Money management requires an understanding of the basic tenets of personal finance. These include learning the difference between good debt and bad debt, how to set up a budget, different types of investments, and banking basics. In addition to that, financial literacy requires personal responsibility. You don’t spend more than you have, you pay down your debt on-time every month, and you make big purchases on worthwhile things. Also, financially-literate people have healthy relationships with money.
Setting up a Budget
In order to successfully manage your money, you will need to develop the ability to budget. You will want to see where your money is going, find ways to save when you can, and develop sustainable spending habits. To get started, first, track your monthly expenses. There are a number of mobile apps available for this exact purpose, but you can also track your expenses manually if you are more comfortable with this.
After you see where your money is going, you will need to decide which expenses are fixed and variable. Examples of fixed expenses include your rent/mortgage, utilities, student loans, and credit cards. You have to pay these things every month or you could run into trouble. Variable expenses, on the other hand, can be amended or taken out altogether in your monthly budget if necessary. Also, you will need to calculate how much you want to save each month to reach your financial goals.
Once you add your fixed expenses and savings, you will know how much money is left for any variable expenses.
Credit is often where individuals run into trouble. If you have had debt at any point in your life, you know how stressful it can be. Many financial experts recommend individuals just starting out or attempting to rebuild their credit on only one credit card. The goal is to showcase proper credit usage and pay the bill in full each month, so you aren’t charged interest.
Once you have built a stronger credit history and have achieved a high credit score, you will find that you will have better options regarding credit cards and loans. The thing to keep in mind is that you shouldn’t think of credit as cash. Only use it when you absolutely need to, and always pay it back as soon as possible.
Banking and Saving
Financial literacy involves some use of banking to keep and save your money. Look for a bank that offers a high number of perks and as few fees as possible. If you aren’t adverse to online banks and don’t mind that your bank doesn’t have a physical location, they often have higher rates and more favorable products. Just make sure the financial institution is FDIC-insured.
The first thing you should do after you open up a checking account is set up direct deposit, so you don’t have to worry about cashing your check or paying interest to a cash advance company. Many people will set up a savings account along with their checking account, so they can automatically transfer money between the accounts if necessary. Just remember that your savings should only be used for unexpected financial expenses and emergencies
Making the Most of Your Assets
Everyone has assets that can either help or hurt them financially. Financial literate individuals understand the difference and will take steps to ensure their assets are making them money. Your assets include any possessions you have, real estate belongings, stocks, annuities, etc. The goal is to have assets that will appreciate and solve financial problems – not create new ones.
Let’s say you own an annuity or structured settlement that provides you with a steady stream of income now or one that will provide you with payments in the future. While these payments may be good for some people, others might benefit from selling their annuity or structured settlement for a lump sum of cash. If you have high interest debt, for example, and want to get your finances under control, liquidating your asset may be the smarter financial decision.