Debt Basics

The key to effective money management is time. The more time you are prepared to invest in managing your affairs the greater the return on that investment. It therefore follows that the earlier you start managing your own money the more effective the process becomes. Too many people start that process too late in life. So rather than managing their money they end up trying to manage on the money they have.

In essence, any money management programme is designed to answer four questions:
1. What are your financial goals and lifestyle requirements?
2. When do you want to achieve them?
3. What funds will you have available to meet your goals?
4. What risks are you prepared to take to reach your targets?

The answer to the first question should be more extensive than most imagine. Having somewhere to live may appear an essential rather than a financial goal. Yet buying a house is the single biggest financial transaction most people undertake. How much is invested in a property will have significant implications for any money management programme.

Identifying financial goals will also lead people to answer lifestyle questions. If a luxury holiday is an essential part of life then there will be less cash available for savings and investment. Sound money management does not prevent you from going on holiday it merely sets priorities and puts a cost on your choices.

Once the goals are set then timing questions must be addressed. Retirement is an obvious issue but when do you want to quit work? What about current liabilities and commitments? As you peer into the future your funding timeline will emerge and you can begin to assess your savings and investment needs.

How successful you will be at meeting those timing goals will depend on how much surplus cash there is once you have met your day-to-day living expenses. The free cash is available for financial planning. But do not forget your existing assets and liabilities. These could be reorganised, refinanced or even sold to liberate funds, or reduce expenses.

Once the surplus cash has been identified then you must decide where to invest. That will require specific advice but before seeking counsel it is important that you establish your own risk profile. The more risk you are prepared to take with your investment cash the greater the reward. There is an important balance to strike.

Having answered the questions and set in place your money management plan it is essential to monitor and review progress. Perhaps your day-today expenses budget was too restrictive. Perhaps your earnings potential is higher than envisaged. Perhaps some of your goals are too ambitious.

It all takes time but this is an investment which costs little and yields much.