Money management affects each one of us every day. It’s one of the most important subjects you could ever learn.
Interestingly, most schools don’t teach money management skills. Math, history, and chemistry are great, but they won’t teach you to spend responsibly and retire comfortably.
Parents are their children’s first and most influential teachers. Sadly, many children have seen and learned bad money habits by watching their own parents.
Unfortunately, some parents haven’t taken the time to teach their children about money management. Here are four money management lessons you never learned growing up.
Manage Your Money Now
Maybe you’re living from paycheck to paycheck and have no money for savings. Or maybe you’re already in debt and don’t know how to get back on track.
It’s not too late. You can still learn how to manage your money now with these basics.
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Open a Bank Account
When you get a paycheck, you’ll need to bank it, so start with opening a bank account. It’s also much safer to keep your money in the bank than under your mattress.
You’ll have access to bank statements, which help you to easily track your transactions. If you open a savings account, you can earn interest, which is basically free money.
Also, you’ll need to provide valid identification and personal information like your address, date of birth, phone number and email address. You may also need an initial deposit; this varies with different banks.
Although, savings accounts may not require a minimum deposit. Choose a local bank that has low fees and suits your individual needs.
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Create A Budget
A budget is a guideline on how to track your expenses. It helps you live within your means and avoid overspending – if you follow it. Follow these five steps for an effective budget.
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Find Out Your Net Income
Your net income is the money you receive after taxes. Most likely, it’s the amount on your paycheck.
Add on any money you get from other income streams like side gigs (minus business expenses). For an accurate account of your expenses and savings, include your recurring deductions like health, 401(k) and life insurance.
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Come Up with a Budgeting Plan
Your budget must cover your needs, a few wants, and most importantly, future emergencies and savings. The 50/30/20 model is a simple plan you can easily use.
Fifty percent of your net income should be on your needs. For example, housing, groceries, insurance, childcare, minimum nation 21 loans repayments, and transportation. In case you can’t fit all your genuine needs within this amount, tap into the “wants” section of the budget for now.
Thirty percent is for your wants. These include going to the movies, traveling and dining out.
However, these also differ from one person to another. For example, would you say a gym membership is a want or a need?
Your commitment to accumulating savings and paying off debt will determine your wants. However, your budget is meant to help you manage your income better not sentence you to a boring life.
You should allocate some money to have a bit of fun. Twenty percent is for savings, unforeseen expenses, and paying off debts.
Financial experts recommend having an emergency fund worth at least six months of living expenses. You can start with a small amount like $500 for simple, unexpected expenses and grow it as you go.
Make sure you:
- Monitor your progress by documenting your expenses in an excel sheet or budgeting apps.
- Automate your account for direct transfers to ensure your savings get to where they should be.
- Reexamine your budget often because it will change as your income and expenses change
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Manage Credit Card Debt
Credit cards are useful and convenient, but if not used properly, they can land you in insurmountable debt. The most important lesson you could ever learn on credit cards is this: don’t use them to purchase items you can’t afford.
Also, make sure you promptly pay off your balances each month. Credit card providers will give you ‘credit’—an amount of money that you can pay back later.
At the end of the month, you’ll be required to pay your credit card bill. If you don’t pay it in time, the company will attach an extra charge known as interest.
And the interest for each month is carried forward to the next as long as you haven’t paid the debt off completely.
Credit Card Benefits
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- Rewards
Many providers give various rewards, depending on the amount you spend. These include gift cards and air miles. This will tempt you into more expenses and if you’re not careful, it could lead to a disaster. However, if you’re good at managing your spending, it’s an amazing opportunity.
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- Fraud Protection
In case your card is stolen, and the thief buys things with it, you won’t have to pay that money. All you have to do is contact your provider as soon as you realize the theft, and they will cancel the charges.
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- Improve Your Credit Score
A credit score is a three-digit number that indicates your creditworthiness. Generally, a score of 700 and above is recommended.
Your credit score can affect your life in various ways. Banks and other loan providers use your score to determine whether they can trust you to pay them back.
Landlords won’t accommodate you if you have a low score. Potential life partners will be put off by your low score as well.
You can request a free copy of your credit report from each of the three main reporting agencies once a year. The major factors affecting your score include:
Credit duration: The longer your credit history, the better.
Past payment behavior: This is the biggest factor affecting your score. Make sure you pay your balances and bills in time. The longer you take, the worse it will get.
Debt-to-credit ratio: If the limit for your various cards is $8000 and you owe $7000, that’s 87.5% which is not good. Make sure it’s not more than 30%.
Credit types: It’s good to have a credit mix. For example, $5000 credit card, $10,000 car loan and $1000 student loan.
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Invest for Your Future
At some point in life, you’ll stop working and will need a significant amount of money to enjoy your retirement. The best time to start saving for that time is as soon as you start earning an income. The second-best time is now.
If your employer offers a 401(k), take advantage of that as early as possible. Contribute a substantial amount to get the match from your employer.
Where else will you find money with compound interest and a tax advantage? The less money you put away, the less you’ll have in retirement.
As long as you’ve been keeping up with your budget, your small savings will increase exponentially. You can then consider long term investments with low risk.
This will grow over several years, and by the time you retire, it will be an impressive sum of money. Research on the best investment alternatives for your income and goals.
The Wrap Up
No matter what you majored in at college, you need basic money management knowledge. You need to retire without financial burdens. Use these steps to get on your way to better money management. Learn them, use them, and teach them to your children.
Raising kids can be expensive. It’s even more costly for larger families.
Getting your finances in order can feel like an impossible task when your kids need shoes and it’s time to buy school supplies.
If you’re worried about affording everything your children need, then you may appreciate these clever little budgeting tips.
