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There is financial management, and there is good financial management. If you have been following this blog, you know I have already written many articles about money. I am a strong believer that every father should learn how to manage their finances well if they want to find success in running their family and businesses. But with all the posts I have written, it seems I still haven’t described what good financial management looks like. Well, that’s what I am going to do today. Here are the four criteria for good financial management:
Disclaimer: The content of this post is based on personal experience and is intended for information purposes only. Please do not take this article as professional advice.
1. There Is A Goal.
The basic element of good financial management is it should have a goal. Why are you managing your finances? What do you want to accomplish? Financial management is useless if it doesn’t take you anywhere. A goal does not need to be something outrageous. A simple one is more than enough. As for me and my family, our current aim is to be debt-free. If you still do not have a financial goal, check out the ideas listed below:
- Pay off debts
- Own a house
- Self or children’s education
- Family vacation
- Buy a car
- Six months’ worth of emergency fund
- Retirement fund
- Start a business
- Business expansion
- Stabilize operating expenses
- Product development
- Asset acquisition
- Crisis management
- Master’s degree
- Improve cash flow
- Attract investors
2. There Is A Plan.
Having a goal is great, but it is not enough. There should be a plan for reaching those goals. In this post, I shared how I found out the root cause of my financial troubles. My debts were basically a product of my expenses being greater than my income. I never realized this until it was too late. Now that I became aware of it, my plan is simple: do the reverse — minimize the outflow and increase the inflow.
Good financial management has a clear goal and a doable plan. It is in a way like going on a road trip. You must have a destination and a map. Who knows where you’ll end up when you start your journey without either one of them.
3. There Is A System In Place.
Having a system is another difference maker between mediocre and good financial management. What is a system? To put it plainly, it is a repeatable method of managing your finances. To help you grasp this idea better, here is a short version of my financial management system:
i. All income I receive is divided into these funds (in particular order):
10% goes to our home church.
10% goes to savings
50% goes to necessities
20% goes to debt payments
5% goes to charity
5% goes to entertainment
ii. I only spend what is available in the fund.
iii. No borrowing between funds, except in an emergency.
The rule applies no matter how big or small the amount I receive. This prevents me from managing my money based on mood and emotion. Follow this link if you want to see the long version. A working system is at the heart of every healthy financial life. So please allow me to spend a little more time on this point with more examples:
- The envelope system — it is the process of distributing the cash in five to seven envelopes and labeling it to where it should be spent. The fund in those envelopes can’t be spent elsewhere except only in the category written on them.
- The pay-yourself first method — is a simple approach where you determine how much money you want to keep before spending what is left.
- The “no” approach — The idea is to simply say “no” to yourself when you do not have the money to spend. This method basically keeps you from getting into debt as it discourages you from using credits or loans.
- The zero-based budget — this is the practice of spending your income on paper first before actually spending it in real life. The total, in the end, should be zero. This method allows you to think hard about where to spend the money you have currently on hand.
4. There Are Checks And Balances.
Typically, you can already have good financial management with those three points above as an individual. But operating a family or an organization needs another element. You should have someone double-check your records. For family, it should be your spouse. In business, it might be your partner or an entire department. Having people to be accountable to will not only promote better relationships but also ensure you are on track to achieving your goals.
My wife and I monitor our finances through Google Sheets and an app called BlueCoins. I act as our family’s main financial manager, but she can always review the numbers whenever she wants. But besides that, we are in constant communication about any changes made in our finances.
What are the benefits of good financial management?
Overall, good financial management has substance. It should have a vision and a mission. It also must be repeatable and measurable. But don’t get me wrong, managing your finances, in general, is already a win. You sure will reap many benefits even by doing small tasks such as keeping track of your expenses. But incorporating the aforementioned elements into your discipline will shift it to a higher gear. Here are a few benefits you can enjoy when practicing good financial management:
- You become more patient in playing the long game.
- You have something to look forward to.
- You experience less financial stress.
- You have healthier personal and business relationships.
- You are less likely to get scammed.
- You can easily spot and eliminate unnecessary expenses.
- You will develop better self-control.
- Your income will improve.
- You will enjoy your money better.
- You will reduce or remove debts completely.
- You are prepared to secure the right opportunities.
- You do not fear battling crisis situations.
- You will open up more time for yourself and your family.
- You will have a good retirement.
- You become generous.
- You appreciate and are content with the simple things in life.
- Your kids learn good financial management.
- You have a higher chance of owning your house.
- More people and institutions would like to do business with you.
- People trust you.
What are good financial management practices?
Dave Ramsey, the author of The Total Money Makeover, says that financial management is 20% head knowledge and 80% behavior. As someone who has battled debt, I couldn’t agree more. I dedicated most of my time studying money when I got broke. But what moved the needle for me was when I started to change the way I live. So don’t be surprised when you find the list below is less about the accounting stuff and more about healthy habits. Here are 30 good financial management practices you can apply in your life today:
- Keeping track of expenses.
- Delaying gratification.
- Paying off your debts.
- Saving 10% of your income for rainy days.
- Setting aside 15% of your income for investment purposes.
- Be honest and transparent with your dealings.
- Learning financial management.
- Getting term insurance.
- Living within your means.
- Not investing in things you do not understand.
- Being generous.
- Playing the long-term game.
- Reward yourself appropriately.
- Simplifying your life.
- Openly talk about money with your spouse and children.
- Saving for retirement.
- Working hard and smart.
- Don’t look for shortcuts. (There’s none.)
- Take care of your health — Rest, exercise, and eat healthily. (Medicines and hospital bills are expensive.)
- Developing and committing to a financial system.
- Having short-term and long-term goals.
- Make your plans realistic.
- Doing a regular audit of your progress.
- Enjoying the process.
- Being grateful.
- Being content.
- Seeking wise counsel.
- Surrounding yourself with good people.
- Staying humble.
- Not comparing yourself with others.
You will recognize good financial management when you see it has a clear goal, a doable plan, a repeatable system, and trustworthy people to be accountable to. We can generally manage our finances without them. But integrating these four components will take our money management to the next level.
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