How to manage your money: 10 tips to improve your finances

Learning how to manage money starts with setting financial goals. This and other managing money tips will help you create and maintain a financial plan that’s right for you.

Personal finances are complicated. Big or small life events—as well as interest rate changes, inflation and other economic factors—can have an impact on how you manage your money. 

If you’re feeling overwhelmed by money management, it’s best to start with the basics. A good first step is to figure out your financial priorities. Once you’ve done this, you can start working toward each goal.

Here are 10 tips for managing money more effectively.

1. Managing money tip: Define your financial goals

Creating and maintaining a financial plan rests on a foundation of your identified and prioritized financial goals. 

For example, your primary goal might be to save for a down payment on your own apartment or house, or perhaps it’s to pay off your school loans. Having a goal, and a plan to achieve that goal, will help you feel more in control of your finances.

Other examples of financial goals include:

• Paying off a school loan
• Starting an emergency fund
• Paying for a wedding or vacation
• Saving for retirement

A comprehensive financial plan that’s tailored to your situation should consider every financial element of your life, including your short- and long-term financial goals.

2. Managing money tip: Address your debt

It’s important to differentiate between debt that can help you achieve your personal financial goals and debt that can set you back. Not all debt is created equal. In some situations, using debt to help manage your finances can be a useful tool.

Most people can categorize their debt into productive and nonproductive (or good and bad debt). For instance, you might consider your mortgage productive debt, as it can help you build equity (and your net worth) and may help you qualify for a tax break.

Student loans can also be thought of as good debt — they may have been necessary to help you get an education that led to you earning your current income. (Here’s some information on paying off student loans.)

On the other hand, credit card debt, especially if it was accrued by buying things that don’t contribute to your net worth or financial future, is often considered nonproductive. Make it a goal to pay down credit card debt as soon as possible.

Remember that productive debt can be nonproductive when it carries high interest rates. “High interest rate” can be a relative consideration, so it’s generally a good idea to consider whether the interest you’re paying on debt is higher than the return you might receive if you invested the same money. 

3. Managing money tip: Build up your emergency fund

Having an emergency fund means you would be covered in the case of a change in your circumstances, such as losing your job or encountering unexpected medical expenses.

The amount in your emergency fund may vary based on your goals and financial situation. However, a general rule of thumb is to have at least three months’ worth of your household income set aside for emergencies—preferably six to nine, especially if you’re self-employed.

Next, think about where you’re keeping it. Consider products that might earn you a higher interest rate than a standard savings account, such as a certificate of deposit (CD) or money market account.

If you have an emergency that requires a smaller amount of savings, you might also consider a home equity line of credit to pay for it. Speak with your banker to see what options may fit your needs.

4. Managing money tip: Don't overpay on housing

It can be tempting to lease an apartment or buy a house beyond your budget, even if you’re approved to pay more. Taking on too much in rent or mortgage payments could mean forgoing other financial goals or feeling financially pressured.

It’s commonly suggested that you spend no more than 30% of your gross income on housing. That benchmark can serve as a reminder that households have many expenses besides housing costs that need to be planned for.

It’s important to also consider whether the payment on your mortgage or rent will hinder your ability to meet other financial goals.

5. Managing money tip: Have a plan for both saving and investing

How much money you set aside for saving and investing, and how you choose to allocate it, should also reflect your goals and timeline.

Consider saving for shorter term goals, such as buying a house, because you’ll have easier access to a savings account than you will money in investment accounts. Investing, on the other hand, might be more appropriate for your longer-term goals, such as retirement or paying for your child’s education.

When deciding how to invest for your goals, be sure to carefully assess your risk tolerance. Talking to a trusted financial professional can help you determine the right mix of asset classes and for you and your goals.

Having a tax-diversified portfolio that includes a combination of tax-advantaged, tax-free and fully taxable investment vehicles and investment accounts can help you manage the amount of taxes you pay.

6. Managing money tip: Stay steady amid market fluctuations

Your investment strategy should change along with your age and financial goals. However, changing your investment strategy based on emotion can hurt your returns. Investors who try to time the market in response to short-term swings often do poorly, and their portfolios would have performed better if they had followed a consistent plan.

Rather than attempting to time the market, focus on time in the market. While past performance is not a guarantee of future results, investors with diversified portfolios who stay in the market have historically and consistently experienced steady gains over time. 

Consider crafting a long-term investment strategy with a financial professional that you can stick to.

7. Managing money tip: Don't raid retirement savings 

If you have an employer-sponsored 401(k) account, you may be able to borrow money from your account to cover emergency expenses or cash flow shortfalls.

While you’ll have a certain number of years to repay loans from your 401(k) (total years will depend on your loan type), you’d be making loan payments in addition to new 401(k) contributions until you’ve repaid your loans. If you leave your company, the loan must be paid off immediately. If you don’t pay it off, the loan will be considered a taxable distribution and possibly incur taxes and penalties. 

Try to resist this temptation if you want to stay on track for your retirement. You’ll lose out on the benefit of compound annual growth, meaning it may be costlier — and sometimes unrealistic — to rebuild your retirement fund to the same level later. 

8. Managing money tip: Plan for after you’re gone

You’ve worked hard for your money, so it makes sense that you should plan for how your assets are distributed after you die. As a first step, consider drawing up advance directives, which will empower a friend or relative to make financial and/or medical decisions on your behalf if you ever become incapacitated. Advance directives include:

• Durable financial power of attorney for financial decisions
• Healthcare proxy/medical power of attorney for medical decisions
• Living will to outline your wishes for end-of-life care

And no matter the size of your estate, make sure to create a will or a trust as part of your financial plan. Otherwise, state law will determine what happens to your assets after you die.

9. Managing money tip: Factor in the fun

For most people, fun is more of a day-to-day interest than a goal, but it’s still incredibly important to your quality of life — and your budget.

Working with a financial professional can help, as they can look at your wishes objectively. Incorporating enjoyable activities into your financial plan year-round, whether it’s regular vacations or weekly date nights, can help you make sure having fun doesn’t derail your fundamentals.

10. Managing money tip: Stay disciplined

Check in with your financial plan regularly, because just as markets are constantly moving, so are your life circumstances. Even if you and a sibling or friend have similar financial situations, what’s right for them might not be right for you.

Remember that a financial plan is tailored for you. How to manage money generally depends on your life stage and personal goals. Knowing where you want to be five years from now can make your big picture financial balancing act much easier.

If you’d like more information beyond these money management tips, the financial planning professionals from U.S. Bank and U.S. Bancorp Investments are available to provide personalized advice and guidance.