You’ve heard this term thrown around for years no doubt. Ever wondered what it really means? What is money management?
“Money Management” revolves around one word – risk. In other words, proper money management helps you reduce risk. It helps you avoid the downside pain and that’s why it’s critical you understand it.
When I was a kid, I learned about money management the hard way. I worked all summer painting house numbers on curbs to save money for a car (my first entrepreneurial idea!) . When I got to my magic number ($400) I went out and bought a car – for $400. Bad money management. It was literally every cent I had.
The car had no gasoline in it. I forgot completely about the need to manage my money around the risk of running out of gasoline. Fortunately, the nice man who sold me the car gave me back $5 so I could drive the car home. That was a very important lesson for me and the last time I ever needed a hand-out from anyone.
Proper money management involves looking ahead with a negative bias, Consider the “what-if” scenarios and take proper action. How you can use this concept?
The concept of money management manifests itself in your life by the way you manage your budget and the way you manage your investments. Believe me, each one is directly tied to the other.
Money management in your budget is simply making sure you spend less than you bring home. It tells you how to stop spending money before you run out. It includes making allowances for unforeseen circumstances and it makes savings a priority. It identifies the risk of running out of money before you run out of month and it identifies the risk of running out of money in the future because of your spending.
If you fail to have proper money management, you’ll never be able to save money and you’ll never be able to hold on to your investments. That’s because your spending habits will force you to invade and destroy your savings and investments. Do you see why money management – otherwise known as budgeting in this example – is so important?
Money management in investing is just as important. Basically, this is making sure you don’t take on more risk than you absolutely have to in order to reach your financial goals. It’s all about the investment strategies you use. It identifies the risk of running out money in retirement as the problem.
So when it comes to investing, think about risk first and foremost. What is the downside to what you’re about to do? What is the upside? Is it worth it?
I met with a gentleman today who made a killing in Apple stock and asked me what he should do with his shares. Since I don’t speculate with stocks, I told him that I didn’t know what was going to happen to Apple. But when we went through his situation, it was clear that he could tolerate the risk and even a significant drop in price wouldn’t impact his lifestyle now or in the future.
But another client of mine had all her retirement assets tied up in the same company she works for. A significant drop in price in those shares would be a disaster for her. Even though we were looking at the same amount of money in both cases, the possible loss would be far more significant for this lady than for my Apple Pilgrim so my advice was very different.
What is money management?
It’s really making sure that you can survive a financial earthquake. You do that by applying these principles and asking these questions with respect to your spending and investing.
How are you using money management in your life? Is it working? Are you doing a good job? Is there anything you need to do differently?