Chances are, if you have a firm grasp on the basics of managing your own finances, you’re doing just fine; relax. But the question is: “How well do I really manage my finances? Do I truly understand the building blocks, or am I just winging it?”
The fact that you’re asking yourself the question is a good sign. You care about your financial health and progress. It’s a good start. But to know how well you manage your finances, you need to check in with yourself and see where you’re at in your current financial state.
So here are 6 of the basic things you should know and be able to apply when understanding how to manage your finances. Can you cross off all 6 of these things off of your checklist?
Know How to Stick to a Budget (And How to Revisit it Regularly)
You might already have a budget. It could be as simple as a limit on what you spend outside of your necessities each month, or it could be a detailed and carefully divided series of categories.
Maybe you use the envelope system, or get bank alerts when you spend over a certain amount on a separate fund for entertainment. But if you don’t already have SOME kind of budget system set in place, you’re in the remedial “Manage Your Finances 101” class. Now’s the time to make a budget, plan ahead, and then stick to that financial map you’ve laid out for yourself! Staying within your budget is good practice for a long future of healthy finances.
So once you’ve established a reasonable budget for yourself, it’s best to adhere to it rigidly until you feel like it’s time to revisit your budget to better fit your life.
But first, you need to figure out where your money is going. Religiously track your spending for a couple months or so, and see how consistently you spend your money on certain things. Start asking yourself questions:
- How much do you spend on your basic living expenses each month?
- How much do you spend on eating out at restaurants?
- What about clothes, groceries, entertainment subscriptions like Netflix?
- Do you have a family that needs to be included in your budget?
- What would you consider “essential” or “nonessential?”
- How much income do you generate each month?
- Can you realistically stick to this limit you set for yourself?
- Are you aiming too high or too low for your budget limits?
Get a handle on how much you spend, and where you spend it. Consider cutting back on anything you could do without so you can save some more money, or put that money to better use somewhere else. Now block out separate budgets for things like Living Expenses for bills, rent, mortgage payments, etc. Entertainment for going to the movies, out with friends, or dining out. Tailor it to your spending habits.
Setting up a budget, sticking to it, and realizing when it’s time to reorganize that budget to suit changing needs is a key step in learning how well you manage your finances, and it’s critical for consistently living within your means and not overspending.
Know How to Properly Use a Credit Card
Just swipe the plastic and then pay it off when you can, right? As you know, credit cards can be a pretty trap. It’s tempting to let those credit card payments go by the wayside, covering costs that you can afford, spending money you don’t have, and using it like an instant loan. But that’s the quickest path to debt, and credit card debt is one of the worst places to be when you’re trying to successfully manage your finances.
Knowing how to properly utilize the all powerful credit card is a basic thing that everyone should learn to master. And credit cards can be beneficial to your overall financial health and well-being. Credit cards, when used right, can improve your credit score; and improving your credit score will open up a whole new realm of financial awesomeness for you.
The simplest tip for using your credit card? Treat it like cash. Have that amount of money that you just spend in your bank account; otherwise don’t use it! Go for a low credit utilization by spending way below your actual limit on the card. Credit cards have interest. Usually high interest. So it’s always a good idea to pay off your credit card statement (and more than just the minimum payment) as quickly as possible; even if you only made a couple small purchases at the store or topping off your car’s tank of gas. Pay it off anyway, before the interest stacks up and makes that trip to the gas station alarmingly expensive!
Steer clear of cards that you can’t afford, or that your credit score can’t get you. It’s better to opt for a simpler card with low interest if you’re just starting out. Later you can work your way up to a fancier card that earns you points or whatever, if you’ve proven to yourself that you’ve got the whole credit card thing on lock. Handling your credit card with care and successfully managing your payments consistently is an important skill to grasp if you want to manage your finances like a pro. Or at least like a real live grownup.
Know Where, When, and How to Invest Safely
Investing can seem like a daunting thing to approach. But if you want to get good at managing those finances, you’ll want to get good at basic investing strategies. Just going about your life, making money, not overspending, and saving practically is perfectly fine. But you could put the money that you make to good use, and hopefully have it do a little work for you. By diversifying what you do with your money, you make yourself more financially wellrounded.
So first step: look around at all the various investment options available to you. There are many. Don’t panic. Just do a little research on the different types of investments, and what’s a solid and safe bet for you to start out on.
The easiest way to invest? Invest in yourself and your career. That means taking advantage of any 401(k) or retirement plans that your company might offer you. You’ll kiss a portion of your paycheck goodbye, but it’s going straight into your retirement savings, so it’s absolutely worth it if it’s an option. Some companies will even match your investments into your plan, meaning you could double the amount of money you put into your savings. So set aside as much money into that option as you can!
If you want to invest in the stock market, pick what you know will work. Particularly if you have little to no prior experience with investments, you do not need to be throwing your money into some risky startup that your friend told you about, or a flashy innovation in the global market.
Invest in something that will stand the test of time, and that will always generate returns… no matter how small. You should try to invest your money for the long haul, and leave it there; untouched. It’s tempting to pull your money from an investment if you feel like it’s not making you any money back, but avoid that temptation. Leave your money on a safe and simple investment for at least a decade. No, really.
Check for company history. A good company will have all its information out in the open, and a history of happy investors and consumers. Look into mutual funds if you want to buy stocks in a company. It minimizes risk, and it’s great introduction to smart investment, and smart investments are a must for being able to manage your own finances.
Know Where Your Financial Priorities Should Be
Getting out of debt should be your first priority, if you have any debt. Nothing can move forward until you’ve cleared your debts. If you’re lucky (i.e. smarter than the rest of us) and don’t have any serious debts hanging over your financial future, then you can move on to the next most important priorities. And that’s where it’s really up to you.
Your personal financial priorities will be different than someone else’s, but those priorities tend to look similar to people of a similar age, financial standing, or level in your career path. So the financial priorities of a single man in his 20s is going to look vastly different than those of a woman with children in her 30s. That’s absolutely ok, because everything else will change to meet those priorities.
At 18, you weren’t too concerned about saving for retirement just yet. But at 50, things are different. The trick is to try to plan for those future financial priorities by incorporating them into your current financial planning. So if you intend to purchase a house within the next 5 years, it’s time to start saving for a down payment now, and make that one of your financial priorities. If you intend to have children in the next few years, you’ll want to make their college funds and futures part of your current financial priorities, as well.
You can’t plan for everything, and your immediate needs must come first. But being able to assess your current situation is the first step to this important part of learning how to manage your finances.
Once you’ve established your most pressing needs, like…
- Making your rent this month
- Paying off debts
- Getting your savings funds started
- Putting money into your higher education
- Paying off your car
…or whatever it is that’s the biggest hurdle in your life at this moment, then you can start to plan how you intend to finance these costs. After that, you can start saving for the future priorities so that you won’t have to fight so hard to pay for them down the line. Today’s financial priorities come first, but if you can get those nailed down, you can start staying one step ahead of tomorrow’s financial priorities.
Know How to Take a Pulse On Your Financial Health
Check your budget, check your insurance, and check to see that your savings funds are flourishing. How’s that income? Is it time to try to step it up? If you want to manage your finances consistently well, you’ll need to be consistently taking a pulse on your finances. Your needs, wants, and resources will never stay static. Neither should your finances.
This is where having a financial advisor of some sort comes in handy. An outsider’s perspective into your financial health is extremely helpful when trying to assess where you’re at. They can help you see where to make improvements, change habits, and plan ahead.
But it’s also important to check in with yourself, just to make sure that everything is progressing forwards instead of stagnating or moving backwards. That means that you’re staying out of debt, making more money than you spend, your investments are generating some kind of return even if it’s minimal, your budget still fits, and your savings accounts are constantly growing even if it’s only bit by tiny bit.
You’re probably doing better than you think you are when it comes to being able to manage your finances well. You don’t need to be a billionaire to have healthy finances. And it’s ok if you slip up every once in awhile, or if you’ve had a tough financial break recently.
Just deal with things as they come and do your best to plan ahead and stay on top of everything. As long as you move forward more often than you slide back, you’re doing great! Take pride in being able to manage your finances… not everyone is as skilled as you.
Know the Importance of Planning for Retirement
If it hasn’t already been stressed enough, it could probably stand to be stressed again: start saving now! You’ll be glad you did. You should be setting aside more than 10% of your total earnings. It can be hard to let go of that money, especially if you’re living paycheck to paycheck. But you’re going to need that money.
You should have more than one savings account. Consider setting aside at least $1,000 in case of emergencies in addition to your retirement fund, your kids’ savings funds for pesky things like education, their health, etc. Once you have money in your savings, keep pouring money into them so that you’re ready for pretty much anything. That’s the whole point of saving money; it means that you don’t have to go into debt if your car suddenly breaks down and you don’t have $3,000 in your checking account to fix it. You’ll have that money in your emergency account.
It’s just like a piggy bank. Sometimes you’ll have to smash the piggy bank, but that’s what it’s there for. Avoid it if at all possible, and never borrow from your 401(k). But if you put in the same percentage of money into each savings account every money, you’ll have that piggy bank’s reserves built back up in no time to be ready for the next emergency and ready to help you manage your finances without stress.