- Money Pro 2 0 – Manage Money Like A Probability Sampling
- Money Pro 2 0 – Manage Money Like A Probability Formula
Whether you work part-time for minimum wage, or you're at the peak of your career making big bucks, you want to get the most out of the money you have.
That's a 2:1 risk/reward, which is a ratio where a lot of professional investors start to get interested because it allows investors to double their money. Similarly, if the person offered you. Managing money is a life skill every one of us need to learn how to do, and the earlier the better. At the very latest, you need to learn how to manage money in your 20's. But this is when you need a money management crash course because you are in the thick of it and tend to be more reckless with your money.
These 7 steps to better managing your money will help you achieve that goal.
In This Article
- Betting a Favorite: The odds for favorites will have a minus (-) sign, and represent the money you need to risk to win $100. So if you're betting on the Packers at -140 against the Vikings, that means Green Bay is a slight favorite. You need to risk $140 to win $100 on the Packers. If they win, you profit $100 and get your original $140 back.
- Money Management - The 2% (Two Percent) Rule. The 2 Percent Rule is a basic tenet of risk management (I prefer the terms 'risk management' or 'capital preservation' as they are more descriptive than 'money management'). Even if the odds are stacked in your favor, it is not advisable to risk a large portion of your capital on a single trade.
- You can't manage your finances well if you don't understand how much you're spending, how much you're making, how good your credit score is, or how to handle your taxes. Today, we're going to talk about becoming more financially aware in all these areas to kick-start your money management goals.
1. Know where your money goes
You wouldn't bake a cake without a recipe or take a drive vacation without planning a route. Managing your money without knowing where it's going is a formula for failure.
Without knowledge of where your money is going you can't determine where to make changes. You're stuck guessing where you should save. Those efforts can be useless and painful.
If you know where you're spending you can compare your expenses to established averages. That will allow you to identify any category that's above normal. Once identified you can make changes where they're the most likely to solve your problem.
2. Always save a little
If you're creative you can come up with a dozen reasons why you can't save some money each month. Some may even have a little truth to them. But, if you allow them to convince you not to save, chances are you'll never accumulate any wealth. It's that simple.
Saving a little with every month or paycheck has other advantages.
You'll develop the habit of saving. You'll be accumulating savings in both good and bad markets (taking advantage of dollar cost averaging). You'll have compound interest working on your behalf. You'll have money saved to handle unexpected big expenses.
3. Understand how compound interest works
Compound interest may be the most important economic concept for you to learn. And it's easy to understand and tremendously powerful. Especially if you learn it early in adulthood.
Compound interest is interest earning interest. For example if you invested $1000 and received 10% annual interest you'd have $1100 at the end of a year. The 2nd year you'd have both your original $1000 and the $100 interest earning money. So, you'd earn $110 that year. The extra $10 might not seem like much today, but if it compounds for 20, 30 or even 40 years it adds up.
Not quite ready for investing? You can still earn interest on your money with an interest bearing checking account, like the Radius Rewards Checking account. The interest rate is currently 1.00% on balances of $2,500 or more. Compared to the national average of 0.04%, this is a great rate!
But just as compound interest is the friend of the saver, it's a terrible master for anyone in debt. Instead of earning interest, they're paying it.
Think that your credit card is helpful when you can't afford to pay for something? Consider this example. If you pay the minimum (say 4%) and your interest rate is 18.9% you'll repay $1.62 for every $1 you charge. Ouch!
4. The rule of 72
This tool is used by financial planners everywhere. It's a quick and easy way to get an idea of how long it will take for money to double. Just divide 72 by the interest rate to get a time estimate.
Often you can do it in your head. For instance, if your interest rate is 8%, it'll take 9 years for money to double (72 / 8 = 9).
Why would you want to know this? Knowledge can be a great motivator.
Suppose you're 30 years old and trying to decide whether to increase your 401k contribution. You know that long-term you can expect your contributions to grow at an 8% rate. So, the money should double every 9 years.
$1 now will be $2 when you're 39, $4 when you're 48, $8 when you're 57 and $16 when you're 66. A quick calculation now might be enough to help you make your retirement more secure.
5. Manage your credit
Some things follow you everywhere. Your credit score is one of them. It's used by financial institutions to decide whether to lend you money and to determine what interest rate they'll charge.
Some landlords will check your score before offering you a lease. And some potential employers are checking before making a job offer.
Money Pro 2 0 – Manage Money Like A Probability Sampling
So how do you manage your credit? Begin by making sure that your score is accurate. Your credit card company may provide your score as part of their service. That's good. But it's not sufficient.
Nearly 1 in 4 scores contain an error big enough to negatively impact you. The only way to find out is to get your full report on a regular (at least twice a year) basis. And always check for accuracy before taking out a large loan (mortgage, auto loan, etc.).
Next, know what actions can help or hurt your score. Having some unused credit is good. Having too much is bad. Don't apply for multiple credit cards at the same time. Paying your bills on time is critical.
How important is managing your credit? A 1% difference in a 30 year, $200k mortgage is $119 per month. Or a total of $42,840 over the life of the mortgage!
6. Use a budget
But, use your budget as a management tool, not a straightjacket!
Everyone hates the ‘B-word'. Understandably so. But if they knew how a budget really worked they'd come to love it. Because a simple budget can be a wealth of information about your day-to-day finances.
A budget is not necessarily a way to prevent you from spending past a certain limit. It can be used that way, but that's not it's best use.
Macbooster 7 0 1. A budget should be a spending plan. Defining how much, or what percent, of your after tax income you expect to spend on certain things.
For instance you might expect to spend 17% for auto and related expenses. Knowing that would be helpful if you were considering buying a car that would run that expense up to the 19% level. Or if your actual expenses were above the 17% level you'd have to decide whether to adjust your plan or try to cut down the expense in the future.
At its best, a budget is an information tool to point you to areas of your finances that need attention.
7. Have both short and long-range goals…and plans
You may not think of it that way, but we all have financial goals. We just think of them as things that we want.
We want to be able to afford groceries and the next rent payment. Those are short term goals. We want to send our kids to college and to retire someday. Those are long term goals.
But there is a difference. A want is something that we hope will happen. A goal is something that should include a plan to achieve the result.
Short-range plans will need to be more precise. If your rent is $1300 due the first of the month you'll need to know exactly where the money is coming from by mid-month.
Longer range plans don't need to be so specific.
For instance if you wanted to have $1 million in retirement funds by the time you turned 65 you could use one of the calculators to determine how much you'd need to save each month to reach that goal. The monthly savings goal doesn't need to be that specific.
You'll make mid-course adjustments as you move towards retirement. The important thing is having a plan and getting started towards your goal.
Summary
So, should you manage your money? It comes down to a choice. Do you want to manage your money? Or do you want your money to manage your life?
Today's post is from Gary Foreman. Gary is a former financial planner and purchasing manager who founded TheDollarStretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.
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Every person in this planet wants to earn enough money to spend a better life with secured future. Some of them have a dream to become richer and gain more wealth. But how many of us are aware of some basic fundamentals related to financial literacy and money management? Being able to effectively manage your money will make life to flow much smoother and save you from many potential headaches like debt.
I believe that most of us struggle financially because we are kept under false perceptions about money, wealth, and prosperity. But if you're serious about building positive cash flow in your life, you have to start with the basic steps of money management as explained below:
Understanding of Assets & Liabilities
Any resource that generates a passive income for us is called an asset. It may be your home, property, jewelry or investments. On the other hand, liability is something that extracts money from your bank or pocket. Liabilities might include a mortgage, student loans, rental home, and credit card debt. Your net worth is calculated annually by adding the value of all your assets and subtracting your liabilities. Your assets should always be greater than liabilities. The ratio of your assets/liabilities must be at least 2:1. This can help you to keep tabs on your overall financial picture and enable you to efficiently manage your money.
Money Pro 2 0 – Manage Money Like A Probability Formula
Miracle of Compounding
As early as you start investing your money, the sooner you enable the power of compounding to work for you. Compounding is the addition of interest to the principal sum, which also includes the accumulated interest of previous periods. It means that you'll get interest not only on principal amount but also on the interest you've generated so far. It can significantly boost your investment returns over the long term. If you are not interested in math and want to calculate the compound interest then you can simply click here for online calculator.
Mutual funds offer one of the easiest ways for investors to reap the benefits of compound interest. Since the interest-on-interest effect can generate incremental returns based on the initial principal amount, it has been sometime referred as 'miracle of compounding'.
Inclined towards Investment
Investing is one of the most effective way to manage your money. When you are young and don't have so much financial obligations, then investment is not often used to be your priority. But do you know that this is the best time to save and invest our money? Du recorder pro. It's quite necessary to have an investment plan for your cash on hand to maximize its earning potential. Understanding the time value of money and the exponential growth created by compounding is essential to optimize your income and wealth allocation. The miracle of compounding can work for you when it comes to your investments and can be a powerful factor in wealth creation.
Whether you invest in stocks, gold or real estate, you need to manage your investment portfolio like a business. By thinking strategically about your investments and being held accountable to the bottom line, you can identify ways to make your investments more effective and manage your money.
Diversification of Income
You can diversify your income by having multiple resources of earning money. By exploring some ideas to create passive income as per your talent and skills, you can easily grow and manage your money. It's not so difficult to start looking for a part-time business or other way to earn a little more income while following your passion. But if you are aimlessly pursuing opportunities without thought for the bigger picture, you can easily find yourself holding a portfolio that does not allow you to realize your dream. According to me, investment and passive income is always an evergreen option to create an extra source of earning.
Cut Back All Doodads
Doodads are those extra things in life that we all crave but don't have a huge need. It might be a sport bike or going out to dinner at expensive restaurants. Whatever your doodads are, stop the habit of purchasing them impulsively just to impress others. This habit will extract all the money you earn and thus disable to save something for investment. Admittedly, this is where your self-discipline and willpower come into play.
In short, start getting in the habit of watching how you spend a dollar here and a dollar there. Give yourself a month and just check on how much you can save by not buying the expensive stuffs or not going out to dinner. Every single thing that we do comes at a cost, the cost being everything we could have done instead of what we actually did. Hence it is very compulsory to stay mindful of spending within your means.
Conquer Bad Debt
There are mainly two types of debts: Secured debt and bad debt. Secured debt is the debt that has collateral backing it up. Typical examples would include an education or home loan. Whereas bad or unsecured debt lacks any collateral that usually includes credit-card bills, personal loans, and medical bills. Your goal should be to get rid of bad debt as quickly as possible so that you can start looking towards a better future. Then you can start building assets that will generate the passive income to pay for your electricity bills, insurance policies, and more.
Unusual purchasing habit and impulsive use of credit cards are the major reason behind your bad debt. And the sooner you can eliminate it, the more in control of your finances you will be. Changing bad habits and getting out of debt is how you learn to manage your money. The best news is that those individuals who have the willpower to follow these simple steps will find themselves financially strong and free of major bad debt within a few years.
Managing your money might be confusing sometimes but it is not hard to do so. There is a lot to learn, regardless of how much you already know. Once you begin executing your plan in the real world, you will certainly recognize a need of making adjustments. You need to be agile in your investing by being quick when responding to changes and opportunities. It is a lifelong process. But the good news is that the hardest part of the process is starting to manage your money. Once you make the commitment, life really does get easier and easier.
