Money Management System -
Key to Getting Ahead Financially

Ever notice how money has a mind of its own? Fail to keep an eye on it and it seems to ooze out of pockets, purses and under doors in the middle of the night. It always travels in one direction: away. Very rarely does it ever show up unexpectedly. That's why there is a strong need for a practical money management system.

So, what is a money management system anyhow? And how can it help you?

The simplest and the one with which most of us are familiar is the family or household budget. In many households there is an envelope for the big bills such as mortgage or other loan payments, cable TV, phone and utilities. There's a separate one for food and maybe separate ones for things that have to be bought frequently throughout the month, such as milk and bread.

Other "envelopes" come in the shape of savings accounts for larger and perhaps annual expenses, such as vacations, Christmas or birthday gifts.

Another form of money management involves saving for larger expenses several years into the future, such as a child's college education, the down payment on a home, a new car every four or five years, or for retirement. None of these goals is easy but we often make them more difficult by our own actions.

Your money management system is not just about money, it is also about time.

Saving for annual expenses needs to be done with a vehicle that will give you at least the same amount of money when you need it. You should not save for a vacation by buying stocks hoping they will increase 20% before you need the money; they may drop 20% and you would not have time to recoup that loss. At the same time, a bank savings account provides almost no interest.

A one-year certificate of deposit would provide a much better rate of interest, but you would need to have all the money up front, not practical for money people. The best solution is probably a zero-fee money market mutual fund. It will pay a little more interest than a bank account and you can save a certain amount each payday. You are not locked into a fixed investment period so you can take your money out with no penalty any time you want.

A good money management system will also make allowance for surprises. You know: You think you have everything organized and the car needs an unexpected repair or toothache requires an unscheduled visit to the dentist. Build up a cash reserve in something as flexible and safe as a money market fund. Some advisors suggest three months' income in case of job loss.

A bond fund may be the best vehicle for investment when you need the money in three to five years ?for a car, for example. Just make sure there are no sales commissions or exit fees or you could sacrifice a significant share of any profits. Paying cash saves paying interest; that makes others rich, not you. A well-managed balanced fund, one invested in a mixture of stocks, bonds and near-cash investments, might also be suitable. The manager will try to move out of investments that get too far ahead of themselves and into assets he believes will perform better in the months ahead.

There are two money management systems for college tuition, both under IRS tax code 529. One allows investment in a selection of mutual funds and gives you more control, the other invests at a rate slightly better than a CD. There is no tax deduction for the money deposited, but growth is not taxed. The prepaid plan as opposed to the investment plan is available in only a few states and must be used at a college within the state. It essentially freezes tuition at today's rates but in most cases will not cover things like books and accommodation. There are severe penalties if your child is unable to use it for college and it appears to be the worst of the two choices.

By far the greatest need for a good money management system, because it requires far more money but offers the ability to save for a much longer period, is the cash you will need for retirement.

Without a money management system in important financial areas of your life, you leave the future to chance and to guesses about the outcome. Frankly, that's what most people do. And if you look around you will see most people get themselves into financial messes they need not have been in. Saving you from those messes is what this section of the site is all about.



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