All of us would like to claim that we’re a success at managing our money. There’s no better feeling than being financially secure. But let me ask you one question – do you even know what that looks like?
Some might say it’s having a certain amount stashed away in their savings account. Or maybe they’re good at keeping their investments tax-efficient? Maybe they’ve been consistent with creating a monthly budget. Or they’re good at shopping for the best deals on groceries.
While these certainly are great victories worth celebrating, they don’t necessarily mean that someone is actually doing a good job overall. Money management should be viewed holistically.
And there are several factors that can be considered the litmus test for managing your money successfully. Below are a few that I believe to be the most informative.
1 | You’re Paying Off Your Entire Credit Card Balance Each Month
To be successful at managing your money, you need to ensure that you’re living below your means. In simpler terms, this means zero debt. No lines of credit. No borrowing.
Of course, there are exceptions to this rule. A mortgage on a house is often something that can’t be avoided to gain entry into the property market. Also, this kind of debt can have a big payoff in capital gains over the long-term – so I consider this more of an investment.
What I’m talking about here is short-term, high-interest debt.
Too many of us get sucked into the marketing ploys of banks and stores, offering us exceptional deals for opening up credit cards, store accounts or taking on personal loans. We often get so enthralled by the clever marketing, that we forget about the ridiculous interest rates that they charge for doing business with them.
If you have a credit card, simply for convenience or bettering your credit score, but you’re paying it off in full each month – then congrats! This is one of the best measures that you’re living below your means. And it’s a bigindicator that you’re managing your money well.
2 | You Have an Emergency Fund
Murphy has a way of showing up when we least expect it. But, if you’re managing your money properly, these visits won’t be surprising or stressful.
It’s a fact of life – and it’s not a matter of if, but more a matter of when. Financial emergencies will rock up on your doorstep at some point. It could be an unexpected medical diagnosis. Or maybe you’re the breadwinner in the family and you get retrenched from your job. Maybe business hits a slump and your commission earnings are lower than expected.
These aren’t scenarios that we like to think about much. And they can be financially crippling if we aren’t prepared for them. But, if you’re managing your money effectively, you’d already have an emergency stash saved away for rainy days just like these.
3 | Your Net Worth is on a One-Way Track Upwards
Your net worth is a metric that allows you to determine where you stand financially. Quite simply, it’s the net value of everything you own that has financial value, with all liabilities subtracted. A simple formula would be:
Net Worth: (Sum of all valuable assets) – (Sum off all debts and liabilities)
Assets would include all your savings, investments and property that have monetary value. Your liabilities would include all short-term debt (including credit cards, store cards and personal loans) as well as long-term debts (car payments and mortgage).
If you’re consistently saving or investing a portion of your paycheck each month, while simultaneously reducing any short- or long-term debts, this value can only ever increase over time. And this is often a measure of success in managing your money effectively.
If this number remains stagnant or decreases, this should serve as a warning that something isn’t quite right. When these warning bells go off, take some time to reflect on where the problem lies.
4 | You’re Saving Smart, Not Sacrificing
What do I mean by this?
Well, those who know me know that I’m a big proponent of balance in life. Whether it’s work-life balance or money-life balance.
Humans are complex beings. We need a certain and consistent level of physical, emotional, social and spiritual support. But often, when we are made aware of issues in our lives, we go to extreme measures to fix them. This can often throw us off kilter, jeopardizing other important and basic needs.
When you realize that your financial situation is dire, it’s easy to lose balance and sacrifice these other needs in an attempt to correct your course. But those who are successful at managing their money tend to maintain a healthy balance.
What does a healthy balance look like? It’s being a smart and savvy about saving money, while not sacrificing on the things that bring joy and value to your life.
You don’t imprison yourself at home, for fear of spending too much money when you go out with friends. Also, you don’t live off of peanut butter and toast to help pay off your debt.
Instead, you find creative ways to balance your financial solutions with your complex needs. You find cheaper ways to enjoy the company of your friends or the ingredients in your meals.
This is not only healthier, but it will also keep you sane in the long run, helping you to be more successful in reaching your financial goals.
5 | You Have a Short- and Long-Term Plan
I love this quote from Bill Copeland: “The trouble with not having a goal is that you can spend your life running up and down the field and never score”.
Those who are successful at managing their money tend to know where they’ve come from but, more importantly, where they are headed.
Setting both short- and long-term goals helps you to better predict and prepare for the near future, but also gives you the inspiration you need to chase after a life that is bigger than the one you’re living currently.
Having a financial strategy helps give you direction, especially on days when it feels like you’re drowning in debt or being pummeled by the unexpected.
Don’t run around aimlessly. Figure out where you want to be in the next 1, 2, 5, 10 and 20 years. Write them down to remind yourself. Then develop a game plan to get you there.
6 | You’re Aware of Your Spending Habits
A surefire way of successfully managing your money comes with financial awareness. What this means is that you know exactly where your money is going each day, week, month and year.
And the only way to really achieve this awareness is through creating a budget or spending plan.
Using these tools, you’re able to identify loopholes or leaks in your spending that may be derailing your efforts to save money and pay down your debts.
Through becoming aware of these leaks, you can also take the necessary action to plug the holes and put your finances back on track.
7 | Opening Your Bank Statements Doesn’t Cause Sleepless Nights
I’m sure we’ve all shared moments when we dread opening up our bank statements. Whether it’s after a big night out or after an expensive trip abroad, it can be daunting to face the music of potentially poor financial decisions.
This indicates a problem in financial awareness.
If you don’t know how much money you have in your bank account or where your money is going, it’s no surprise that you’d be filled with dread. This feeling often accompanies a sense that your finances are out of your control.
However, when you’re managing your money well, you take a different approach. Without even checking your balance, you always have a somewhat accurate idea of how much money is in your account. You’re also pedantic about tracking where any of that money goes and aligning it to your spending priorities.
When you have this much control over your finances, you’ll find that your bank balance loses its ability to cause sleepless nights. Instead, you rest assured that you’re heading in the direction of financial freedom.
8 | Money is No Longer a Taboo Topic
In my opinion, those who are comfortable talking about a topic are more inclined to feel secure about it.
We are always told that speaking about money is taboo. It’s rude. It’s too personal. Or it’s a topic that carries too much emotion.
But maybe the real reason is that we aren’t happy with the direction that our finances are taking? Maybe we’re worried people will judge us for our spending habits? Or maybe we’re too scared to admit to ourselves how bad the situation really is?
Whatever the reason, if your finances are on shaky ground, you’re less likely to open up and talk about them.
On the other hand, if you’re managing your money successfully, you’ll feel in full control of your finances. This will remove some of that underlying emotion that money seems to elicit. And you’ll find that it’s easier to talk about.
In fact, talking about it can often provide the necessary accountability and encouragement you need to continue making solid progress.
9 | You Use Credit to Actually Save or Make Money and Not Out of Necessity
It’s no surprise that credit card companies market themselves by offering you some pretty sweet deals to get you to apply. Whether it’s travel or cash back rewards, they know your pain points and choose to exploit them for their own profit.
But you’re smarter than that!
You can take full advantage of these offers, while still living below your means. In fact, I’ve been able to save and make money by simply owning and using credit cards in line with my budget.
When I lived in the United States, I didn’t pay for a single national flight for almost 3 years. Want to know how I did it? I signed up for credit cards that offered some insane introductory offers. Shockingly, by the time I left, I had 11 credit cards in hand.
But, more importantly, there was a zero balance on every single one. I never paid a cent in interest. I didn’t use credit cards out of necessity. Instead, I used them to my advantage.
While credit card rewards and loyalty programs will differ from country to country, it’s worth checking out whether it’s worth taking advantage of them. However, as a MAJOR side note, I definitely don’t advocate having multiple credit cards, especially if they will tempt you to spend. Even more so if you’re currently carrying around credit balances.
But if you’re disciplined and pay off your cards in full while still taking advantage of the offers, you’re managing your money like a boss, my friend!
10 | Retirement Doesn’t Scare You
For some, the idea of retiring is scarier than death.
How will I afford to live the next 20 years on a fraction of my current income?
What happens if there is a major emergency that sinks my retirement savings?
Will I be able to afford to live the kind of retirement I’ve always dreamed of?
O'Hagan is one of Personal Finance's New Voices and his finance blog is called the Saving Scientist.