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Money management is the process of competently utilizing financial assets. There are a number of elements that go into effective money management, such as setting up and sticking with a budget, assessing the necessity of purchases, and retiring debt within a reasonable time frame. This type of financial planning also involves using available resources to create financial reserves for the future by means of investments or the creation of interest bearing accounts that help to generate revenue.
Central to the task of money management is the process of budgeting. A budget is intended to ensure that the individual or business is able to manage financial obligations in a timely manner, using income received within the same period. In order to be effective, a budget must account for every outstanding liability related to the household or business. This includes payments on revolving debt such as credit cards, or on loans such as a car loan or mortgage. Under the best of circumstances, proper budgeting makes it possible to honor all obligations in a timely manner, and still have a surplus that can be used to create reserves for the future.
Savings is one of the money management tools that helps to create financial security. This process involves diverting surplus funds into an interest bearing account, such as a bank savings account, certificates of deposit, or other low risk savings ventures. In order to build savings, it is often necessary to delay the purchase of goods that are desired but not considered necessities.
The effective money manager will also seek to secure and use credit wisely. This involves not securing more credit than can reasonably be managed with the amount of income available. Under the best of circumstances, credit can be used to secure necessary goods and services and pay for them over time, factoring in a monthly installment payment into the budget each month. When credit accounts are kept current within the terms and conditions defined by the credit issuer, there is often the possibility of receiving higher credit limits as well as receiving high ratings from those creditors.
Money management is very concerned with cash flow. This involves understanding when cash will be received so that disbursements can be made from the accumulated cash in a manner that allows all obligations to be paid by the stated due dates. Paying close attention to cash flow also makes it possible to identify ways to manage the budget so that some of the income received can be diverted into savings or investments on a regular basis.
Competent money management makes it possible to enjoy an equitable lifestyle without undue worries about past due bills or threats of action from creditors. The process also makes it possible to prepare for the future by setting aside funds for such important projects as funding college educations, creating reserves for the retirement years, or even accumulating money to use for a vacation. Without proper asset management, financial security is impossible to achieve.
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