Why don’t we teach our kids how to manage their money when they are in high school?
Seriously, it is ridiculous to get a high school diploma without knowing how to manage your money.
Whether you are a veteran adult looking for a few new ideas or just getting started, this guide to managing your finances can help you get rolling with your money.
Make a Budget
Now you may hear alarm bells with a flashing giant word NO when you think of a budget, but a budget is just a tool that tells your money where to go.
In fact, the budget is the first strategy that anyone should use to get their finances in order. Once you understand how to make a budget it gives you all the information you need to win with your finances.
Even if you are living paycheck to paycheck, budgeting is necessary part of getting your finances in order.
Understand Your Spending
The biggest advantage to having your budget in hand is that it will detail where you are making mistakes with your spending.
When Amy and I did our first month of budgeting, we realized we were spending way too much money on food. We were able to immediately able to identify our overspending and take steps to reduce our spending in the right areas.
We then took action. For us that meant switching to cash envelopes for groceries, dining out, entertainment, and personal care in our budget. So much of the reason why people feel poor or feel stressed with their finances is not knowing what is going on with their money.
Understand Your Income
Most people know how much they make each year or per hour, but does that translate into getting to the goals you want?
Before anyone learns how to manage your finances, they are usually in the dark as to how far their income is really taking them. Maybe you need to get a side hustle or a part time job.
Maybe your current job isn’t as lucrative as you thought and you need to find another way to make more money.
OR maybe your income is pretty good and your spending was the main problem with your finances.
It seems like credit is getting more and more important in our lives. Your credit score can make it easier to get good rates on a home loan or even better premiums on your insurance.
Your credit score is a single number that measures how trustworthy you are to handle new debt. That is really the basics of understanding what your credit is. At the root of it, you will see the best thing you can do is get all your debt paid off.
Fix Your Debt
There are good debts and bad debts. Good debts are ones that result in long term assets, think business debts and home loans (within reason).
Bad debts are debts that cost you interest and don’t result in any meaningful assets. These would be credit cards, car loans, student loans, and most personal loans. These are the ones you want out of your life because they restrict you from growing wealth.
Put in a plan of action the allows you to get out of debt so you can start the process of wealth building. I always encourage people to go through the process of seeing how to get out of debt without debt consolidation.
This is because consolidation loans can take the pressure off of a bad situation and make it easy to continue the in debt lifestyle. Once you prove to yourself you are getting out of debt, then consolidation can be an option to turbo charge your debt payoff.
Build an Emergency Fund
An emergency fund allows you to not turn to debt when an emergency happens. This allows you to not have to play a game of paying off debt, getting out of debt, back to paying off debt and round and round.
A beginner emergency fund is usually $1,000 while you are paying of debt and then once all your consumer debt is paid off, three to six months of expenses.
We recommend using a high interest savings account for your emergency fund, because it will get much higher rates and hedge against inflation.
Save for the Future
In teaching my kids about money, if I could get across that saving money for the future HAS to be a major part of a financial plan, I would consider that the biggest win. There are two main areas that you need to save for the future.
Known Upcoming Expenses
Upcoming expenses can be big or small. Small ones would be kids clothes or minor taxes. Larger upcoming expenses could be purchasing a new car or saving for college for the kids.
We know these expenses are coming, so saving for them is a must.
Retirement is a major concern for everyone. So many of us try not to think about it and put off saving for retirement.
The truth is the earlier you start investing for retirement the better off you will be. When you do the math, people who start younger end up reaching their goals more easily.
A person who starts at 16 and puts $100 a month into retirement savings, is pretty much guaranteed to have at least $1 million by the time they retire in their 60’s.
The old saying goes, “There are only two things that are certain, death and taxes.” While taxes are inevitable we can minimize our tax burden by understanding income taxes.
Once you start making more money, minimizing your exposure to taxes can be done by maximizing your deductions.
This may mean using tax advantaged retirement accounts or making sure to take care of family deductions when filing your taxes, whether you file your own taxes or decide to use a top tax software package or a tax professional.
This of course leads to planning for taxes and final expenses with your estate.
Plan Your Estate
Estate planning is a gift you are giving your loved ones. A proper estate plan insures that when you pass all the financial side of your life is a blessing to them instead of a burden.
For my family this includes me having a sizable life insurance policy, so that my wife and young children are fully taken care of if I were to die early.
We also have a will that determines how our assets are split between the kids and who would be responsible for taking care of them if both Amy and I were to pass away.
Right now we do not have enough assets that we would have to consider getting a more comprehensive estate plan through a lawyer. However, if you have assets in excess of $500,000, you may want to meet with an estate planning attorney to make sure your families inheritance is not eaten up by taxes.
Monitor Your Financial Life
Keeping track of your finances can becoming increasingly difficult as you acquire more wealth. The easiest thing you can do is try to consolidate information through various personal finance apps.
I know other people who do monthly updates of spreadsheets from all their financial accounts and others who use services like Personal Capital or Mint to sync their data and be able to see it on a single dashboard.
No matter how you do it, you will want to make sure you are consistently monitoring your financial accounts.
Continue to Learn
In a world where technology is constantly changing it is vital that we all take steps to educate ourselves on a regular basis.
This could be as simple as reading personal finance blog (ahem!) or keeping up through different forums and magazines. no matter how you get your financial information, you will want to be consistent and always check the advice.
Make sure you seek out others who are farther down the path of finacial freedom so you can learn from them. Also look for information in sources like Bible verses about money or lectures from people in the 1950s.
These less frequented sources have timeless wisdom that we can glean great insight into our modern lives.
How to Manage Your Money Bottom Line
Whether you are starting out on your, about to get married, or getting a job for the first time, learning how to manage money will make almost every other aspect of your life easier.
Following the steps above will put you in the right frame of mind to tackle your finances and make all your money work for you, instead of you working for the money.