How to Manage Your Money Better in 4 Steps

At a Glance

• Money management starts with knowing what you want. Set clear goals and build a plan around the life you want, not just the bills you have.
• The core of personal finance is growing the gap between what you earn and what you spend. Nothing works unless you spend less than you make, and building that gap gives you the room to save, invest, and make progress.
• Systems beat willpower. Automate savings, debt payments, and investing so your goals happen on autopilot—research shows this is the most reliable way to get results.

How does someone go from feeling stressed about money management to feeling confident and capable?

Studies show that people with a financial plan are twice as likely to report no anxiety or depression, and those who track their spending and set goals report higher life satisfaction and lower stress.

This is why financial goal setting and building a simple financial plan matter.

Money management works best when you follow a process, and the process starts with knowing what you want your money to do for you.

Once you are clear on your goals, every other step becomes easier to put in place.

In this guide, I will walk you through the five steps of money management so you have a clear plan regardless of where you are today.

The Basics of Money Management

There's a lot more to money management than just budgeting. Knowing where your money goes is important, but it's just one small slice of the pie.

To become good at managing your money, there are five different steps you'll need to go through. 

1. Define Your Values and Set Your Financial Goals
2. Understand Your Starting Point
3. Plan and Automate Your Cash Flow
4. Track Your Progress and Adjust

Step 1: Define Your Values and Set Your Financial Goals

Money management works best when your goals reflect what matters most to you. Step 1 brings these two ideas together by having you define your values first and then turn those values into clear financial goals.

Part 1: Define Your Values

Your values act as the foundation for every decision you make with money, and they give your goals direction and purpose.

Values are the two to three core ideas that guide your decisions with money. They help you understand what matters most so your goals have meaning and direction.

Values will differ from person to person, but most fall into one of these categories:

• Security. Wanting a stable and predictable financial future.
• Accumulation. Focusing on growing your net worth over time.
• Freedom. Prioritizing the ability to make life choices without financial pressure.
• Generosity. Wanting to give back and support others.
• Enjoyment. Choosing to spend on experiences and items that bring joy.
• Family. Ensuring the well-being and stability of loved ones.

A helpful question to ask yourself as you think this through is:

“When I look back on my life many years from now, which values will I regret not prioritizing?”

Use that question to identify the values that feel most important to you, and write them down. The categories above can help you get started, but feel free to define your values in your own words. They belong to you.

Part 2: Set Your Financial Goals

Once you have defined your values, the next step is to outline the big goals you want your money to support.

You do not need to worry about exact numbers yet. That will come later when you understand your income, expenses and cash flow.

For now, focus on the bigger picture.

Here are three questions that can help you get started:

1. If you woke up tomorrow with no money stress, what would be different?
2. What do you want to be able to do, have, or experience in the future?
3. Which goals feel most connected to your values?

Write down the goals that come to mind, even if they feel big or far away. You will refine and prioritize them later once you understand your full financial picture.

If you want more support with this part of the process, I have two helpful guides you can use: one on creating a financial plan that includes a one-page template, and another that walks you through how to set clear financial goals.

Tracking Your Income and Expenses

One thing has to be true in order to see consistent increases in your net worth: you must spend less than you earn. Therefore, you'll want to track what you earn vs. what you spend every month. 

There are a number of ways you can do this. 

Here's some advice on how to approach the process, depending on your situation.

• When you're living paycheck-to-paycheck, or on a very tight budget: If you're consistently struggling to come up with enough money at the end of the month, it's best to thoroughly track each and every dollar. You might try an approach like the allocated spending plan, which has you manually budget every paycheck. 
• When you have solid income but also high expenses: If you're wondering where your money goes every month, even though you seem to be making plenty of it, consider an approach like the cash envelope system. This budgeting method has you separate your expenses into different envelopes; once you go through the money in that envelope, you can't spend a single penny more in the given category. That makes it a good approach for those with a penchant for overspending.
• When you're living below your means. If you know you're living below your means each month, consider a financial tracking app that allows you to easily see a snapshot of what you're earning vs. what you spend. Instead of estimating, the right app can help you get a quick, accurate analysis of what you earned vs. what you've spent for any given month. 

Step 2: Understand Your Financial Starting Point

There are two parts to understanding where you stand today.

First, you need a clear snapshot of your overall financial picture. This gives you a starting benchmark you can measure against in the future. Your net worth is the simplest way to do this, and the goal is not to judge where you are now but to improve this number over time.

Resource: Free Net Worth Spreadsheet Template.

Second, you need a good handle on your income and expenses. Pay attention to what is fixed and what is discretionary so you can understand where your money is going. This helps you see how much room you have in your cash flow to put toward your financial goals.=

Here's some advice on how to approach the process, depending on your situation.

• When you're living paycheck-to-paycheck, or on a very tight budget: If you're consistently struggling to come up with enough money at the end of the month, it's best to thoroughly track each and every dollar. You might try an approach like the allocated spending plan, which has you manually budget every paycheck. 
• When you have solid income but also high expenses: If you're wondering where your money goes every month, even though you seem to be making plenty of it, consider an approach like the cash envelope system. This budgeting method has you separate your expenses into different envelopes; once you go through the money in that envelope, you can't spend a single penny more in the given category. That makes it a good approach for those with a penchant for overspending.
• When you're living below your means. If you know you're living below your means each month, consider a financial tracking app that allows you to easily see a snapshot of what you're earning vs. what you spend. Instead of estimating, the right app can help you get a quick, accurate analysis of what you earned vs. what you've spent for any given month. 

Step #2: Know Where to Put Your Money

Once you know where you're at today, the big question becomes what to do with your money. This includes managing your current assets and liabilities, as well as determining how to handle future income and debts.

Tracking Your Income and Expenses

One thing has to be true in order to see consistent increases in your net worth: you must spend less than you earn. Therefore, you'll want to track what you earn vs. what you spend every month. 

There are a number of ways you can do this. 

Here's some advice on how to approach the process, depending on your situation.

• When you're living paycheck-to-paycheck, or on a very tight budget: If you're consistently struggling to come up with enough money at the end of the month, it's best to thoroughly track each and every dollar. You might try an approach like the allocated spending plan, which has you manually budget every paycheck. 
• When you have solid income but also high expenses: If you're wondering where your money goes every month, even though you seem to be making plenty of it, consider an approach like the cash envelope system. This budgeting method has you separate your expenses into different envelopes; once you go through the money in that envelope, you can't spend a single penny more in the given category. That makes it a good approach for those with a penchant for overspending.
• When you're living below your means. If you know you're living below your means each month, consider a financial tracking app that allows you to easily see a snapshot of what you're earning vs. what you spend. Instead of estimating, the right app can help you get a quick, accurate analysis of what you earned vs. what you've spent for any given month. 

Developing Financial Goals

Here at The Ways To Wealth, we call the difference between your income and expenses “your gap.” 

Managing your money well comes down to:

1. Growing the gap between your income and expenses.
2. Allocating what's inside the gap towards the financial goals that are most important to you.

In other words, the goal isn't to have a $500 gap that just sits and builds up in your checking account each month. Instead, the objective is to put this $500 towards your personal finance goals. 

For some people, this may involve paying off credit card debt or student loan debt. For others, their goals might be retirement savings, saving for a car, a wedding, a house, or even all these things at the same time. 

Step #3: Make a Cash Flow Plan

In our post on creating a financial plan, we discussed how cash flow planning is the most important aspect of financial planning. 

Most people equate financial planning with managing an investment portfolio. But it's far more important for most households to focus on cash flow planning — i.e., on deciding what to do with your income.

The Ways To Wealth

It's the proper allocation of your monthly income that's going to drive your progress towards your financial goals. 

So far, we've focused on what you'll do with your money. Now it's time to get down to the how. 

Because it's not enough to commit to the idea of building an emergency fund or saving money for retirement; you need to develop a plan for how to make that happen. 

Paying Your Goals First

Let's say your goal is to start saving more money for retirement. 

The two options you're considering are:

1. Have your employer automatically deduct money from your paycheck.
2. Wait until the end of the month to see how much extra money you have left over and then invest that.

If I was to place a bet on which of these strategies would lead to more money saved over time, I would go with the first option every time. 

Money without a purpose tends to get spent. On the other hand, when we allocate money to our most important financial goals up-front, the small stuff always seems to work itself out. 

In practice, this idea is referred to as paying yourself first. 

Specifically, that means that instead of waiting until the end of the month to fund your financial goals, you pay these goals first. 

And for even better results, you'll want to automate the process. 

What this automation looks like depends on what you're trying to do. However, here are some best practices based on common financial goals.

1. Building an emergency fund: Schedule an automatic transfer from your checking account to a savings account for the day after your paycheck hits the bank. For best results, keep your savings account at a different bank than your checking account, so that it's harder to withdraw the money. One of my favorite high-interest savings accounts is offered by CIT Bank. 
2. Paying off debt: Create a debt snowball. For the debt with the smallest balance (not the one with the highest interest rate), set up an automatic payment that's higher than the minimum. 
3. Achieving short-term saving goals (car, house, wedding, etc.): As with your emergency fund, set up a recurring transfer from your checking account to your savings account. If your bank allows you to have sub-savings accounts, you can even go as far as naming your accounts after your goals.
4. Investing. Utilize a 401(K) or other employer-sponsored plan to make automatic contributions. For IRA contributions, set up a recurring transfer that goes from your checking account to your investment brokerage soon after each paycheck hits.

Step #4: Automate Your Bills

The vast majority of monthly bills, including credit card, cable, internet, cell phone, utilities and other subscriptions, should ideally be set to auto-pay.

This is a big time saver. But even more importantly, it helps you avoid late payments. And since one of the most influential factors in your credit score is on-time payments, this habit can boost your credit score significantly over time. 

At the same time, this can be tricky for those living paycheck-to-paycheck. If that's the case, here are a few tips:

• Use auto-pay to make only the minimum monthly payment. This can help you at least avoid late fees for missing payments. Ideally, you can then go in and make a bigger payment on your own.
• Sign up for a bank account that doesn't nickel and dime you for overdraft fees. Overdraft fees alone totaled $11 billion in the U.S. in 2019. If you're with a bank that has numerous fees, consider switching. One of our favorites, Chime, allows account holders to overdraft up to $100 without a penalty. 
• Utilize notifications. Use text or email notifications to stay on top of when bills are due throughout the month, as well as when your bank account balance gets low. 

Step #5: Track What's Important and Adjust If Necessary

What's known as Pearson's Law states:

“When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates.”

For the best results, it's important to keep continuous tabs on your financial situation over time. You want to know if progress is actually being made, as well as how much or how little.

Here are a few important areas worth tracking.

Monitor Your Credit Score and Credit Report

Most people don't realize that your credit score can impact your financial situation by tens of thousands of dollars or more over your lifetime.

Tracking this three-digit number over time, and knowing simple steps you can take to improve it, is therefore a smart financial move. 

I recommend using a site like Credit Karma that can help you get your credit score and report for free, and which offers customized tips on how to increase your number.

Learn more about how it works in our Credit Karma review.

Track Your Net Worth

The first step in managing your money is tracking your net worth. To get the most benefit out of this exercise, however, you'll also want to constantly monitor your net worth.

Personally, when I started to pay attention to my finances, I was tracking my net worth on a monthly basis. Over the years, the time between calculations has increased. Today, I only calculate my net worth twice a year.

Know the Day You'll Be Debt-Free

One of the more motivating numbers to track, for those looking to pay off debt, is the exact month they'll become debt-free. 

What I like about this number is that it encompasses income, expenses and current debt, providing an overall snapshot of your situation. Best of all, it tends to be very motivating knowing that you're X Months away from being debt-free. 

Our post on how to get out of debt explains the step-by-step process for calculating this number, even giving you a free template to help you do it.

Strive For Financial Independence

If you're in the wealth accumulation stage, consider tracking the date you'll become financially free.

Specifically, that's the date the income from your investments will allow you to maintain the same standard of living you enjoy now. 

As with tracking your debt-free date, this number encompasses both your income and expenses, as well as your investment portfolio. 

Plus, seeing that cutting $500 from your monthly expenses means you'll reach financial independence X Months or Y Years sooner can be quite motivating. 

Final Thoughts on Managing Your Money Better

Learning how to manage money is a skill. Don't expect all systems to fire perfectly each and every week. However, if you commit to the process, you can expect to get better and better over time. 

Things may be difficult at first. It doesn't always go as planned. 

When things do go wrong, stick with the fundamentals of:

• Knowing where you are today so that you can make intelligent decisions about how to improve.
• Managing your cash flow to help you accomplish your goals.
• Prioritizing your most important financial goals by paying yourself first.
• Automating as much as possible.
• Tracking what's important so you know whether you're making progress.

These fundamentals will help you take control of your finances and lay the foundation for a solid financial future. They can even help you live without a job, if your goal is full financial independence.