A Few Things You Should Know About Financial Management

What do you think of when you think of the term, "financial management"? At its essence, financial management is simply managing your finances wisely. There are a few factors that come into this, though, besides just managing the finances you have for the needs you have now. Financial management also includes planning for the future, including how to support dependents in the event of your death (untimely and/or eventual), your retirement, and "saving for a rainy day," in the event of financial hardship. Let's take a look in each of these areas in some depth.

Managing your finances today

Of course, the biggest component to managing your finances wisely is to never live beyond your means, no matter what you do. To determine what you should be spending on a day-to-day basis for all of your current needs, you should assume that roughly a third of your income is going to go to taxes, roughly a third of your income is going to go to your day-to-day expenses, and roughly a third of your income is going to be saved for "later," whether that be for emergencies, retirement, inheritance for your heirs, and so on.

A note about taxes

It's rather unfortunate that many people don't include what they'll be paying for taxes in their day-to-day expenses. However, you should. That's because Uncle Sam doesn't take kindly to people who don't pay their taxes on time. Make sure you put aside what you will be paying in taxes (minus any contributions your employer makes, for example) with every paycheck. If you don't have the discipline to do it yourself, make sure you have enough withholding in your paycheck itself so that you'll be getting some money back at tax time and won't actually have to pay any taxes in.

Day-to-day expenses

Roughly a third of your income (or about half after taxes) should be what you live on with your day-to-day expenses. That includes EVERYTHING. No, "Well, if I want X, I'll just put it on the credit card and pay for it later." That's becoming increasingly impossible anyway in today's economy, and it never was good, responsible financial behavior at any point.

Your day-to-day expenses should be budgeted, and should include rent or mortgage payments, heat, utilities, food, car payments, student loan payments, insurance (renters, home, medical, car) and any work related expenses, plus REASONABLE clothing budgets, so that the kids have new shoes when they need them, and so on. Your budget should also include any medical expenses you may have that your insurance doesn't already pay for. Your budget should NOT include shopping sprees, new car purchases, or buying things you can't afford and don't really need.

Add the aforementioned expenses up. Now, take a look at what you spend monthly on necessities as they've been outlined previously. Do you have extra with the third you can call "disposable" income? This is what you can spend on "extras" like shopping trips, vacations, and so on.

Savings, retirement, and investments

The second half of your post-tax income is to go to savings, retirement, investments, and so on. A good rule of thumb is to put a third of it in liquid savings so that you can get it if you need it in an emergency (an emergency is a surprise medical bill, NOT an impromptu shopping spree), a third of it into retirement (you should be saving between 10 and 15% of your pretax income, in general, in retirement), and a third of it into riskier investments like the stock market so that you have some leeway to make more money over the long term for your eventual retirement. If you are just a few years from retirement, then your investments should be conservative; if you are many years from retirement, your investments can be a bit riskier. Remember that with this part of your financial portfolio, ONLY your liquid savings should be touched even in the event of an emergency. Retirement accounts and investments should be structured such that they will not have to be accessed until you retire.