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How Do I Choose the Best Money Management Strategy?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 15 November 2016
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Strategies for money management can be applied personally or in the financial services industry where professionals invest and trade money on behalf of clients. In professional investing, certain formulas are riskier than others and the types of returns, or profits, that can be earned are dependent on the size of the bet. A money management strategy might focus on the amount of capital invested or the types of financial securities that are used, for instance. A personal money management strategy might focus on eliminating debt using techniques designed to produce financial freedom.

A professional trader could specialize in a particular money management strategy, such as volatility trading. This is a technique that seeks to benefit from wild price fluctuations in the financial markets. There are a host of different ways to apply volatility trading, and this method involves the use of derivatives, which are financial instruments such as options. An options contract allows a trader to buy or sell securities based on an anticipated change in the price of that investment. Depending on a trader's expectation, he or she can trade volatility using a neutral or biased approach, the latter of which could involve positioning for either upward or downward price movement in the markets.

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Financial traders complete numerous transactions in the markets each day. The more money that a trader bets, the riskier the transaction is considered. One money management strategy for traders is to consider the total capital that is available for trading in a given period, and to avoid placing any bets for more than two percent of the final amount. In doing so, a trader protects himself or herself from crippling future trading activity that could arise from experiencing severe market losses.

Personal budgeting might involve a money management strategy tied to debt reduction. There are many different ways to approach debt reduction, and the best method may depend largely on a person's level of debt as well as any streams of income. A strategy might include beginning to repay credit card debt.

The approach may focus on the balances for each individual card and begin paying more than the minimum due to eliminate the lowest balance first. Once the balance with this individual creditor is nothing, the debtor can then keep applying the same monthly payments to the next lowest balance. Eventually, all of the credit cards should be repaid. Another money management strategy could focus on paying down the credit cards with the highest interest rates first, by paying slightly more than the minimum amount due on those debts each period.

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