Managing money is as important as earning money. Or maybe it’s even more important, for you might get lucky (win a lottery, get your share in the ancestral property), but if you are terrible at managing money, very soon you and your money will be separated. The bottom line is however rich you are, no matter how stable are your income sources, you can easily screw up your finances by lacking money management skills. Such skills are essential.

Below is a detailed discussion involving a step-by-step explanation of why money management skills are important. So keep reading.

Avoiding student debt trap

Money management skills can help you dodge a bullet; the bullet is student loan. Before explaining it any further, I must clarify one thing. These skills are not just about what you do with your paycheck every month. They extend beyond matters linked to money and finances and touch upon other aspects of life. How you view education, what are your plans to succeed in life, etc are all parts of money management.

Students often think taking a loan is necessary when in reality it is not. Besides, student loans don’t come with the advantages that you can expect from personal loan. Money management skills sharpen your decision-making abilities, letting you decide whether the college major is worth pursuing or not. You learn to think in terms of ROI (return on investment). Taking a loan for studying gender studies or comparative religion in college may not be worth as people majoring in these academic areas face grim job prospects after they graduate.

But a chance to study petrochemical engineering in a prestigious school justifies borrowing a huge sum of money as petrochemical engineering is among the highest paying majors. Graduating in it means getting recruited almost immediately and getting $100K a year. Money management skills, therefore, ready one to decide what kind of student debt is essential and what kind is not.

Maintaining a monthly budget

Almost all families have a budget. However, very few of these families know how to properly maintain a budget. Money management skills are important because without these skills maintaining a budget that includes everything – from grocery bill to auto insurance premium – is incredibly hard.

People remain too occupied with either saving or spending that they fail to see opportunities right in front of their eyes. Ask yourself; do you actively look for cool deals from retailers every month? There are always some offers going on, some airlines are offering budget trips, some hotels are lowering fees on vacation packages. If you know how to connect the dots, you can enjoy a relatively cheap vacation tour with your family. Grocery stores give new discount offers every month to attract customers, restaurants offer cool deals for children or couples. Money management skills help you become active and take advantage of these kinds of offers. This is how managing budget gets easy for you.

Doing experiment with money

Most people have a conservative attitude towards money. In fact, you’d be surprised to know how different demographic groups in the United States spend money. They think (at least on a subconscious level) that it is their hard earned money and saving it is the only logical thing to do. While I am not against saving, I am against being conservative. When one harnesses money management skills, they realize there are multiple experimental things they can do with their money besides saving.

Mortgage refinancing is one such thing. It has gotten a bad rap since the 2008 fiasco causing several financial institutions to go bankrupt. Yes there are certain risks associated with mortgage refinancing but being good at managing money can help someone leverage it to multiply their earning.

Debt consolidation is another experimental thing. Is consolidating debts a good idea or a bad idea? There’s no definitive answer to this question. Like every other thing, consolidation of debts has some pros and some cons. The interesting thing is that the outcome of debt consolidation depends a lot on the borrower. If they excel at money management and are systematic, debt consolidation can lower interest rates and declutter their financial lives.

Making better investment decisions

Better money management skills can translate to better investment decisions. People who are efficient managers of money are not risk averse. They take calculated risks. Investment is all about carefully measuring risks and realistically expecting rewarding outcomes.

If you are good at managing money, you’d be good at investment as well. All you need besides money management skills is knowledge in the domain of investment. Say for example, you are investing in real estate. Sound knowledge in the state’s laws, how to hire contractors, how to determine the quality of materials like cement, concrete, glass and would be needed. If you are investing in stock market, knowledge in equity, bond and future options would be required.

Summing up

Money management skills are really important because these skills change you. Acquiring these skills means transforming into a better person, someone who handles money responsibly, assesses the situation objectively and take the right decision.