9 Simple Ways How To Manage Money Better & Reach Financial Freedom

Learning how to manage money takes time and effort! 

But we’re here to make money management much easier and help you fill your savings account and keep more money in the bank.

There are 9 steps in organizing your personal finance. After following these steps, you should have a very clear picture of what your personal finance looks like.

From there, you can make the necessary changes to achieve the financial freedom you desire.

9 Steps For How To Manage Money Effectively

Now that you’ve got your head in the right place to be ready to dive in, it’s time to share our personal finance strategy that will help you manage your finances like a pro with a simple straightforward approach that’s easy to follow. 

1. Calculate Your Net Worth (Assets and Liabilities)

The first step to money management is knowing what you own and what you owe, which leads to you’re net worth. 

Many people believe that calculating your net worth is difficult. In actuality, it’s probably the simplest step in starting or learning to manage your finances.

To calculate your net worth, subtract your total debt from your total assets (Assets – Liabilities = Net Worth).

Assets: These include checkings, savings, retirement, IRA’s, vehicles, stocks, bonds, annuities, and home equity.

Liabilities:  This includes student loans, mortgage, cars loans, personal loans, credit card balances, and any other debt you might have.

 Write down everything that has value to you and write down all of your debt.

If you are just getting started organizing your personal finance, using a pen and paper works great. Keep it simple write everything down with a name and dollar amount.

Other options include an excel spreadsheet or using a free website like Mint. It has free overviews of your money and can create graphics for you to check out

Or check out Personal Capital, which is like the next step up- where you can track your investments, get financial advice and more!

2. Create Your Monthly Budget: Income vs. Expenses

Figuring out your cash flow and creating a budget is critical in getting your finances organized.

The first 2 steps provide a great overall picture of your personal finance. They show how you are doing financially as a whole, which is very important. Equally as important is understanding your monthly cash flow.

Income: This includes your hourly wage, salary, bonus, side hustles, side business, etc.

Expenses:  Fixed expenses (that don’t change price often) include rent, mortgage, insurance, student loan payment, cell phone bill, internet, gym membership, etc. Variable expenses (that change cost) include utilities, groceries, discretionary money, donations, gas, etc.

List all the income you receive in a month. Then write down all of your monthly expenses. Subtract your expenses from your income, and you’ll know how much money you have available for other things like savings and vacation.

3. Calculate Your Overall Cash Flow

This is also a simple equation. To calculate your monthly cash flow, take your income and subtract your expenses (Income – Expenses = Monthly Cash Flow).

To think of this in simple terms, your cash flow is basically your “money in and money out”.

Your overall cash flow is probably the most useful tool in your efforts to manage your finances because it gives you a constant checkpoint to see how effective your various financial strategies are.

As your income goes up and expenses go down, this calculation will show you concrete proof that you’re moving in the right direction. 

4. Get a Hold of Your Credit Scores and Reports

You know your overall net worth (Assets – Liabilities) and your monthly cash flow (Income – Expenses). That’s a great start!

The next step in organizing your personal finance is getting a hold of your credit score. Think of your credit score as an insurance policy to lenders.

Your credit score is extremely important in getting the very best rates on loans. Having a good credit score can literally save you hundreds of thousands of dollars over your lifetime. 

You have lots of free options here. Companies like Credit Karma will provide you with a free credit score.

5. Evaluate Your Personal Finance Situation

Now that you have your net worth, cash flow, credit reports, and credits scores it’s time to start evaluating. Having the information is great, but understanding it is a different story.

It’s now time to start evaluating your personal finance in detail:

– Net Worth

Your goal with your net worth should always be in the positive. If you have more assets than liabilities you have a positive net worth; congrats!

If your net worth is negative, it’s a good wake-up call to get your finances in check. Knowledge is power. Now that you know your net worth, set some obtainable goals to increase it.

– Cash Flow

Your cash flow should be a positive number, this is very important. If you have a negative cash flow you are bleeding money from your accounts.

From time to time, you will have a bad month where your expenses out weight your income. If your goal is financial freedom you can’t let this happen very often.

Always aim to have a positive cash flow every month. Be sure to include any money you are investing or putting into retirement accounts as an expense. This is money that is not liquid and you will not be able to use in the near future.

The entire premise of knowing your cash flow is maintaining a budget and grasp on your financial situation. In tracking your expenses you will have a clear picture of what your biggest monthly expenses are. Y

ou will also see where you are overspending and be able to adjust, helping you fine tune and better manage finances before things get out of control.

– Savings (liquid asset)

Do you have an emergency fund? If you answered “no” then you need to get on it. Life is unpredictable and things are going to happen. Things like car repairs, surgeries, and death’s in the family are going to happen.

Having an emergency fund prepares you to deal with those situations financially. The last thing you want to worry about in an emergency is “how am I going to pay for this”.

How much of an emergency fund you need varies. The typical rule of thumb is at least 3 months of living expenses. Ideally, you would have more than 6 months of living expenses saved up.

– Credit Report

Go through your credit reports thoroughly. Understand what is being reported and why. Errors do happen in credit reports and correcting those are important.

Contact the credit bureau directly to make them aware of the error so they can get started in correcting it.

Negative entries on your credit report will stay active for up to 7 years. After the 7 years are up the negative entries will be removed from your credit report.

– Credit Score

Compare your credit score to the graph below from Experian. If your credit score is lower than you like, don’t fret! It’s easier than you may think to increase your credit score to excellent.

6. Create Monthly and Yearly Budgets

Once you have gotten this far you should know exactly where you stand with your personal finance. Now that you know where you are you can start planning on where you want to be.

This seems to be the hardest step for most people. If you truly want to get your finances organized, a budget is a must. A budget is a plan for your money. You either have to tell your money what to do or it will leave rapidly.

Since you already took a look at a traditional monthly budget in the early steps, expand on it to span the entire year.

For example, you know that Christmas happens every year, so make sure that you start saving a “Christmas fund” at least a few months in advance.

Add it into the budget for a given month, as applicable, to make purchases you know are coming, such as birthday gifts, back-to-school supplies, or even oil changes. 

Once you’ve set up a recurring but slightly customized budget for each month of the year, you’ve got a chance to see the entire year at a glance.

Make a note of things like the total amount needed for those here-and-there birthday gifts, any party costs, etc.

As the year moves on you may find yourself able to save for an entire budget item that spans months in a shorter amount of time, freeing up cash in later months to be applied elsewhere. 

Always remember that budgets should be followed pretty strictly, but they should also have room for change if absolutely necessary. 

7. Get Motivated

Ask yourself the honest question “why do you want to organize your finances?” What is your purpose and motivation behind learning more about your personal finance?

Figure out the real reason why getting your personal finance organized is important to you, such as attaining financial freedom. Once you have your purpose getting motivated will become much easier. Set goals, stick to your plan, and go after it!

8. Ongoing Review

After completing steps 1-8 it’s important to continue to review. Set a time each month to check on your finances. If revisions need to be made, make them. Continue to stay informed on what is going on in your financial life.

Don’t fall back into your old ways after learning your financial situation. Mistakes will be made and that’s okay, get back up and start over again. It might be frustrating at first, but once you get a system in place it’s extremely rewarding.

It’s also a great habit of doing a thorough review of your financial situation on a yearly basis.

Compare your net worth from one year to the next, hopefully, you are seeing it grow. Compare your monthly budget from year to year as well.

This is a great way to make sure you are always living under your means.

During this time of review, it’s always a great idea to also go back through your investment accounts to make sure everything is squared away. 

9. Relax

As silly as it may sound, it really is important to stop and take a deep breath once in a while as you’re going through your financial journey. Managing finances can be truly stressful! 

Don’t forget to stop every so often and take some time out to recharge as needed. It’s totally reasonable to budget for an occasional (read:  infrequent) break, sort of like taking a little “vacation day” from all your financial work.

Go see a movie, order takeout, or plan a little weekend getaway. Just make sure you don’t undo all your hard work!

Money Management Tips

Know your financial goals. 

The very first thing to consider with money management is your financial goals.

We can give you all the quick financial tips you could want, but if you don’t have your goals clearly defined it won’t matter because you won’t know which tips might apply to you and which would send you in the wrong direction. 

Do you want to retire early? Do you have debts to pay off? Are you a parent who intends to pay for your kid’s college degree, or are you wondering if that’s even remotely possible?

The specifics for how to manage money in your 20s are far different than in your 60s.

Over time, your goals may differ and you may decide you need to invest more or you want to pay yourself first rather than do traditional budgeting.

Have a rough path forward. 

Money management doesn’t have to be exact- especially when things change as you go. Flexibility is important to manage your money effectively.

You can have a general outline of what to do and how to reach your goals.

The specifics of your next action steps will depend on the results of the steps outlined later in this article. 

Generally speaking , you’ll want to go into all these steps and any calculations knowing the big picture of how you want to proceed, which in turn tells you which financial planning tips you need. 

Do you want to pay off debts first, then save for retirement, then pay off your mortgage (following the advice from the wise Dave Ramsey)?

Do you want to chip away at debts while saving for a down payment for your first home, then worry about retirement? 

Stay motivated. 

If you’re like most people and need to pay off debts as a big part of your financial management strategy, you’ve got to be prepared for some rough times and sometimes a long road ahead of you.

Try to remember that every step you take and every milestone you can check off (even if it’s just one $300 credit card balance) is still progress and another step in the right direction! 

Having motivation is really all it takes to manage finances effectively! 

Know when you’re out of your element and don’t be afraid of asking for help or advice.

Not all of us are born to be accountants, investment bankers, or stock traders, and that’s ok. 

When it comes to something as important as doing your taxes or saving for retirement, the majority of us are going to need some help along the way. 

If you truly are struggling to figure something out for yourself, consider hiring a professional to help you manage your finances and learn for yourself, and also look into some “DIY” options, such as robo-investors like Betterment or even Acorns.

If you are looking to get started investing check out our investing for beginners guide here. 

The last thing you want to do is stay proud and try to struggle through something on your own, only to realize much later that you’ve made a huge mistake! 

Use the tools you need, and find new ones as necessary. 

Just like you can cut wood with a number of different tools, you’ll need to find the budgeting and financial tools that work best for you. 

If you’re looking for a simple pen and paper solution, try some of these budget templates.

If you want a paper tool that’s a little more thorough/complete, you’ll definitely want to check out our Budgeting Binder, to cover just about all of your financial needs! 

Some things really do need to be done a little more particularly. While pen and paperwork just fine for budgeting, you might find that you need a budget app to have it more automatic and ready to use at any moment.

If you choose not to work with a professional for some of your personal financial management needs, you’ll definitely want to consider investing in some quality money management software, such as Quickbooks.

There are plenty of free online budgeting tools so you have no excuse to not take advantage of them. 

Final Thoughts

Money management doesn’t have to be rocket science, and we’ve gone over the best money management steps and tips to get you started right away.

We have gotten where we are today by having a clear plan and always reviewing our situation monthly. It’s actually really hard for us to imagine not being financially organized, it’s scary.

If you are looking for a digital way to track and organize your finances try out Personal Capital!

We LOVE our free account and highly recommend them. If you’re not as tech-savvy, a pen and paper always works wonders.

Now that you have the knowledge, it’s time to take action. Get your personal finances organized today!