In a recent column entitled “The 3 Ms of Money,” we discussed the principles of financial achievement – managing, multiplying and maintaining your money. Over the coming weeks, we will examine these three pathways to money success in greater detail.

The key to managing your money is knowing what to do with the money that you are already earning, so that you can comfortably pay your bills and work towards attaining your goals. There are four components to successful money management, which, like the ingredients in a recipe, are all essential to producing the perfect end result.

Budget properly

The first step in your journey to financial independence is to learn how to budget properly. A budget is a document that allows you to capture all the things you spend money on, along with your sources of income. The budget must be used as the basis for making all financial decisions.

In 2004 I discovered a book, The 9 Steps to Financial Freedom by money guru, Suze Orman. In it, she explained that in order to change our finances, we needed to be honest with ourselves about how we spent money. Orman helped me to design a simple spreadsheet that would capture every dollar that I had spent over the past year.

I searched for all my bills and receipts and placed them into different categories such as house, car and personal expenses, and debt payments. Then I recorded my actual earnings for the period. To my shock, I discovered that my monthly income had not been enough to meet all my expenses.

I realised that I had used loans and credit cards to finance my lifestyle, instead of living on what I had earned. The budget tool helped me to stop spending frivolously and to put aside my salary bonuses to pay for luxury items. For the first time, I felt that I knew where my money was going, and that I finally had control over my finances.

Need help with managing your money? CLICK HERE!

That initial budget form has been improved over the years and is now available on the Internet at www.financiallysmartonline.com in the financial tools section. This document is vital as it will help you to effectively carry out the other three money management steps.

Save consistently

You might think that saving money would be a normal process for most people. Not so, as I had never really saved anything prior to 2002. For many people who are young and carefree, money earned is money spent. I used to think, ‘Why deprive myself by putting money in the bank?’

After reading The Richest Man in Babylon by George S Clason, I learnt some important savings principles. This helped me to adjust my attitude, as I realised that when you spend all you earn, you are only making others rich and impoverishing yourself.

Clason’s masterpiece taught me that:

. putting aside ten per cent of every dollar I earned was the key to building wealth;

. the earlier I started to save, the more time would work in my favour;

. compound interest would make even a little amount of money grow exponentially;

. I had to be disciplined by making the savings process automatic.

Use your budget to record your savings as one of your first expense items.

Borrow wisely

After realising that I had been sabotaging myself by borrowing to finance my lifestyle, I searched for principles that could guide me on debt management. I learned that there was a difference between ‘good’ debt, where money was borrowed for productive purposes such as buying a house or starting a business; and ‘bad’ debt that was used for consumer spending.

The key is to use your budget to work out how much you can spend on non-essentials. If you want to buy more things, the financially smart way is to increase your income to pay for them, or cut back on other spending.

If you’re already stuck in the debt quicksand, check out the debt tracker available at www.financiallysmartonline.com. This tool will help you to create a strategy to pay down your debts over time.

Plan for the future

It is very easy to squander money when you haven’t set financial goals. You must create a dream for yourself, whether it is to buy a house, send your children to college, have a comfortable retirement, or just to achieve a savings target.

Although this principle can help you to make wise decisions with money, I realised that there was a vast difference between dreaming about your goals and attaining them. Napoleon Hill’s Think and Grow Rich was very instrumental in teaching me how to actualise my dreams.

The four-step goal attainment process is: visualise and focus on what you want, express your dream as a specific and measurable goal, get expert help to create an action plan, and carry out the plan with enthusiasm and determination until you are successful.

The budget will help you to put aside extra funds to achieve your goals.

Next week we will look at ways of increasing your income to make ends meet, attain your goals and create wealth.