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Money Management Basics

Money management is an important life skill. Unfortunately, most of us learn it after various hits and trials on our own. However, the good news is that money management is not rocket science but simple common sense.

The reason we are not good with managing our money is not hard to find. Fear of numbers, information overload in the media, financial jargons and the complexity of financial products adds to our inertia.

One of the biggest reasons why people do not manage their money is that they don’t have any data about their money. How it is coming, where it is going, whether it is lying idle, etc.

To get started on financial management, it is a good idea to start measuring your financial situation first. Because once you start measuring things, managing them becomes clearer and easier. In other words, measuring is the first step towards managing money.

In many cases only a very small amount (the ‘tip’) of information is available about a situation, whereas the ‘real’ information or bulk of data is either unavailable or hidden. The iceberg model of a competency is the principle that gets its name from the fact that only about 1/10th of an iceberg’s mass is seen outside while about 9/10th of it is unseen, deep down in water.

We need to see beneath our surface personalities in order to make better decisions on important things of life. Sigmund Freud argued that our conscious behavior is only the visible 10% of our psyche – the tip of the iceberg. The deeper motivators of our behaviors – that is, 90% of our mental nature – lie submerged in our sub-conscious or unconscious mind.

The key to the best financial decisions lies in the understanding of our own mind, both conscious & subconscious mind.

The guiding principles to manage your money would be:

  1. Know Yourself
  2. Know how your money is doing
  3. Make Your Money Work: (And not just you work for Money!)
  1. Know Yourself:  We have a very vague idea about our money.

Like, have you figured out your risk profile/appetite? Are we conservative or aggressive investors?

Do we know about our income and expenses, networth? Do we know that our portfolio follows the optimum asset allocation principles?

The idea is that, if we had a way to measure income, expenses, portfolio, risk profile, etc, we could have a discussion on how to improve them. No records, no improvements.

We also need to be aware of our money behaviour. Once you are aware, other things follow.

  1. Know how your money is doing:Now that you have numbers ready, the improvements follow naturally. For example, you see that your percentage spend on “eating out” is 2-3 times the monthly grocery bill or it forms 25+% of your expenses.

Also, you will get an idea how to balance your portfolio according to your risk profile. You will match the portfolio with your risk appetite and see if you can take more risk or go more conservative. In other words, you get to decide your asset allocation strategy.

  1. Make your Money Work:Other than tracking your earnings and your expenses, it is important to see if your money is working for your future.

How about allocating your income among fixed expenses, discretionary expenses, short term savings and long term investments? It’s like assigning goals for your money.

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