7 Steps to Manage Your Money

The COVID-19 pandemic caused long-lasting changes to the U.S. economy and how people manage their money. Scores of workers left their jobs in what was dubbed the “Great Resignation” while many others embraced a permanent remote or hybrid work schedule. Meanwhile, some families bought new houses as home purchases and prices in suburban areas soared. Others transferred their children to private schools or began homeschooling in response to virus outbreaks.

All that change means now might be the right time to reevaluate your money situation. This is especially important for those who have struggled in recent years and needed to rely on temporary relief measures like stimulus payments or paused student loan payments to sustain their budgets.

Spring also seems like the perfect time to reassess your budget as Tax Day nears. But money experts say any time is a good time to review your money management plan. “It’s never too late, and it’s never too early,” says Racquel Oden, head of network expansion for JPMorgan Chase.

Creating a budget is only one part of how to manage money, and if you start there, you'll miss critical information. Here are seven steps to take to manage your money properly:

Understand Your Current Financial Situation

Before you can start managing your money better, you need to take stock of your current situation. “You have to know where your money is going,” says Karen Heider, senior wealth advisor with Concenture Wealth Management in Houston, Texas.

The most basic step to understanding your current financial situation is to record all your regular monthly income and expenses. If that sounds overwhelming, Heider says you can take advantage of numerous apps that can automate the process. Mint, PocketGuard and Simplifi by Quicken are a few of the free or low-cost apps available that can sync to financial accounts and make it easy to categorize spending.

If you aren’t comfortable linking your bank account to an app, save receipts for a month to determine where money is spent beyond major bills like rent, utilities and debt payments. It could be a wake-up call to realize how much is being spent on items such as groceries or dining out.

Working with a professional is another way to understand your current financial situation, and it may be possible to find this help for free. Chase, for instance, offers free financial health checkups in all its branches, according to Oden.

Set Personal Priorities and Finance Goals

Once you have laid out your current financial situation, it's time to determine whether it aligns with your values. “You don’t have one goal in life,” Oden says. “You have multiple goals.” And defining what you'd like to achieve with your money can make the process of creating a viable budget much easier.

For instance, if spending weekends with your family is a priority, paying for a housekeeping service may free up valuable time and be a smart use of money. However, it may not make as much sense if travel is a bigger priority. In that case, the money spent for housekeeping may be better spent on vacations.

When setting financial goals, people can make the mistake of limiting themselves. “It doesn’t have to be paying off debt or saving for retirement,” Heider says. Financial goals can be large or small – from saving for a modest purchase to splurging on a luxury vacation – and mixing in some short-term goals can help keep you motivated.

Create and Stick to a Budget

Writing a budget designating how your income will be spent each month can be easy. Following it, though, is often a challenge. People may not have the self-discipline to limit impulse purchases, or they may feel too restricted by having to plan their spending in advance.

However, the reward for sticking to a budget is having cash available to spend on those items most important to you. What's more, it will be easier to follow a budget that is written with your priorities and goals in mind.

If you discover there isn't enough money to pay for everything you'd like, look for ways to whittle down expenses. While eliminating small, recurring purchases such as duplicative streaming services or takeout coffee is often suggested, don’t forget larger, irregular expenses.

You may not realize how easy it can be to reduce expenses that are often thought of as fixed, according to Tyler Boyd, chief strategy officer for Squeeze, a digital service that helps users compare and reduce household bills.

Boyd points to auto insurance as one place where households could see significant savings. “That’s a great example of a bill that we put down on our ledger and don’t cost compare it,” he says.

Establish an Emergency Fund

Part of how to manage money better is to have cash set aside for unexpected events such as a lost job, illness or broken car. “Obviously you need an emergency fund,” says Gregory Lawrence, certified financial planner and founder of retirement planning firm Lawrence Legacy Group in Estero, Florida.

The best way to create this fund is to include savings in your budget. How much you save depends on how much extra money you have available, but a common rule of thumb is save 10% of your income for emergency savings each month with the goal of reaching an amount equal to about three to six months of your typical expenses.

Regardless of how much you can save, make it a habit. “The people who save pay themselves first,” Lawrence says. Set up direct deposit or automatic transfers into a savings account to ensure you get paid before money is eaten up by other expenses or impulse buys.

Save for Retirement

At some point, you may want to retire, and that will be hard to do without a retirement fund. Social Security benefits only replace approximately 40% of your income, and many employers no longer offer pensions.

“People focus too much on debt and don’t think about retirement,” Heider says. “You absolutely need to be looking at retirement (savings) right away.”

Workplace retirement plans such as 401(k) accounts can be a good place to save for retirement, since contributions are automatically deducted from payroll. Plus, many employers will match a portion of their workers' contributions, further boosting retirement savings. There are tax incentives for these accounts as well. Contributions to a traditional 401(k) are tax-deductible, while Roth 401(k) accounts are funded with after-tax dollars but earnings withdrawn in retirement are tax-free.

For those who don't have access to a 401(k) or other employer-sponsored retirement plan, an IRA offers similar tax benefits. In 2022, total contributions to IRAs can't exceed $6,000 for workers younger than age 50 or $7,000 for those age 50 or older.

“I love maximizing Roths,” Lawrence says. Not only can they reduce taxes in retirement, but they also have estate planning benefits. “It’s a great way to pass wealth to children,” he says.

Pay Off Debt

Having debt can get in the way of meeting financial goals but paying it off can be challenging.

Since most debt accrues interest, becoming debt-free can be a long process if you are only making minimum payments. One strategy to speed up repayment involves concentrating any extra money on one debt. Once that is paid off, roll its payment into another debt and continue the process until all the debts are gone.

In some cases, it may help to consolidate high interest credit cards into a lower interest loan or line of credit. However, debt consolidation only works if you commit to living within your means going forward. Otherwise, you could end up with both a debt consolidation loan and a new credit card balance. If you do get a loan, choose one with the shortest term possible.

Don’t make the mistake of putting savings on hold while paying off debt though. “It’s not all or nothing,” Heider says. “It’s a balance.” She says the best approach is to split money between debt and savings goals.

Schedule Regular Progress Reports

Managing your money is an ongoing process. It helps to schedule regular times throughout the year to evaluate your financial situation, including your income, spending, savings and net worth.

At least once a year, also check your credit report by requesting a free copy on AnnualCreditReport.com. “A lot of people do not actively check their credit report,” Heider says. Reviewing report data regularly is essential to identifying mistakes or potential fraud that could negatively impact not only your credit score but also the rates you pay on loans and credit cards.

Use these check-ins to also determine what progress has been made toward financial goals and whether any budget items need to be adjusted for the future. You may find your goals have changed, and your spending should change as well.