How to create a money management plan: 10 tips for smart finances

Key takeaways:

• Creating a money management plan involves assessing your spending, setting financial goals, addressing debt and risk, and considering future planning.
• Money management plans are unique to each individual, since they consider income, assets, and discipline.
• Money management plans can be used for family households, irregular income, illness, and retirement planning.

Keeping track of your finances can be intimidating, especially when accounting for financial circumstances like investments or debt.

Building a money management plan, also called a financial plan, can help you understand your spending and work toward specific financial goals.

Our comprehensive PayPal guide breaks down how to create a money management plan (and when to make one), the top tips and tricks, and best practices for its use.

Table of contents

• 1. Take inventory of your finances
• 2. Set financial goals
• 3. Choose a tracking method
• 4. Pick a budgeting method
• 5. Make a personal budget
• 6. Address your debt
• 7. Prioritize risk planning
• 8. Plan for retirement
• 9. Adjust your spending to stay on budget
• 10. Review and update money management plans regularly
• Best practices for money management plans
• When to make a financial plan
• Start building a money management plan with PayPal
• Frequently asked questions

1. Take inventory of your finances

Understand your current spending by assessing your current financial situation, including your net income and current budget. Track your expenses for an extended period and collect your financial information, including:

• Income sources, such as primary and irregular income streams.
• Recurring expenses like rent and utilities.
• Non-essential spending, including entertainment and dining out.

Knowing where your money goes each month is important for making short- and long-term financial decisions.

2. Set financial goals

After you assess your current spending, it’s time to set future financial goals. These can be long- or short-term financial goals, but they should always be SMART, meaning they’re:

• Specific and clearly define what you want to achieve.
• Measurable and easy to track.
• Achievable and realistic with your time and resources.
• Relevant to your overall financial plans.
• Time-bound with a clear deadline.

For example, a SMART financial goal could be: "Save $5,000 for a vacation in the next six months by setting aside $833 each month."

3. Choose a tracking method

Next, choose the right financial tracking method for you, whether it’s automated or manual. To simplify the decision, consider your goals, the complexity of your financial situation, and how frequently you want to monitor your spending.

Below, we outline the potential pros and cons of three of the most common financial tracking methods.

4. Pick a budgeting method

Your budgeting method needs to address savings and expenses, as well as fit your goals and lifestyle. Consider these common methods for managing finances:

• Zero-based budget: Allocates every dollar to a specific purpose and zeroes out the budget.
• Cash stuffing: Allocates physical cash to specific spending categories.
• 50/30/20 budget: Allocates 50% of income to necessities, 30% to wants, and 20% to savings and debt.
• 60/30/10 budget: Allocates 60% of income to needs, 30% to savings, and 10% to wants.

5. Build out your personal budget

Building a personal budget combines your spending assessment, financial goals, and tracking and budgeting methods into a cohesive plan. A successful personal budget will also consider factors beyond income and expenses, like:

• Unexpected payments and irregular spending patterns
• Personalized budget categories
• Financial flexibility and changing financial statuses

Sticking to a personal budget can help you consistently allocate money toward financial goals while accommodating your lifestyle.

6. Address your debt

A comprehensive money management plan accounts for debt, no matter how it accumulates. Make sure you include goals dedicated to repaying debt, especially high-interest debt like credit card balances.

To save money and address debt:

• Look for lower interest rates through balance transfers and other methods.
• Avoid new debt by pausing or limiting credit card use.
• Set up automated payments to keep payments consistent.

7. Prioritize risk planning

You can go beyond saving and spending by building a financial safety net into your money management plan. Preparing for the unexpected can help you protect long-term goals and progress.

Incorporate these elements of risk planning:

1. Emergency fund: Prepare for job loss, medical bills, and other sudden costs by setting aside approximately three to six months of essential expenses.
2. Investing: Invest in stocks, bonds, or mutual funds so you can attempt to grow your funds over time (and beyond what a savings account would typically earn).
3. Insurance planning: Review health, life, disability, home, and auto coverage to ensure you and your assets are protected.
4. Estate planning: Create or update a will and consider a power of attorney for the management of your wealth and assets.

8. Plan for retirement

Long-term money management plans should include retirement planning, allowing your money time to grow through compound interest. Common retirement plans include:

• Employer-sponsored plans: Typically 401(k) or 403(b) plans where employers match employee contributions
• Individual retirement accounts (IRAs): Plans that individuals can open and contribute to

Traditional accounts allow you to contribute funds before your income is taxed, while Roth IRAs contain after-tax money. You can contribute to a single plan or a mix of different types.

9. Adjust your spending to stay on budget

While building a money management plan, it’s helpful to consider repayment strategies, retirement contributions, and risk planning methods that fit into your budget. However, if your income changes (from job loss, seasonal work, or other fluctuations), you can adjust your monthly spend to match your income.

Practical ways to stay on budget include:

• Adjust savings contributions temporarily and then resume your savings plan when your income stabilizes.
• Regularly track your expenses weekly or monthly to spot patterns of excessive or nonessential spending.
• Look for ways to make money at home through side jobs, freelancing, or other professions.

10. Review and update money management plans regularly

Successful money management plans are often flexible. Be open to reviewing and adjusting your budget to align with your changing goals and life circumstances. Consider reviewing your money management plan regularly, like biweekly, monthly, or annually.

Tip: While you may need to adjust your spending to fit your budget at times, don’t force yourself to stick to a money management plan that isn’t right for your lifestyle. Use your best judgment to decide when your plan may need an overhaul.

Best practices for money management plans

When creating a financial plan to help you manage your money, consider these best practices:

• Compare budgeting tools: Choose the best tool for you based on features, pricing, and user experiences. Consider managing your money with PayPal to have access to online payments, direct transfer, and more.
• Understand complex finance concepts: Do your own research to understand concepts, like compound interest, that will affect (present and future) financial planning.
• Include financial automations: Improve financial discipline with automations like transfers to savings accounts or payments for recurring bills.
• Manage subscriptions: Cancel unwanted or unnecessary subscriptions to reduce the risk of unaccounted-for payments.
• Lean into rewards programs: Consider cards and accounts with cash back or points to get more value from your rewards.
• Factor in fun: Don’t forget the fun and games in your budget. Make sure you set aside some funds for entertainment.
• Stay disciplined: It’s easy to overspend or ignore money management plans, but staying disciplined is important to meeting your financial goals.

When to make a financial plan

Money management plans can be especially helpful for reaching financial independence in certain situations or life changes. These are a few common scenarios where financial planning is ideal:

• Family planning: Whether conceiving, adopting, or merging households, a family financial plan can help you plan for new or changing expenses.
• Irregular income or freelance work: If you have an irregular or fluctuating income, consider planning expenses around your known payments and other contributing factors.
• Income changes: Job loss or gain, seasonality, and other situations can cause unexpected income changes, which may prompt the need for new or updated money management plans.
• Illness: One-time and ongoing medical expenses may impact your budget and fund allocation.
• Retirement: Your income may change after retirement, which may prompt you to update your money management plan to accommodate it.