Knowing how to manage, spend, and invest money properly is an important skill in life. Unfortunately, it is not part of our education. We learn basic math but not money management.
Learning how to be financially literate takes time, but the basics are simple and consistent. How to get started? You should know how to create a budget, understand how investments work, and the credit card process. Here are the basics of finance for those who have never learned about it.
Basic rules of personal finance
When you think about managing finances, it feels like a bunch of numbers and paperwork. You make a certain amount of money and then spend less than this amount. But it’s not just numbers, mindset also matters. Your habits, values, and psychology will affect your money management skills.
As a rule of thumb, you should:
● Control your expenses or spend less than you earn, this way you have an emergency fund.
● Plan for the next month, not just the current one. Eventually, you need to plan for your retirement as well.
● Let your money grow on its own by investing it.
These are important rules that go way back, but how you do it depends on the circumstances. Our grandparents did it differently, and so do we. Today, we have the tools to make money management easier for us.
Find a bank account that is suitable for you
As much as you want to keep your money in your vault or under the mattress, it’s not advisable or safe. You will need a bank account to place your short-term savings and spending money. Banks or credit unions have ATMs and debit cards so you can easily withdraw your money.
It is also easy to set up a bank account — you can do it online or visit a branch near you. What’s going to be hard is choosing a bank. You’ll have to research on which bank offers the services you want with fewer fees. The bank should have debit cards, ATMs, paper checks, and a website where you can check your account balance.
After deciding on which bank you want, you can go to their website or visit a local branch to open an account. Prepare your identification cards and forms that contain your name, date of birth, social security number, and photo ID. If you’re not decided, you can always change banks if you don’t like your current one.
Learn how to set up your budget
Budgeting is important to help you know where your money goes. This is one of the best ways to ensure that you’re spending less than what you earn. Start categorizing your bills and tracking your expenses at an early age.
You can start computing for your budget using a pen, paper, and calculator. Eventually, you’ll need more advanced tools.
For now, here is how to calculate a simple budget:
1.Find out how much money you make a month.
2.Compute for your total expenses per month. This includes your utilities, car payments, rent or mortgage, and more. For variable expenses, try to get an idea of your monthly spending on these.
3.Your expenses should always be lower than your earnings. If it’s not, go over the expenses list and try to cut down.
4.Next, place a percentage on fixed costs, variable expenses, savings, and guilt-free spending. Make sure that the total amount is less and not exactly the total amount that you earn.
Budgeting is basically knowing what happens to your money and planning on how to use it.
Use your credit card cautiously
Credit cards are used to pay for products or services that you currently don’t have the cash to pay for. But make sure that you are still spending the amount that you can pay on the due date so you never get into deep debt.
Not only don’t you have the money to pay for the amount you spend, but you also have to pay extra for the interest. If you can’t pay it as soon as possible, your debt will increase. So don’t get a credit card if you feel like you can’t use it responsibly. Otherwise, having one does have benefits such as rewards and protection from fraud.
Know how credit score works
Aside from the benefits mentioned above, credit cards can also help your credit score. This is a report that shows your borrowing and repayment habits. If you have a great credit score, you can get a better cell carrier plan, car loan, or house loan and you may not need to put down a deposit on utilities. This also affects renting an apartment or complex, so make sure to take care of your credit score.
You also have several credit scores, usually from three major nationwide credit agencies. Monitor them, and you should know that the factors affecting your scores such as payment history, debt-to-credit ratio, types of credit, credit checks, and length of credit history.
Save for your future
After spending less than you earn, creating your budget, and building your credit, it’s time to plan ahead. Once these become a habit to you, the next step is saving for your future.
If you’re employed, you can ask your company if they can do direct deposits to your savings accounts. This way, you can allot a certain amount and save it. Even if it’s not a big amount, it will become one at the end of the year.
This way, you have an emergency fund, savings for an item you want, and for long-term, your retirement. You’ll need more than savings account for the last one. Look into low-risk investments so your money can grow on its own. You can also ask your employer if they offer 401k. Investments are a complicated area of finance, so you’ll need to study more on it.
Based on Materials from Life Hacker
Photo Sources: Flickr, Freepik, Wikimedia, Joint Base San Antonio