Introduction: Personal Money Management

What It Means

Personal Money Management refers to the process of balancing one’s individual wealth and income with financial needs, desires, and goals. Though some of us may survive without sophisticated money management strategies, none of us can escape financial pressures entirely. Most of us hold jobs during the most productive adult years of our lives, and the income we bring in must be managed effectively if we are to satisfy our basic needs and lead fulfilling lives. The decisions we make regarding our personal finances can be complicated, and they change as we pass through the various stages of life. While we may start our adult lives simply depositing our paychecks in bank accounts and spending most or all of that income using cash, checks, and credit cards, as we age we may find ourselves drawn more deeply into the worlds of borrowing, saving and investing, and insurance.

When Did It Begin

Personal money management is not new. Since the rise of capitalism (the economic system characterized by private ownership of property and the ability to pursue profit with relative freedom) in the 1600s, the survival of individual households has frequently depended on their ability to allocate income effectively. Likewise, financial success has since that time been at least theoretically possible through saving and investing any excess income.

Personal money management in the United States plays a much larger role in the financial success or failure of families today than it did in earlier eras, however, and it was a much more widely discussed topic at the beginning of the twenty-first century than it had ever been before. This was the result of a change in the structure of the U.S. economy that occurred between the middle and the end of the twentieth century.

In the mid-twentieth century many American workers could count on companies or unions (organized groups of workers who had the bargaining power to negotiate with employers) to solve many of their financial problems and help them prepare for the future. For example, if you got a job with a major corporation in the 1940s or 1950s, you could expect to be employed by that company for your entire career. During that time the company would likely pay not only for your health insurance but would also guarantee you a pension to live on after retirement. Many workers not entitled to such company benefits could get them by joining a union, which used its bargaining power to extract better treatment from company management and which provided members with many other financial benefits. This meant that personal money management, for many households, primarily meant nothing beyond the balancing of income and daily expenses.

By the beginning of the twenty-first century, however, workers were expected to fend for themselves. Companies constantly restructured themselves to adapt to changing conditions, cutting jobs in response to larger economic trends and reducing or eliminating employee benefits regardless of the effect this would have on households. During the late twentieth century, additionally, unions lost not only much of their influence but also many of their members, as the blue-collar industries that were most heavily unionized (such as the steel and automotive industries) fell on hard times. Pension plans for most U.S. workers were largely eliminated, and the rising cost of health care made it increasingly likely that this employee benefit, too, might become a thing of the past in the near future. Collectively, these changes shifted the responsibility for a household’s financial well-being away from employers and onto employees. This made the need for effective personal money management much more important.

More Detailed Information

Personal money management at its most basic level concerns the purchases you must make to satisfy your everyday needs and desires. This means keeping track of your checking and other bank accounts, as well as the purchases you make using credit cards, to ensure that your monthly expenses do not exceed your income.

No matter who you are, you will almost certainly pay several basic expenses each month. First, you must pay for housing. You may pay rent to live in an apartment or house owned by someone else, or you may make a monthly mortgage payment to the bank that loaned you the money to buy your own home. In either case this will probably be your biggest single expense each month, but it is hardly the only one you will have to account for in your budget. You must also budget for bills, such as electricity, phone service, and water, and you must budget for groceries and other basic purchases. Further, unless you live in a major city served by an efficient public transportation system, you will likely need a car to get to and from work and the grocery store, and this may, like the purchase of a home, require borrowing money from a bank or other financial institution. In this case, you must budget for a monthly car payment.

Ideally you should make enough money every month to pay for all of these needs and still have savings to set aside for the future. Money left over after paying expenses and setting aside savings can be confidently spent on entertainment or other nonessential purchases, but making such purchases in lieu of saving money is usually a bad idea. Going into debt to make such purchases (for example, by accumulating a credit card balance that you cannot pay off), or to pay for basic expenses, is almost always a bad idea. If you cannot live normally without going into debt each month, you may well be headed for a financial crisis.

Not all debt is unwise, however. As mentioned above, most people would be unable to make large purchases, such as purchases of homes or cars, without borrowing money. Since cars are essential to the daily lives of many, borrowing money to purchase a car is often unavoidable, even if it is not as financially advantageous as buying a car using cash. Borrowing money to buy a house, on the other hand, is sometimes a sounder financial decision than paying cash, since houses generally appreciate (gain value) over time. Thus, even though you must pay interest on the amount of money you owe the bank, the rate at which your home appreciates may outweigh the money you lose to interest payments. Borrowing money to start or enhance a business is another financially sound form of debt. Assuming that your business is successful, the profits you bring in should compensate for the interest payments you must make. Likewise, borrowing money to put yourself or your children through college may be a wise financial decision, since a college education enables one to earn enough money to compensate for the expense of the loan, at least over the long term.

If you ever hope to have any financial independence (that is, to escape the pressures of living paycheck to paycheck, in fear of any accident or change that may interrupt your income), you will probably need to save around 10 percent of your income every month. Saving will allow you to reach both short-term and long-term financial goals. A common short-term goal may be the building of an emergency fund. Most financial experts suggest that you should have enough money in reserve to support yourself and your family for three to six months in case of accident, injury, or some other emergency. Other short-term goals might be saving enough for a vacation or the purchase of a new washer and dryer. Common long-term financial goals are saving enough money to make a down payment on a house (when borrowing money to buy a house, most people are required to pay a percentage of the sales price called a down payment, which typically ranges from 5 to 20 percent) and saving enough money to pay for your children to go to college. It is also necessary to save money for retirement. No matter how young you are, you cannot afford to ignore the fact that one day you will be unable or unwilling to work. Government sources of retirement funding, such as Social Security, generally only supplement the living expenses of the elderly, and the future of such programs in the United States is far from certain.

To reach your savings goals, it may be necessary to invest the money you set aside. Keeping money in a checking account usually amounts to losing money, since prices in the economy are always rising. One dollar today will always purchase more than one dollar next year; keeping money in a checking account that pays little or no interest means that your savings will lose value over time. Even savings accounts, which often pay a higher rate of interest in exchange for offering you less frequent access to your money, pay so little interest sometimes as to fall behind the rate at which prices rise.

Investing in financial markets, such as the stock and bond markets, is generally considered a good idea for anyone with a significant amount of accumulated savings. How and where you invest your money will depend on your own personal knowledge of the financial world, your tolerance of financial risk, your investing time frame, and your monetary requirements. The stock market, in which buyers and sellers come together to purchase shares of company ownership whose value fluctuates as companies flourish or struggle, generally offers the greatest potential for multiplying your savings, but it also offers greater risk than other forms of investment. Purchasing bonds is usually a safer but less lucrative form of investing. A bond is a share of government or company debt; in exchange for lending money to a government entity or a corporation, the bondholder can count on regular payments of interest. As long as the government or company is stable, the bondholder can expect to receive these payments until the bond matures, at which point the initial loan amount will be returned. There are many other forms of investments, ranging from those that cater to people without specialized knowledge to those that cater to experts and institutions.

Saving and investing money will certainly go a long way toward preparing you for the future, but it can also be wise to purchase a variety of insurance policies to protect yourself further. To purchase insurance, an individual or family generally pays a monthly premium, or fee, that varies according to risk factors. Health insurance, which helps pay for medical care, is essential in today’s world, given the often extremely high price of doctors’ fees, tests, and surgical procedures. In general, the more likely a policy-holder is to need medical care (due to age, medical history, and other factors), the higher the premium will be. Homeowners’ insurance is, likewise, generally a necessity for those who want to purchase a home today. This form of insurance pays for damage inflicted upon a home through no fault of the homeowner. If, for example, your home and possessions were demolished by a fire, your homeowners’ insurance would pay to have the house rebuilt and would reimburse you for the value of the home’s contents. Without homeowners’ insurance, not only would you not be reimbursed for your losses, you would also still be required to pay back the money you borrowed from the bank to purchase your house. To ensure that they do not lose money in situations like this, most financial institutions require home buyers to purchase insurance. Again, the individual premium would be related to the risk of mishap that one’s house represents: an old, wooden house with outdated wiring and plumbing would probably cost more to insure than a new, brick house.

Other forms of insurance can be just as crucial to a family’s survival, even though they are less universal. If, for example, you are the main breadwinner for your household, you may want to purchase life or disability insurance. Life insurance guarantees that those who depend on your income will be provided for in the event of your untimely death, and disability insurance guarantees your household an income if you become unable to work because of illness or injury.

In short, it is impossible to live in the modern world without paying attention to money. To avoid inconvenience and hardship, you must be able to make sensible financial decisions. This requires, first of all, being knowledgeable about spending, borrowing, and saving money, and about insuring yourself and your property. With this knowledge in hand, you can set financial goals and craft plans for reaching them.

Recent Trends

Though personal money management represented a new burden for many individuals in the late twentieth and early twenty-first centuries, technological advances had the ability to lighten that burden significantly. Most financial information could, by this time, be accessed using the Internet at any time, so that individuals no longer had to wait for monthly banking or investment statements to confirm the results of their own record-keeping. This made it possible to have a more accurate idea of one’s actual financial standing at any given moment and in turn to plan more effectively. Additionally, the Internet offered an ease of access to various consumer, banking, investment, and insurance opportunities that had never existed before. Whereas consumers in previous eras were restricted, in their financial decision-making, to the options available in their local area, the Internet in many cases eliminated these restrictions, allowing consumers to shop around not only for such goods as books, electronics, furniture, and even automobiles but also to choose among numerous competing insurance policies or mortgage companies. This frequently resulted in monetary savings for those consumers willing to undertake the task of researching their options online.