Managing Your Money

Money management includes all the activities you’ve learned about so far—earning, saving, purchasing, borrowing, and investing. Successful money management creates a smooth and consistent cash flow rather than a cycle of feast or famine. The tool that brings all of these factors together is a budget.

Budgeting

A budget is a plan for balancing income and expenses. It is also a tool for assessing how well you are doing so that you can make adjustments. Some income and expenses are fixed—the amount you are always paid and the amount you always pay out. Other income and expenses vary. In the example budget below, the budget amounts were filled in before the month of June as a prediction, and the actual amounts were filled in afterward.

Example Budget

 

Managing Risk

As you have learned about investing, part of managing money is managing risk. Low-risk investments tend to have low-yield returns, while high-risk investments can have high-yield returns—or losses. Unexpected life events present another kind of risk.

The first defense against emergencies is to set up a savings account (see page 296). By putting aside a certain amount of money each paycheck, you’ll eventually have the recommended three to six months of income stored up to support you.

However, some emergencies may require a great deal of money or may limit your earning ability. To prepare for such events, you need to have insurance.

Understanding Insurance

Insurance comes in various forms to help you manage risk in different areas of your life. Each insurance policy document outlines the terms of that particular policy, the premiums you must pay, and the benefits the insurance company will pay you under specific circumstances. Contact a professional insurance agent before you make any insurance decisions. Here are the basic types of insurance:

• Auto insurance protects you from liability in case of an auto accident that is your fault. Some policies also pay to repair or replace your vehicle and may also pay medical expenses.
• Disability insurance protects you in case you suffer an injury or illness that impacts your ability to work.
• Health insurance pays for specific medical expenses, from doctor visits and hospitalizations to medications and medical equipment such as wheelchairs.
• Homeowner’s insurance pays you to repair or replace your home in case of fire or other property damage from specific causes. Often, flood insurance must be purchased separately.
• Liability insurance protects you in case another person sues you for injuries or loss caused by your negligence or improper actions.
• Life insurance protects beneficiaries (people that you name) from loss of your income by paying them money after your death.
• Long-term care insurance pays for custodial care in your home or in a nursing facility.
• Renter’s insurance protects you from the loss of your property within a rental unit due to damages from fire, theft, or other named causes.

You, your employer, or both pay the premium that purchases an insurance policy. In addition, you may be required to make co-payments for services as well as pay a percentage of costs not fully covered by your policy.