Financial management basically means taking the correct approach to your finances which in turn can help you to increase your net worth, to avoid financial difficulties and generally to be better off.
Many of us think of financial management as being something that’s only for big businesses, or perhaps very wealthy billionaires. In fact though, financial management can benefit everyone and if you know how to handle your money correctly you can completely change your life.
The Basics of Financial Management
Many of us struggle with our finances even despite being on good salaries and having relatively low outgoings. The main reason for this is simply that we aren’t managing our finances strictly enough or in the best manner. This is why financial management is so important and it’s why everyone should familiarize themselves with the basics. Then, even with a relatively lower income, you will find it’s possible to actually feel well off and to live like someone with a considerably greater income.
Projections
The first thing to do when it comes to financial management is to make projections. This means entering all of your current income and all of your current outgo into a spreadsheet or financial management software. When you do this, you will then be able to spot trends and patterns and use this to predict your future fortunes (or lack thereof).
So if your finances have recently been climbing as your income exceeds your overheads, then you will often be able to (mostly) safely assume that this gradient will continue and in X amount of time you’ll have Y amount of money.
Investing
Businesses invest money all the time. Partly they do this by pouring money into research & development and partly they do it by investing in other companies or in stocks and shares. This is something a private individual can do too and it should certainly play a part in most financial management strategies. Don’t aim to just “get by” — aim to grow your assets in a way that manages risk.
Contingencies
Of course it doesn’t always work like this. Sometimes an unexpected expense will come up or you will find that things go wrong. That’s why it’s always a good idea to prepare for various contingencies to have plans in place for when things don’t go as expected. This is why you should earn to save more than you need and you should aim to build resilience by anticipating future issues and by having multiple revenue streams. For a business, this means having side projects and investing in assets. Families and individuals can do the same as well as thinking of alternative career paths or expenses that could be cut if needed.
Budgeting
With all this information, it should be possible to create a budget that defines how much you can spend in each area. For families that might mean a food budget, a budget for holidays and a budget for living expenses. Your objective then is to make sure you meet the criteria of the budget and when you have a strict number to aim for you’d be surprised at what you can accomplish with limited funds.
Photo Credit: Tax Credits
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