Money Management Principles
“Act your wage” is a catch-phrase of the popular money management expert Dave Ramsey used to describe the mindset needed for money management. Dave Ramsey and Suze Orman are just a few of the popular personal financial gurus who are providing the needed guidance for Americans struggling to get out of debt and experience financial success. The following are basic principles that most financial counselors use to guide clients.
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Budget
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The most basic money management principle is to begin with a plan for your money. A budget is a plan usually based upon a month that specifically accounts for all of the household income. A successful budget is one that offers a clear, accurate picture of the financial needs of the household. It should account for major expenses such as mortgage, food, bills, transportation, and still account for small yearly items that can sneak up on a family, such as taxes or insurance.
Money Management Tools
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One of the basic money management principles is to use tools to implement your budget. Envelope systems and spending diaries are two popular methods for tracking spending. In the envelope system, you have an envelope for each category of spending like groceries and eating out. Then you put the amount of money you budgeted for that category into the envelope in cash. You should spend only the money in the envelope. A spending diary is a ledger where you track your spending to see where you tend to spend the most money and if you are staying within your budget. You also should save for major purchases such as cars, washers and dryers, and Christmas, so that you do not have to go into debt to afford them.
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Become Debt-Free
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Many Americans are struggling with compounding bills by financing purchases like expensive cars and putting groceries on their credit card. The accumulation of debt over time will eventually catch up to the consumer. Ramsey offers the Financial Peace University, and his baby-step plan for getting out of debt. His first recommendation is to cut up the credit cards, and his second is to begin tackling debt using the debt snowball. He recommends listing debts from lowest to highest and begin putting as much money toward the lowest as you can. Once that debt is paid off, you combine the monthly payment from that debt with the additional money you have been applying to the next debt. You should continue doing this until you have become debt-free. Orman also recommends negotiating with the credit card company to secure the best rate to save money while paying down your debts.
Emergency Funds
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The purpose of an emergency fund is to provide money in case of an emergency such as job loss, appliance repair or medical bills. Ramsey's plan recommends that people getting out of debt begin with a $1,000 emergency fund. However, once they are out of debt, he recommends that they keep three to six months of living expenses as an emergency fund.
Investing
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According to an online report by The Wall Street Journal, 20 percent of empty-nesters plan to “trade down” to a smaller house to pay for their retirement. To maintain the lifestyle to which so many Americans have become accustomed, a solid financial plan can mean the difference between experiencing retirement in security or despair. Ramsey recommends saving at least 15 percent of your pre-tax income in Roth IRA accounts.
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References
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