First, learn the answer to, “Why is money management important?” Then get insights and resources to gain a better control of your finances here.
Have you been paying some of your bills late or not having enough to pay them? Maybe you can’t put any money towards retirement, much less into your savings account. There may have even been instances wherein you overdraft your accounts.
Those are all signs you need to look into how you’re managing your money. This is the first step to controlling your finances better.
But why even go through all that trouble? Why is money management important in the first place?
We’ve listed some of the most crucial reasons in this guide (and threw in a few money management tips), so read on.
Why Is Money Management Important?
Money management allows you to determine where your money goes and how to use it better. It also helps you avoid terrible money decisions and reach your financial goals. If not for this strategy, you may find yourself wallowing in debt.
Avoid Living Paycheck to Paycheck
Paycheck-to-paycheck living is a scenario that affects six in ten Americans.
That means their paycheck doesn’t last long and typically only covers necessary expenses. It may not even be enough to pay for all these costs! There’s no extra left, not even a little bit for savings.
Soaring inflation is the primary reason that puts many households in this situation. However, for others, it’s due to a lack of money management.
Unfortunately, living paycheck to paycheck can result in missed or late payments. This can lead to more unnecessary expenses, such as fees or penalties. Late payment fees can wreak further havoc on your budget, costing up to $41 per instance.
It also puts you at risk of being unable to cover emergency costs. These may include emergency medical care or home/auto repairs. Not having money to pay for these can force you to take on more debts, further straining your finances.
Keep Your Credit Score Under Control
Late or missed payments due to a lack of financial discipline can also cause your credit score to drop. The lower it is, the higher your future financing costs. This can make you fall into worse financial trouble, affecting you for years.
Suppose you have a variable mortgage. Its interest rate could spike even after a month of late or missed payment.
A drop in your credit score can also affect your potential for qualifying for future credit. This could be a big problem if you must take on a new emergency loan. If you don’t qualify for a loan with a reasonable rate, it can force you to rely on one with a much higher or predatory rate.
So before that happens, review your budget to see what’s eating it up.
Feel Less Stressed
Unfortunately, when stress becomes chronic, it can adversely affect one’s health. For example, experts associate it with long-term health problems, such as:
- High blood pressure
- Weakened immunity
- Digestive issues
- Sleep problems
- Mental health problems, including anxiety and depression
You could be at risk for such health woes if you constantly worry about your finances. And when you fall ill, you’ll have more expenses, such as medical bills and prescriptions, to think of. This could lead to an endless cycle of repeated worrying, getting ill, and more money problems.
Better money management won’t completely free you from stress. However, it can at least help you have fewer financial worries. The fewer things you need to worry about, the lower your stress levels can be.
Get Out of or Avoid Bad Debt
Some types of debt can be “good,” particularly those that allow you to reach your financial goals.
A perfect example is a well-managed home mortgage. It can benefit you in the short and long run as it satisfies a basic necessity (sheltering you). Your home’s value can also increase, making it a fantastic investment.
On the other hand, bad debts often don’t have long-term benefits and can detract you from your goals. Examples are using credit cards to finance extravagant clothes or the latest gadgets. You can enjoy these if you have the means, but they’re not a good idea if you must take on new credit to get them.
If you learn how to manage your money, you’ll likely make sounder financial decisions. For example, you may develop this inner voice telling you to think twice about purchases you want to make. This can help you avoid impulse buying, which would most likely lead to bad debt.
How Can You Better Manage Your Money?
Look at your monthly take-home pay now. See what areas you can cut back on (e.g., food away from home or entertainment). Then, put as much of your savings as possible in a high-interest savings account.
Another example is if you’re paying a lot toward credit card finance charges. In this case, paying off your accounts with the highest rates may be best. Minimize using these high-rate cards for future purchases as much as possible.
Then, once you’ve significantly grown your savings, you can invest some of them.
Regardless of how much risk you want to take on, it’s always a good idea to have diverse investments. For example, you can start with precious metals, such as gold and silver bars, bullion, or coins. These can provide a hedge against inflation and often carry less risk than stocks.
Bonds, exchange-traded funds (ETFs), and index funds are also ideal for new investors.
If you’re ready to take on more risk, you can start building your stock portfolio. They’re riskier than the methods above, but they can also have higher pay-offs.
Take Better Control of Your Finances Today
Now that you know the answers to the question, “Why is money management important,” it’s time to focus on the how. First, review your take-home pay and budget, then cut back on unnecessary costs. Put whatever you save into a bank account, grow your savings, and use some to start investing.
All that can help you become more financially responsible and stable.
Ready for more personal finance guides and strategies? Then browse our latest news and blog posts for other reads like this!