Money management strategies

Key topic

In this lesson we are preparing you for your financial lives whether you become professional athletes or not. Throughout the lesson we stress the necessity of learning, adopting and practicing good money management habits from day one of your career.  The most important money management habits to adopt are those of living within your means while at the same time creating alternative sources of income through investing.

Learning objectives

• Understand that financial success necessitates good money management habits
• Develop good money management skills
• Learn to avoid bad money habits

Introduction

When starting your career, whether in professional sports or not, you will need to set up a financial plan which will have to cater for the different stages of your life.

Financial plans are written strategies for maintaining financial wellbeing and attaining financial goals. Developing a personal financial plan, will not only allow you to take control of your financial situation, but will also enhance your quality of life by reducing the anxiety and uncertainty that is associated with financial issues and future needs.

The importance of money and developing a strong set of financial skills

Money itself, paper and coins, are not important. What is important is that money is a tool that can give you freedom, security, convenience and choices.

When you have money, you have the freedom to decide for things such as where you want to live or you have the choice to pay someone to do the chores you don’t want to do, or don’t have time to do, such as cleaning your house, etc. In turn, you can use the extra time to do something you enjoy. On the other hand, when you don’t have much money, choice may be something that you cannot afford; your choices are limited. The choices available to you may not really be choices at all. Without enough money, life can be challenging and at times even miserable. The most important use for money though is that it can help you turn your dreams into the reality you live in.

Developing strong financial skill can support both your motivation and the attainment of your financial goals as it allows you to choose the lifestyle you want to have, support your family to the best of your ability, experience the freedom to do what you want, when you want to do it, and live without the stressors and negative emotions often associated with financial struggles. You want to be able to afford the best for yourself therefore you cannot afford to  neglect good financial practices by avoiding to  plan and manage your money wisely.

Financial skills are skills related to the understanding, evaluation and management of your financial resources and the creation of wealth. They also relate to your capability to use relevant knowledge and understanding to manage an expected or unpredictable situation in order to solve a financial problem and convert it to a benefit or opportunity. These skills can be acquired through financial education. Some of the most important of these skills are:

• Setting up a budget
• Balancing a checkbook
• Building credit and managing credit cards
• Being a conscious consumer
• Committing to saving money
• Insuring yourself and your assets
• Investing
• Understanding and utilizing interest rates and managing debt
• Planning for retirement

Before continuing with the rest of our lesson, let’s watch a short clip which we believe is quite informative:

Steps for Money management and financial planning

Budgeting and its importance

There is this misplaced belief that people who have lots of money don’t need to follow a budget. A person without a budget is like a ship without a captain. Every person needs a budget in order to know where they are, to know where they can get and how to get there.

A budget is a summary of your expected income and expenses for a period of time, usually a week, a month or a year. While the word budget is negatively connected with restricting your spending, a budget actually means efficient spending.  Creating a budget can be done in a few simple steps.

There are numerous benefits to having a budget, such as:

• Budgeting helps you save more– When you budget, you can see which of your expenses are unnecessary and eliminate them easily. That is on top of what you initially choose to save. You’ll therefore be able to save more.
• It helps you prepare for emergencies– Life is filled with unexpected surprises; unfortunately, many of them unpleasant. This is where the emergency fund comes in. Your savings and budget should include an emergency fund that consists of at least 6 to 12 months, worth of living expenses.
• It helps you avoid overspending– Far too many people live on credit and when the month is over, they end up with more expenditure than earnings. When you see your finances written down and realize that you spend more than you have, you are able to understand how damaging that is. It thus becomes easier to reduce your spending.
• It makes bad spending habits apparent- Bad spending habits are those that we should drop. Having a budget will highlight them further, since it can help you identify your bad spending habits.
• It shows you where the money goes– Which is important for different reasons, but is also important in itself. Knowing where your money goes will enable you to adjust your spending to meet goals; be they for saving purposes or other things.
• It helps you keep up with your financial goals- Keeping a budget helps you evaluate your financial goals. Are you doing well? Are you on track? Should you change anything? The answers to all these questions are hidden in plain sight on your budget.
• It reduces money-related stress and anxiety- A lot of people go through a lot of stress due to their finances. Having a budget reduces that stress and anxiety that may even translate into mental health issues. When you have everything written down, the burden feels lighter and the element of uncertainty is greatly reduced. Otherwise, you might end up doing calculations in your head which can just exacerbate the anxiety and the stress.

Let’s remind ourselves what we need to create our budget:

1. Try to gather any financial documents you have available like bank statements, credit card statements, bills, and any other information in connection with your income or expenses which you will use later in the process of creating your budget.
2. Write down all your sources of income. These may include salary from part time work, your allowance, gifts, etc. Record this total income as a monthly amount.
3. Write down a list of all the expected expenses you plan to make over the coming month.
4. You then need to separate your expenses into fixed and variable. Fixed expenses will be relatively the same each month and are essential for you. Variable expenses will change from month to month and may include gasoline and expenses for going out. Variable expenses are what you can adjust if you find yourself in a negative balance when doing your budget.
5. Now calculate the total of your monthly income and monthly expenses and if you have more income than expenses, you are off to a good start. You can use this excess for savings. If your expenses are more than your income, you will need to start making some cuts on your expenses or find ways to make more money!
6. Try to adjust your spending so that your inflows and outflows are equal. This means all of your income is accounted for and budgeted for a specific expense, savings goal or investment.
7. Review your budget on a regular basis in order to stay on track. At the end of the first month (and second and third) take some time to compare the actual expenses you made against the ones you wrote down in the budget. This way you can see where you did well and where you need improvement.

The most important thing is to stick to your budget. If you think you need help with creating your budget you can start working with your parents or a financially savvy friend, who will guide you all the way and will make you accountable thus making it easier for you to stick to your budget.

Let’s watch a 6-minute video on how to manage your money using the 50-30-20 rule.

Managing your money using the 50-30-20 rule

Money management strategies

There are unlimited ways and strategies to manage money. Below we propose a few money management strategies that anyone can easily implement, regardless of their level of income.

1. Track Where You Spend Your Money
You need to have a clear picture of your spending habits, so you will have to pull out all your bank statements, ATM withdrawals and any electronic payment records. Use a spreadsheet or just paper and pen and total your expenses.

You can separate your expenses in needs and wants or be more detailed and separate them in categories such as entertainment, food costs, travel and transportation, etc. Total each category to see where your money goes. Once you do that you will see and notice things  that you would never have before. You can identify unnecessary and inefficient expenditures and be in a position to remedy them, if that is necessary. Also, without tracking your consumption, you cannot have a budget and if you “run” your life without a budget, trouble will ensue.

2. Create an emergency fund
Living month to month is not only irresponsible but it’s also very dangerous. When handling finances, it is always good to have at the back of your mind that everything might go wrong, and your objective is to prepare to the best of your ability for such a contingency. The rule of thumb to creating an emergency fund is to have about six to twelve months of living expenses in a liquid account in case anything bad happens.

3. Automating your finances
The most difficult part of implementing and sticking to any money management strategy is finding the willpower to do so and making the effort. Being your own worst enemy in this case, you need to remove yourself from the equation  by automating  your savings, bill payments and investments.

Simply create a different bank account for each purpose, such as an emergency fund, savings and investment accounts and have money automatically deposited to each account every month. This way you can achieve specific goals by systematically creating positive long-term habits while fighting the temptation to deviate from your financial plan.

4. Saving for retirement
Retiring does not always mean that you will stop working; it means not having to work for money. To be able to do that, you need to create passive income through a retirement fund that will pay you a stable income every year for the rest of your life. To create such a fund, you need to start with an amount which you will invest in a mix of investments that will give you an annual return. You should continue to put money in this fund regularly and leave any profits in the fund to be reinvested. Building a retirement fund that can produce income for the rest of your life should be the ultimate goal of any money management strategy.

5. Have a Plan and stick to it
Once you know how much money you earn and how much money you spend, you need to make a plan. This plan needs to align your financial goals with your spending habits. It needs to prioritize things into primary, secondary and tertiary objectives. For example, if you have just a few days a year for vacation and you love spending this time in a tropical destination, you need to fit the necessary cash outflows into your spending plan. But, if you have set as a priority to buy a car by the end of the year, then you will need to plan cutting expenses elsewhere and modify your long-term spending plan to accommodate such a large outflow. Once you create a plan, give it a try for at least a month. You need at least a month to see if it works for you; anything less than that and you won’t see the benefit of keeping an eye on your finances.

Money management tips

Having discussed some very useful money management strategies, we now turn to providing some useful tips regarding money management. These dos and don’ts can help you construct a framework that will help you apply the above strategies effectively and coherently. Although, money management has to be carefully tailored to the specific realities, conditions, needs and wants of each individual, there are some rules that should never be violated and/or always followed. So here are a few tips tailored for families:

• Prioritize needs and live within your means – Living within your means that you spend less than you earn. In order to do this, you need to figure out your needs (what is vital) versus your wants (what is desired). Obviously, needs come first as we kept stressing throughout this course.
• Build and sustain good credit – Paying bills on time is very important because it will help you build a both a good credit score and credit history. The better your credit score, the more willing banks are to loan you money on favorable terms.
• Identify spending habits and attitudes – This links back to the first point. You will be more likely to handle challenges orbiting around finances in healthy ways if you have a sound understanding of your spending habits and attitude towards money.
• Avoid (bad) debt– Choose credit cards with a low interest rate when possible. Even better, avoid using them altogether, if that is realistic or just pay the balance in full every month. Credit card debt can be a deadly trap if left unattended. Americans owe over $800 billion in credit card debt.
• Although obvious, don’t buy things you can’t afford– If the only way you can afford something is using a credit card, then that’s probably a sign that you can’t really afford it. Even interest-free offers just postpone the pain. Do it the traditional way
• and save in order to purchase.
• Give it time, don’t rush into it– When faced with a decision, especially about a larger purchase, it’s wise to give yourself time and space to think. We often tend to spend more when we’re emotional. Removing the emotion and thinking, clearly gives you a chance to consider whether you really need what you’re about to purchase. So, next time you’re about to make an important purchase, you may want to sleep on it… for a few days.

Action steps – Exercise 1 (10 minutes)

• Are you following any of the money management strategies we have just discussed? If yes, which ones and how have they helped you improve your finances?

Let’s now check what you took away from today. Please answer the following multiple- choice questions:

1. Choose all that apply. Good money management strategies include:

1. Creating an emergency fund
2. Tracking your spending
3. Saving for retirement
4. All of the above

2. One of the most common bad money habits of athletes is saving a lot.

1. True
2. False

3. One of the most common bad money habits of athlete is spending extravagantly

1. True
2. False

4. Choose all that apply. During your late teens, early 20s you should at the very least:

1. Set a spending plan
2. Start saving
3. Buy a house
4. Buy a luxury car              

Answer sheet

Lesson wrap-up

Today’s lesson was about money management habits. We began by stressing the vitality of financial skills and the importance of money. We then turned to highlighting the benefits and importance of having a budget and in what ways it can help us realize our financial goals. Finally, we pointed out some principles you could incorporate in your money management to succeed financially.

At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!