Recently, there have been a number of posts about how it’s possible to earn a six-figure income and still feel poor. And, of course, we also hear stories about millionaire celebrities and athletes going broke, blowing all their cash in a matter of years. Recently, with the Mega Millions jackpot in the news, there have also been poignant stories of lottery winners who lost all their winnings.
It’s easy to think that having more money will solve your problems. In some cases, having more money can certainly ease the situation. You can pay bills more easily, afford a bigger house payment, or not have to worry that enjoying a nice dinner tonight will result in an overdraft tomorrow. Long-term, though, having more money doesn’t really help you unless you know how to manage it.
Following the Principles of Money Management 101
To many, it seems as though just having more money means that the regular rules of money management don’t apply anymore. Why do you need to worry about spending according to your priorities if you have so much cash? There’s no reason to have an emergency fund when you have vast riches. Saving for the future seems silly when you have so much money that you can do whatever you want today.
One thing that many people forget is that it’s easy to go through capital when you aren’t making an accounting of it. On top of that, many people fall into the trap of thinking that things will always be the same going forward. You’ll always have the great job. The windfall is so vast that you’ll never go through it. Everyone is in great health, and they’ll not get sick.
Unfortunately, things don’t stay the same. Accidents happen. Natural disasters change the way the world looks to you. Jobs are lost. And, without limits and proper direction, you can easily overspend your income. One of the basic recognitions that you need to make is that things don’t always stay the same. Money management 101 requires you to understand that something could change and you need to be prepared for it. No matter how much money you have, it’s basically useless in the long run if you don’t follow sound money management principles.
These basic money management principles are so old and tired that you probably know them by heart. However, that doesn’t make them any less true. You still need to save for the future via a tax-advantaged retirement account, and you should still set money aside in an emergency fund. You should track your spending, and make sure that you are living within your means, and that your spending is meaningful and kept to a sustainable level.
When you find yourself with more money, whether it’s more money from a promotion, or whether it’s the result of a windfall, it’s a good idea to step back. Become educated about how money works, and how to manage it more effectively. Then, create a plan for your extra cash. While you want to enjoy it, don’t forget that you won’t enjoy it for long without following basic money management principles.
Tom Drake writes for Financial Highway and MapleMoney. Whenever he’s not working on his online endeavors, he’s either doing his “real job” as a financial analyst or spending time with his two boys.