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This is all about money management which we need to do on a periodic basis to have financial freedom.

There are many articles which say about this, but in real life I found many people managing it in their own way and getting financial freedom out of it. For ex: Simplest money management system suggested by a friend of mine as below:

50% - Necessities Expense account (Your Day to Day Expenses Account)

20% - Financial Freedom Account (FFA Account only for investments. Never spend only invested)

10% - Education Account (Invest in skill development, Personal Development)

10% - Long Term Saving for Spending Account.

5% - Fun & Joy account (balance out the investing for fun % joy(nurture yourself – fine dining, etc)

5% - Give Account (To a lot of people wealth is how much you have. But if you truly want to create wealth, you might want to change that viewpoint. Try thinking of true wealth as how much you give.

Now my question is what is the way you follow and why do you think it is best? Please share your money management way so that if it is really good and possible then others can also follow it.

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4 Answers

up vote 2 down vote accepted

As others have said, the decision is a very personal one.

Personally, I think you have a good idea. For those of us that thrive in structured systems having a detailed breakdown and distribution of assets is a great idea.

I recommend going one step further however. Instead of having a single "Necessities" account have a division here. 1 account for "Bills" and another for "Living Expenses." Your Bills account should recieve the funds to pay your monthly expenses such as Rent, Utilities, Insurance. Living Expenses is for day to day spending. I recommend this because your Bills are generally a fairly fixed expense. Keeping your flexible spending separate allows you to manage it more carefully and helps prevent overspending.

I keep my Living Expenses in cash and divide it up by the number of days before my next check. Every day I put my portion of the Living Expenses in my wallet. This way I know that I can spend as much money in my wallet and still be fine for the rest of the pay period. I also know that if I want to go out to a nice dinner on Friday, it would be helpful if I have money left over at the end of the day Monday through Thursday.

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In general, the better advice I've heard is to spend only on things that matter to you and scrimp on the rest. It's an easy way to budget without having to stick to a strict set of rules.

Otherwise keep 3-6 months of living expenses in liquid accounts (money market, savings) and invest the rest.

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Your money management technique is a very personal choice. Each person's system will be a little different. For us, we don't believe in debt so we operate on a cash basis for everything with the exception of our house. We keep our expenses to roughly 75% of our after tax income. The rest we save and invest. And we are paying extra on our mortgage to get the house paid off asap. Each person will divide their 75% differently based on your consumption preferences. The same goes for the 25% savings and investing. You need to set some goals and save accordingly.

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Whatever the percentage divisions are, I'm a big fan of keeping things in separate accounts. This works especially well for fixed bills. It is essentially a bank account version of the envelope method. If I take out everything from your paycheck I know is reserved (including reserving savings), for me it is a lot easier to not even miss the money when I'm going towards "fun" expenditures - which come from the checking account.

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