Money management is the way people are able to make sound decisions with their money. It includes the concepts of cash flow management (also known as budgeting), personal net worth, and financial goal setting. Individuals should be able to create a budget, analyze their net worth and set short-term and long-term financial goals. These concepts are so important that even the national government has begun to develop policy promoting financial capability among its citizens.
Financial capability is the capacity, based on knowledge, skills, and access, to manage financial resources prudently and effectively. Efforts to improve financial capability, which should be based on evidence of effectiveness, empower individuals to make informed choices, plan and set goals, avoid pitfalls, know where to seek help, and take other actions to better their present and long-term financial well-being.
Having a basic understanding of money management from as early as possible will make individuals better equipped to tackle more and more complex financial decisions in their transition through adulthood. Some of these critical decisions will include financing higher education, buying a home and saving for retirement. These decisions can have a lasting consequence on their financial security. Strengthening the financial capability of and individual is an investment in the community as a whole.
Budgeting will be the foundation for the financial planning that you will do with those individuals that you will work with. It’s all about managing cash flow, and once you can show them this you will have begun to assist them in achieving financial capability.
The actual process of creating a budget can be broken down in three steps. There is no ‘right or wrong’ way, this is just one particular system. The three basic steps:
- Listing income and expenses;
- Evaluating where changes need to be made in the event the budget doesn’t balance; and
- Following through to maintain the budget.
A budget should represent as true a picture of an individual’s financial situation as possible, so collecting accurate information is important. Before even beginning the budgeting process, you will need to have certain financial records available, including:
- Recent pay stubs if they are employed;
- Records of other sources of income;
- Copies of all household bills, such as utility statements; and
- Records of all their outstanding debts. A credit report may be the best source for this information. Individuals can receive a free report annual at www.AnnualCreditReport.com per the FACT Act.
- Lastly, any budget recommendations that you make and any choices that an individual agrees to must be realistic, or they will not be long lasting. Individuals tend to favor short-term action and rewards sooner rather