bills — especially in the digital age. But paying your bills online across different websites doesn’t give you an easy way to track those payments.

Money management software lets you link up your bank account to pay regular monthly bills, such as utilities and credit cards. You set the payment dates and amounts, and you can even back payments out a few days if you’re waiting on a paycheck to cover them.

“We always recommend the use of bill-paying software,” Stuart says. “It helps you avoid late fees and makes the whole process much easier.”

Simplify your tax prep

Pulling together your tax forms and related documents each spring might be the most work-intensive financial task you face. Along with receipts, pay stubs, and bank statements, preparing federal and state taxes can use up a significant amount of your time. Files get lost and receipts mysteriously stray.

A good personal finance software package offers a tax-preparation feature. By tracking deductible expenses and payments, it can help you complete tax forms automatically and do the calculations as well. The software may suggest write-offs you haven’t thought of, and can also cut down on math errors that could end up costing you hundreds or even thousands of dollars.

Manage all your investments in one place

If you’re putting money aside for a big-ticket item or a college education, money management software typically can help you track the performance of your investments.

Showing the risk and return on your assets can also help you re-balance your portfolio periodically to keep it in line with your plan. This feature can cut down on the time you spend managing your savings and can help you make progress toward your long-term goals.

Quicken can help you manage your investments in one easy-to-use dashboard, making money management a breeze.

Money management for self-employed or small business

If you run a small business or work as a freelancer, keeping tabs on clients and prospects, tracking expenses, and following up on invoices and payments are all essential activities.

Fortunately these can be handled by money management software with built-in features for small businesses — like Quicken Home and Business. The package can also assist at tax time if you need to complete Schedule C or E, or throughout the year if you make quarterly estimated payments.

Top money management mistakes

  1. Paying yourself last
    You might be tempted to wait until the end of the month, after all your expenses are paid, before you put any money into savings. If you do, don’t be surprised to discover there’s nothing left to put in the bank.

    “Pay yourself first, either through payroll deduction into your company retirement plan or by an automatic draft from your checking account into your savings account,” says certified public accountant Mark Noel. “If you don’t see it, you’re less likely to spend it.”

  2. Carrying high-interest debt
    If you have money in a passbook savings account earning less than 1 percent interest, but you’re carrying an equal amount in credit card debt at 19 percent interest, you’re losing 18 percent per year. Cut your interest expenses by using your savings to pay off that high-interest loan. Then use the money you were paying on your credit card to rebuild your savings.
  3. Not insuring your assets
    Property insurance, such as your homeowners and auto insurance policies, are designed to protect your assets if you experience a loss — for example, if your car is damaged in an accident or your house is damaged in a fire. A properly designed policy typically includes a deductible, which is the amount you can afford to pay toward that expense.

    If you have $10,000 in the bank set aside for emergencies, but you’re only carrying a $500 deductible on your homeowners’ insurance, chances are your premiums are too high. You can pocket some extra money by raising your deductibles.

  4. Not having a budget
    “One of the biggest mistakes people make is not having a budget,” Noel says. “A budget is a road map to financial freedom. If you don’t have one, you are shooting from the hip, as far as your paycheck goes, and you’ll eventually shoot yourself in the foot.”

    A personal budget doesn’t mean you can’t have fun. It’s just a means of determining, in advance, where your money should go, so you can make an informed decision about how you spend, save, and invest.

  5. Buying a new car over a used one
    A new car depreciates as soon as you drive it off the lot — in other words, it’s already worth less than you just paid for it. According to the Edmunds auto website, the average new car loses 9 percent of its value the minute you sign on the dotted line. After one year, it’s only worth 81 percent of its original purchase price. To protect your wallet, consider buying a gently used vehicle instead of a new one.
  6. Impulse buying
    We have all experienced that moment when you just can’t resist that must-have item. You see that new jacket or that shiny new miter saw, and it’s on sale now, and you just have to have it. Except that you didn’t actually need it when you walked into the store.

    Before you buy an item that’s not on your shopping list, take an hour to cool off. If you still think it’s a sound buy and you have extra wiggle room in your budget, go for it. If not, skip that purchase and save yourself some money.

  7. Not preparing for non-monthly expenses
    You probably know by heart what day the mortgage or rent payment is due, and the electric bill rolls around the same time every month. Because they’re predictable, you’re probably pretty good at getting the monthly bills taken care of, but non-monthly expenses like anniversaries, birthdays, vacations, and bi-annual visits to the dentist can sneak up on you if you don’t prepare in advance.

    Noel recommends sitting down with your spouse and other family members and getting their input. “It’s important to have another set of eyes to look over your budget so you don’t forget an upcoming expense,” he says. Personal finance software can also send you automatic reminders in advance, so you can be better prepared for non-monthly expenses.

  8. Assuming your retirement will take care of itself
    Depending on which personal financial adviser you ask, you’ll need between 60 and 80 percent of your pre-retirement income to maintain your lifestyle after you retire. The sooner you start investing toward your retirement, the better chance you have of reaching your retirement goals.
  9. Getting a big tax refund
    Everyone loves a tax refund, but a big refund isn’t necessarily good news for your finances.

    “A tax refund is nothing more than the amount you overpaid to Uncle Sam during the year,” Noel explains. “When your employer withholds too much from your paycheck, you are actually making an interest-free loan to the government.”

    If you adjust your withholding to be more in line with what you actually owe, then put that difference into your savings account, you’ll have more money in the bank than you’d get from that tax refund check.

Best money management app

Manage your finances on the go

Using a mobile app can save you time while you’re busy saving money. Instead of collecting your receipts and entering them manually when you get home, use your smartphone or tablet to take snapshots of your receipts and upload them to your app.

You can even let your money keep track of itself by setting up purchase alerts, or check your balances at the touch of a button while you’re out and about.

Every budgeting app is a little bit different, but with Quicken, set up takes about 5 minutes. Just connect your bank accounts, bills, and investments. Once your accounts are connected, you can start keeping track of your finances automatically.

Adding budget categories

Organizing your spending into categories makes it much easier to manage your budget. For example, if you use your debit card at the grocery store, the Quicken app will automatically place that purchase under “Groceries” (which you can edit if you want to).

As the weeks go by, you’ll be able to see how much of your money goes to your different spending categories simply by looking at the pie chart on your “Spending” home screen. And clicking on a category gives you a detailed list of all the places you spent your money.

Change the time period displayed in the chart to track your expenses over different time frames. Check out the past month to see where your money has been going recently, or take a look at the bigger picture by tracking your spending over the past year.

Remember to leave some wiggle room

According to Valrie Chambers, Associate Professor of Taxation and Accounting at Stetson University, “It’s important to put a cushion in the budget for uncertainties. You won’t have a financial setback every month, but you will have them, and if there’s no room in the budget for those setbacks, they can be very demoralizing when they occur.”

Each day, your budgeting app will add the money you’ve spent to the monthly total. Just click the “Budget Your Spending” option on the “Home” tab to see it. The bar graph illustrates how much of your monthly budget you have left, so it’s easy to see how much padding you have for emergencies. Make a commitment to reserve a comfortable amount of extra dollars in case you need that wiggle room after all.

Conclusion

Taking control of your finances by managing your money is the best way to secure your financial future. Although it might sound intimidating if you’re just getting started, money management doesn’t need to be difficult. In fact, today’s money management apps can make the process simple, rewarding, and even (believe it or not) a little fun.

By putting all your finances in one convenient place, you can see your complete financial picture with the click of a button. The app downloads your latest transactions and categorizes them for you automatically, so you don’t have to waste your time looking across dozens of websites or entering a whole lot of data in a spreadsheet.

Instead, you can set your financial goals, make a plan to get there, and keep that plan on track in just a few minutes each week so you can reach your goals with confidence.