Personal Money Management Definition

money management notebook and calculator

Money Management Definition

Some people wonder why they never have enough money to buy the things that they want. Others may question the best way to manage their funds properly. Effective money management is essential to financial freedom. No amount of money will ever seem to be enough if you don’t have sound money management skills.

What is Money Management?

There are two ways to define money management.

Personal money management is how you handle all aspects of your finances, such as budgeting, spending, saving, and investing. Your financial decisions can be tiny, for instance, making a budget to allocate funds from your paycheck to more significant long-term investments.

Alternatively, professional money management is when an ordinary consumer hires a financial advisor to assist in particular areas of his or her finances. This financial advisor may manage an investors’ portfolio to increase his or her net worth or offer counsel on long-term financial plans that may include estate planning or retirement.

How to Develop Money Management Skills

There is a process and an order that you must follow to develop excellent money management skills.

1. Personal Assessment

The first step to a clear money management plan is to make a personal assessment of where you’re at financially. This evaluation includes identifying your assets, monthly income, monthly debts, and any other financial obligations, such as monthly expenses.

Assets and Liabilities

Your assets include your bank accounts, retirement accounts, investment accounts, and things that you own, such as a house or car. Your debts and liabilities are what you owe, such as credit card balances, student loans, car loans, rent or mortgage, etc.

Mainly, you want to calculate your net worth by subtracting your liabilities from your assets. Ideally, your liabilities should not be more than your assets, resulting in negative net worth. However, with proper money management skills, you can change that.

Spending Habits

To get a sense of where you’re at, you’ll likely need to track your finances as thoroughly as possible for the last three months to truly see where your money is currently going. A few tips to be able to do this is by looking at your debit and credit card bills. You may also consider pulling out any old receipts you have lying around.

The purpose of this assessment is to see how much you spend and in what categories. Knowing where your money is going will help estimate your spending habits. Be sure to use real data of what you regularly buy and a conservative estimate of monthly income, excluding one-time bonuses, when designing your budget. When you pay close attention to what the reality of your family’s spending habits is, you will be in a better position to create a realistic budget, personalized budget later on.

Attempt to organize your spending into categories. Here’s a sample list for a household with a monthly income of $5,000.

Category Spending Amount
Food $700
Housing (including utilities) $2,300
Clothing $200
Personal $100
Transportation (auto loan and gas) $400
Medical $100
Education and Recreation $350
Miscellaneous and Emergency $100
Savings $250
Insurance $500

2. Set Your Goals

The second step to proper money management is to identify your financial goals. In other words, what do you want your money to accomplish?

Your long-term economic goals should be what you want to achieve in the future. Some consumers may wish to pay off debt, save for a down payment on a new home, or start saving for retirement. On the other hand, your short-term goals are how you will get there by following your money management plan.

There is no right or wrong answer when it comes to your financial goals. Although, by prioritizing your ambitions, you can acutely see the effort required to attain them, and which expenses may be hindering your plan.

couple money management

3. Design a Budget

Many consumers automatically assume that they cannot make purchases when on a budget. Although, a budget does not need to be negative. When we define money management, it means saying “no” to spontaneous purchases, but “yes” to purchases that are the most important to you.

Josephine Turner, Ph.D., CFP, and professor of Family and Consumer Economics at the University of Florida prepared a recommended breakdown of a family’s budget percentages. Of course, no family is identical, and no one budget fits everyone. Nonetheless, the goal is to compare how your current spending habits stack up against what some financial experts consider “reasonable limits” based on a family’s take-home pay.

Turner’s recommendation includes a range of percentages in the categories. Be sure to confirm that your percentages add up to 100%.

Category Recommended Percentage
Food 13-15%
Housing (including utilities) 32-42%
Child Care 15-25%
Clothing 3.8-4.2%
Personal 2-5%
Transportation (auto loan and gas) 17-18%
Medical 6-7%
Education and Recreation 0-10%
Gifts and Contributions 0-10%
Miscellaneous and Emergency 2-10%
Savings 0-10%
Insurance 0-10%

By following these budget percentage recommendations, our sample family has a monthly income of $5,000. The following chart shows how much they should be spending compared to how much they are actually spending.


Category Recommended Percentage Recommended Spending Actual Spending Actual Spending Percentage
Food 13-15% $650-$750 $700 14%
Housing (including utilities) 32-42% $1,600-$2,100 $2,300


Child Care 15-25% $750-$1,250 $0 0%
Clothing 3.8-4.2% $190-$210 $200 4%
Personal 2-5% $100-$250 $100 2%
Transportation (auto loan and gas) 17-18% $850-$900 $400 8%
Medical 6-7% $300-$350 $100 2%
Education and Recreation 0-10% $0-$500 $350 7%
Gifts and Contributions 0-10% $0-$500 $0 0%
Miscellaneous and Emergency 2-10% $100-$500 $100 2%
Savings 0-10% $0-$500 $250 5%
Insurance 0-10% $0-$500 $500 10%
Total     $5,000 100%


Our hypothetical household is doing quite well compared to the recommended budgeting percentages. The only category that is over budget is housing. They exceed the recommended limit by 4% or an equivalent of $200 but make up for it in other categories.

4. Achieving Your Financial Goals

Our family is not spending any money on child care. Only 5% of their income goes into savings, and 2% is allocated for miscellaneous expenses and an emergency fund.

If this family is trying to save for a down payment, pay down debt, plan to have a baby, or trying to plan for retirement, this budget is not going to help them achieve their financial goals. Additionally, it is advisable to have an emergency fund that is equivalent to at least three months’ worth of your salary. Ideally, your emergency fund can sustain your expenses for six months to a year.

Emergency Fund

An emergency fund is critical to cover any of life’s unexpected bills that may arise from job loss, an accident, death in the family, unexpected home or auto repairs, or significant medical payments. This money will help avoid a financial crisis by maxing out credit cards or taking out a loan and accumulating debt.

For our hypothetical family, they would need a minimum of three months of $5,000 or $15,000 in an emergency fund. Unfortunately, setting aside 2% a month, or $100, would take you 150 months, or over 12 years to reach the recommended amount. This family should consider cutting back on other categories in their budgets, such as recreation and clothing, to fund this goal.

Saving for a Large Purchase or Paying Down Debt

Very few people can quickly increase their monthly income to help save for large purchases or pay down debt in a lump sum. You will always need to work within your budget and move money around by decreasing your expenses in one category to finance your purchases or pay off any liabilities like credit card debt.

Planning Retirement

If you have reached the point where you have a good handle on your finances that you are planning your retirement, it may be time to review your retirement plan options. You should consider enlisting the help of a professional money manager or financial advisor to help you with financial decision-making and to explore investing strategies.

Saving for retirement obviously requires money. There are numerous options for help fund your lifestyle after you stop working. For example, IRA, Roth IRA, 401(k) as well as Roth 401(k) are excellent retirement plans.

Alternatively, you may consider swing trading on the side, in addition to your full-time job, to have some investment income during retirement. Depending on your situation, you might be able to be more aggressive investing in stocks if you are many years away from retirement.


A good money management definition requires understanding your financial situation, knowing your options, and planning according to your financial goals. Remember to consider what your financial goals are now, and for the future. Then, develop a budget that will help you achieve both your short-term and long-term financial endeavors. It is wise to keep a few key items at the forefront of your financial considerations.


Try to have an appropriately sized emergency fund that can support you through unexpected circumstances. High debt can be a significant weight that holds you down while attempting to reach your other financial goals. Plan well to eliminate this type of debt first and as fast as possible. Consider your plans for retirement now and begin making arrangements to help you in that endeavor. Making your financial goals your priority can help you not only develop a budget but also help you stick to it as well.


If your situation allows for it, consider alternative ways to increase your net worth like swing trading or long-term investment strategies. These avenues can prove to be a useful source of income that aids you in reaching your financial goals, especially if you do not have a pension or suspect Social Security payments will not be enough. Most importantly, remember that money management is a long-term mindset and lifestyle which requires a commitment to succeed. Plan carefully, and you will be well on your way to reaching your financial goals.


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