6 proved steps on how to manage money and unlock financial freedom

6 proved steps on how to manage money and unlock financial freedom

There are 6 basic steps everyone must understand to know how to manage money well. If you want to reach your financial freedom, start now and put these topics on the top of your priority list.

When talking about how to manage money and financial education, there are 6 topics you must understand well. By doing so you will be able to achieve outstanding progress towards your financial freedom.

How to manage money and unlock financial freedom:

  1. Make a family budget

  2. Spend your money wisely

  3. Save efficiently

  4. Set goals and track your progress

  5. Invest in your financial literacy

  6. Understand compound interest

Mater each one of the areas listed below and you will be closer to being financially independent. Let´s take a look at each one of them in more detail.

1 – How to make your family budget – the first step on how to manage money

Budgeting is where everything starts when we talk about how to manage money.

Having your family budget is the primary step to understand your personal finances, and it means being in control of your:

  • Income, or how much you earn, 
  • Debt, or how much you own, 
  • Expenses, or how much you spend, 
  • Saving, or how much you save.

Some people get a bit intimidated when they hear about having a monthly budget. In truth, it is a straightforward concept, you probably already do it in your mind several times a month.

A family budget is a financial plan that allocates future personal income towards expenses, savings, and debt repayment based on past spending and income data. Sounds confusing? Maybe, but it is not.


Basic financial goals checklist

Create a budget and set a basic financial goals checklist:

  • Emergency fund: set aside 6 to 12 months of your net pay for emergencies. Keep your emergency fund in a liquid savings account.
  • Loans: list your loans by their outstanding amount and interest rates. Make sure to include your credit card debt, student loans, and personal loans.
  • Credit: understand your credit report and your credit scores
  • Investments: Save money directly in your bank account is not going to pay you any interest. Set a limit to the amount of money that you keep in your checking account and look for better financial products and services.
  • Save for retirement: Ensure to set aside some of your extra money for retirement.

Stop procrastinating and start doing your family budget today, your financial future relies on it. It only depends on you. Start with a simple budget, do not overcomplicate. A notebook with a monthly summary of your finances is already better than zero control.

Where to go next: Check these details post on the family budget. I will give you a detailed introduction on how to start your family budget in simple steps customized to your needs: Family budget: create one in 6 easy steps and reach your financial freedom

2 – How to spend your money reflects on how you manage your money

More important than a huge paycheck is to arrive at the end of the month with enough to save. Your spending habits will define how much money you have left to save by the end of the month.

Having a spending plan is the best way of controlling your spending. This means that to save efficiency, you MUST have a quality family budget setup.

Saving money is about understanding where your money is going.

Taking notes of your monthly expenses is the first essential step that you need to do to understand how to save better. Budgeting is the hands-on part of how to manage money, if you didn’t start yours yet, go back to step one and start doing it!

Great! You are now in control of your family budget. You have a monthly list of your income, debt, expenses, and savings. Now it is time to learn how to spend your money wisely. 

Allocating your expenses well is the key to spending wisely. While doing your family budget, we classified your expenses in three types, we will now cover how to scrutinize each one of them:

Fixed expenses – don’t let your fixed costs overwhelm you

Remember from the family budget exercise: fixed expenses are your recurring fixed costs.

They might vary a bit from month to month, but at the end of the day, you know they will come within that average value. Fixed expenses include:

  • your utility bills,
  • rent payments,
  • student loan payments,
  • transportation to and from work or college

Get your fixed expenses and rank them by value, higher costs at the top, and lower at the bottom. Now focus on the top rows, these are our main offenders, and we must be sure they make sense.

For each of your main offenders, try to set up one or two cost-saving actions. As yourself questions:

  • If your electricity bill is too high, where does the cost comes from? Are you using an electric oven or electrical shower? Can you replace them?
  • If your rent is one of the critical fixed expenses, what might be done to reduce it? Can the price be negotiated? Does it make sense for you to move?

Good cost-saving ideas come with time. You might need several iterations and a couple of months to set up a solid plan. Above all, don’t desperate, the more dedication and time you put over it, the better the outcome will be. 

Once you have adjusted your mindset to think about it, don’t be surprised if you have your best cost-saving ideas while taking a shower.

Finally, get your list with your initial actions and talk about them to your family, your friends, and colleagues. Good ideas come from productive discussions, team up with the ones you love. 

Irregular Expenses – don’t be caught off guard

Irregular expenses are similar to fixed expenses, but they don’t happen every month. They might be every quarter or every year, but you know they are there waiting to hit you at some point. They include costs like:

  • Mandatory vehicle maintenance,
  • Insurance payments (if not paid monthly),
  • Some annual taxes depending on where you live

Similarly to what we did with the fixed expenses, start with your list and rank them. Higher cost at the top, lower at the bottom. This time you might need to do some maths to ensure they are all referring to the same time frame.

Normalize the expenses to a monthly cost so you are able to make the comparison quickly. For example, if the payment happens once per year, divide it by 12 to have the monthly cost. If the payment happens once per quarter, divide by 3.

Now you have a list of irregular expenses ranked by monthly cost. With the fixed costs, we focused on trying to make them smaller. Usually, recurring costs are harder to cut, we often either have them or not. Therefore you should now divide them into two categories: essential and nonessential expenses. 

Essential ones are the costs that you cannot decide to stop having. For example, your fire department yearly contribution – if you have one – is not something you can choose to stop paying. On the other hand, the need for your biannual package of foot massage can be brought under scrutiny.

 Finally, once you have your ranked list, focus on the nonessential ones, and try to cut them. Review them regularly and try to keep the nonessential to a minimum. 

How to reduce your nonessential irregular expenses?

One good practice is to set a time frame for the nonessential irregular expenses. Give them a life span. Doing so will help you to save money in the long term.

I used to pay for a yearly package of piano lessons. I am not a great player but music relaxes me and playing the piano takes me away from the day to day stresses of life.

Truth is that I would pay for the classes at the beginning of the year, and would not think about that cost again for the next 12 months. With time I started to notice that I was not dedicating myself to it as much as I should, and the cost was adding up.

Therefore, to reduce the costs, I decided not to renew my yearly piano classes package. Instead, I got a quarterly package twice a year. I would have classes for three months and self-study for the quarter thereafter.

Knowing that I had only a limited amount of classes made me commit more to it. At the same time, while in the self-study period I was able to properly practice and understand the topics that were covered during the lessons.

Because the yearly package came at a higher discount than the quarterly one, I ended up saving about 30% of the original cost. And what is better, my commitment to the classes increased because now I knew I was doing them for a limited amount of time.

3 – Save efficiently and protect yourself

As much as we can plan and control our spending, we are still humans. It is always easy to get carried away, overspend, and behave like we do not know how to manage money.

Every day we are bombarded by ads, salespeople, and propaganda on needs that are not real, and that will not impact our long term life goals.

To be financially free, we must know how to save efficiently. That means setting up automatic investments that will ensure the money is put in the right place before you can have any urge to spend it.

Once you have decided how much you are going to save every month, set up a monthly automatic investment. Ensure that in the same week your paycheck hits the bank, the auto investment kicks in and take that 10-20% to a safe place.

Finally, your long term financial goals should ensure any extra money is set for investments with elevated interest rates.

4 – Setting goals and tracking their progress will help you in the long term

You will not get anywhere if you do not know where you are going. Knowing how to set goals and track their objectives is a key element on the path to understanding how to manage money.

Start with the most pressing needs first. Paying off debt, especially your high-interest debt should be your first financial decision. To be out of debt will set you free for long term goals like saving for retirement.

I have covered this topic already in my post on how to set your family budget. But I have decided to include it here as well because it is so important, and because it made such a big positive impact in my life. I want to ensure that everyone has a chance to go through it.

It is now enough to set any goal, you need to be S.M.A.R.T.

You might have heard about the S.M.A.R.T. acronym before, George T. Doran created it in 1981. He wrote an article called “there’s a S.M.A.R.T. way to write management’s goals and objectives.”

The S.M.A.R.T. concept is straightforward, and that’s what makes it so powerful. Applying it can make your objectives and goals much more realistic and efficient.

The purpose here is to set a S.M.A.R.T. goal that will help you on how to manage your money, meaning your goal will be:

  • Specific: Target a particular area for improvement
  • Measurable: Set a number that you can measure for your target
  • Achievable: Be realistic when setting your target
  • Relevant: Ensure that the goal is appropriate for you and your family. This will keep you motivated to continue pursuing it.
  • Time bounded: Set a target date to achieve the goal. Once you do it, ensure to celebrate, reward yourself, and evaluate what is going to be the next goal.

This technic can be used in your professional and personal life. I have been doing it, and the results are excellent. Here are some examples:

  • Not Smart: “Improve household finances”, “get more money”, “pay off debt”, “start a retirement account”, “use a financial planner”.
  • SMART: “Reduce debt to $1,000 by cutting expenses in the next 6 months”. “Reduce fixed expenses by 15% within 6 months”, “Increase savings allocation by 10% in the next year”.

You don’t need to have only one goal, but it is advisable not to have more than three.

5 – Investing in your financial education – improve your skills on how to manage money

Managing money takes skill and self-control. This is not acquired overnight. If you want to reach your financial freedom, you must invest in your financial education.

Focus on understanding how you can manage your money better, what are your key objectives, what are your strengths, and your weakness. 

One key aspect of your financial education is understanding your appetite for risk. Ask yourself these questions:

  • Are you a risk-taker?
  • Would you be willing to lose money for the risk of potentially getting high returns?
  • Are you ready to perform cautious controlled gambles to increase your chances of earning a lot of money?
  • Would you be satisfied with the peace of mind of knowing that despite low returns, your money is safe?

Risk management in personal financial planning takes much more emotional intelligence skills than actual knowledge in finances and economics. A personal financial plan is key to evaluate the risks you are taking versus your potential earnings.

Managing money is also about managing yourself, and that is part of your financial education as well. 

Many people think that personal finance knowledge is mainly technical. Or that you need to be good at maths, that you need to understand all the nuances of compound interest and valuation. These qualities can help you. Still, they are not the main differentiator between someone financially free and another person that is struggling.

Your financial skills together with your attitudes, behaviors, goals, and general knowledge will shape your financial capability. Most of your financial decisions will not involve complex mathematics. Your financial life is shaped by behaviors, not numbers.

Where to go next: Building your financial knowledge is a long term investment. It takes time and dedication, but it is also the cornerstone of your financial freedom. Read in this post how I improved my financial education by going through A colossal quantity of authentic financial knowledge.

6 – Understanding compound interest – accumulate more in the long run

Compound interest is the key enabler to increase your net worth over time. There is no way how to manage your money without using compound interest. Compound interest is what makes your retirement savings to increase in value over the long term.

To understand compound interest, you must first understand what interest is. Interest is how much you earn when you lend money to someone, or how much you pay when you borrow money from someone.

Interest is usually calculated by a percentage of the amount that was loaned. 

Compound interest is even more potent than simple interest. It means the interest will be calculated not only over the loaned amount but also on all the accumulated interest of the previous periods of the loan. You can think of it as interest on interest, and the result of it is that the money will grow much faster than with just the usual interest calculation.

Let’s give an example. Let’s say you invested $10,000 in the SP&500 in 2009. The average yearly return of the SP&500 for the past ten years has been around 7%. 7% of $10,000 is $700. If we were talking about just interest, at the end of the ten years, you would collect $10,000 + 10 x $700 = $17.000. But as you have kept the interest from the previous years invested, the interest will be calculated over the $10,000 principal amount and over the returns of the previous years. Meaning that your total amount at the end of the 10 years will actually be $10,000 x (1.07)^10 = $19,671. This $2,671 came from the interest compounding effect.

The longer you keep your investment, the higher the compounding effect will be.

You can use a good compound interest calculator U.S. Securities and Exchange Commission site.

There are 6 basic steps everyone must understand in order to know how to manage money well. Understand them now and get closer to your financial freedom.

BONUS TIP: Want to booster your monetary self-awareness? Check this post I wrote about financial literacy and take this free financial survey questionnaire. No e-mail, log in or registration needed!

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