What You Need to Know About Managing Money
The Fundamentals of Money Management
Having realized why we need to give more thought to our finances, the next step is understanding what we need to do to manage them properly.
After all, proper money management is one of the key steps in the journey to financial freedom.
Author's Note:
This is going to be a bit long and comprehensive, so sit tight, enjoy, and let's ride together.
I personally like to group money management into four pillars: Earn, Save, Invest, and Spend.
Earning
"Your number one wealth-building tool is your income."
This is a phrase that's often repeated on The Ramsey Show, and for good reasons. You can't talk about money management if you don't have any money to begin with. This entire wealth-building model falls apart without income to sustain it.
The question of where/how to build income is crucial, and there are several channels through which we can earn, including but not limited to:
Allowance: For people who are still financially dependent on their guardians or trust fund kids, allowance is a form of income and should be treated as such.
Part-time Jobs: Taking on part-time work is an option, especially for university students or if your main job doesn’t provide enough income.
Freelancing/Self-employment
Full-time/Salaried Jobs
There’s no way to build wealth without having income, so it's important to note that this first pillar comes before all others.
Saving
It doesn’t matter how much you make as income — if you don’t have any savings strategies in place, you’re digging a hole for yourself.
Consistently living above your income and blowing through it all is a perfect recipe for financial disaster. This is why even high-income earners sometimes find themselves living paycheck to paycheck.
It’s paramount that every month you sit down, make a budget, evaluate your savings rate, and track your financial health.
The reason why a lot of people end up in debt when they shouldn’t is simply because they didn’t have an emergency fund.
But you might ask, “What exactly should I save for, and what is an emergency fund?” These concepts will be addressed in subsequent issues.
Investing
A downside of saving is that you can’t save your way into financial freedom — this is where investing comes in.
Investing addresses the limitations of saving, and it’s the next pillar of money management. The real question is: Where and how do you invest?
This is a million-dollar question (literally), and you must approach it carefully. All investments come with risk, and the higher the potential returns, the higher the chances of losing money too.
Generally, there are two main categories of investments:
Traditional Investments: Stocks, bonds, mutual funds
Alternative Investments: Real estate, gold, private equity, hedge funds, etc.
Because of the risks involved, it’s generally advised that you consult a licensed financial professional who has a fiduciary duty to you. (This is important so they don’t just try to sell you financial products.)
Investing can look scary, but it doesn’t have to be. In future issues of this Finance Simplified newsletter, I’ll break down investments and simplify the process (for informational purposes only) to help you make better-informed decisions.
Spending
Money is called "currency" because like a current, it’s meant to flow — not just sit still. All savings and investments without spending are like planting without ever reaping the fruits of your labor.
While it’s wise to cut back on money-wasting habits, this advice wouldn’t be balanced if we didn’t also remind you to spend on the things that bring you joy (when you can afford it).
A lot of “Finfluencers” are quick to tell you to cut back on coffee spending, claiming that if you invest that money, you’ll be a millionaire after 30 years. But I can promise you there are more effective ways to achieve that goal. Your coffee didn’t cost you your financial future. (Shout out to How Money Works on YouTube)
Some categories of spending include:
Giving
Essential Needs
Discretionary Needs
Author's Note:
Thank you for reading all the way through. I hope you now remember the four pillars of money management. Feel free to reply to this mail, share to those that you know needs this or comment if you have any questions or suggestions for related topics you want me to discuss.
Next week, I’ll be diving into the principles of debt management — something you need to understand before diving into saving and investing. Debt management is important, especially in personal finance.
To a simpler financial life,
Adedoyin
PS:
What part of money management do you find most challenging? Let me know by replying to this email — I’d love to hear from you!
Too awesome brooo🔥🔥