My Money Management Strategy: The Debt, Savings, and Investment Triumvirate

My Money Management Strategy: The Debt, Savings, and Investment Triumvirate. The strategy for saving, investing and paying off debt.
One time while browsing the forums, I cam across a poster asking what the proper way of saving was. I thought it was an odd question. I mean, saving is saving, right? Is there a wrong way of doing it?

It turns out the poster was actually asking about managing his savings. He's been reading up on personal finance and, like most of us, he was learning that we should have a fund for pretty much everything - emergency funds, funds for debt payment, fun funds, personal development funds, etc.

And it was a bit too much. Where do we get money for all of that? We'd have to be very rich or a very-high earner to fund all of that from just savings. And that's where money management comes in. And in this article, I'd like to share my personal money management strategy.

In my opinion, any money management strategy will revolve around the three most important things you can do with our money: Save, Pay Debts, and Invest.

In my personal strategy the first step and most important step, no matter what the situation, is to save as much as you can.

Pay yourself first. Take 10% of your salary and save it. After that make a budget.

Track your weekly and monthly expenses and eliminate as much expense as possible. Ideally your regular expenses should be for:
  1. Housing - rent/mortgage; don't include house improvements/beautification yet
  2. Food  - groceries (be a smart shopper); eat out only when necessary
  3. Transportation - gas & parking, or fare
  4. Utilities  - electricity and water; Internet and cable should be reduced to the most reasonable plan for you.

If your remaining income can't cover the regular expenses above, look for ways to save more. Commute more instead of using your car. Conserve electricity and water. Get a more reasonable phone plan, internet or cable subscription. Try anything to simplify your lifestyle without affecting the quality of life you have.

On the other hand, if there is money left over, increase the percentage that you pay yourself. You are paying yourself first, so don't think of it as a sacrifice; instead think of it as getting a raise :) Later, you'll see why it really is a raise.

After saving, the next step is to consider debts and investments.

If you have no debts the strategy is:
  1. Focus on accumulating the first 3 months of your emergency fund. This is going to be a long and perhaps challenging process. You might get tempted to invest right away to start earlier with making your money work for you. I would strongly discourage you from doing that. The peace of mind that comes from knowing you have a nest egg to fall back on can immensely help you make smarter and rational investment decisions. I had to find that out the hard way.
  2. After you accumulate a 3-month emergency fund, you can start doing more things with your savings. You can now split your savings between your emergency fund and investment fund. It can be a 50-50 split or some other distribution (can be 70/30 or whatever works; but it's important to note that the next 3 months of emergency fund is still very important.)
  3. If the 6-months emergency fund is complete, place most of your money in the investment fund. But keep placing money in your emergency fund; either small amount (100, 500, 1000) or smaller percentages of your savings (1%, 5%, 10% of total savings) this is for inflation fighting and better protection
  4. Your investment fund, whether or not your emergency fund is complete, is the source of all other funds - travel, luxuries, personal development. The difference is the objective, where it's invested, how long before redemption, etc.

If you have debt:
  1. First, evaluate your debt and ability to pay. Then, split your savings between debt payment and emergency fund. The immediate reaction is to put everything towards paying down your debt. But that isn't necessarily the best strategy. Because if something comes up and you have no emergency fund, you might end up having to borrow again. Plus seeing your money grow, even during debt, is a great psychological and morale booster.
  2. But you have to carefully monitor the ratio between debt payment and emergency fund. If it's bad debt (ex: credit card debt or past cash advances), make sure the majority is for debt payment. If it's good debt (house loan, business loan) and is manageable, generally it's ok to just pay the required amount until you can make a big lump sum payment later or maybe renegotiate better terms.
  3. If all your debts are paid before completing the 6 months emergency fund, then proceed with the steps above (no debt)
  4. If debts are the good kind (house/business loan) and are manageable and are not fully paid yet, and the emergency fund is complete, split your savings between dept payments and your investment fund. But devise a loan payment strategy and think of making a lump-sum payment or paying off the debt earlier as one investment goal you can have.
  5. If the debt is the bad kind and is not fully paid yet, but your 6-month emergency fund is complete: divert most - if not all - of your savings to paying off the debt.
  6. You can consider diverting some of your money towards investments, but check first the interest you are being charged. For example, credit card finance charges and/or interest is notoriously high. It might be practically impossible to get an investment that will get higher returns then the interest/charges you are paying.


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photo credit: Jun Acullador via photopin cc

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