How to Start Managing Your Money for Those Who Have Never Learned to Grow

Posted on May 12, 2015 by resourcefulman

How you manage, spend and invest your money can have a profound impact on your life, but very few schools teach these essential skills. Learning financial intelligence can take a while, but the basics are pretty simple and never change . Here’s where to start.

You were probably taught the basics of math as a child, but too many people live to adulthood without ever learning the basics of money management. Skills such as budgeting, investing in the future, or even working with credit cards are surprisingly rare skills. If you are looking for Money 101, we’ll cover the basics for newbies and also provide you with the resources you need to learn more.

The golden rules of personal finance

Managing your finances is like a bunch of papers and numbers. You make X dollars, you spend Y, and you try to make sure Y is less than X. However, your finances are just as much dependent on the psychology, habits, and values that you choose to live with. In other words, your way of thinking matters as much as mathematics .

Beyond software and budgets, there are a few rules that will always help you improve your financial life:

Spend Less Money Than You Earn: If you make $ 30,000 a year and spend $ 31,000 a year, you will be in a spiral of debt that is hard to get out of. If you spend as much as you earn each year, you will never be prepared for emergencies or major life changes. By spending less than you earn, you have the freedom to procrastinate, prepare for the future, and deal with the inevitable crises that life throws at you. The greater the difference between your income and your expenses , the better.
Always plan for the future: this doesn’t just mean retirement. When a store offers to let you pay off a gadget within 6 months without interest, you need to know that you can pay for it or avoid the deal. Setting up an emergency fund will enable you to deal with unexpected car repairs or medical bills. A retirement plan will provide you with income when you are no longer able to work. Your finances should always be ahead of the current month.
Make Money to Make More Money: Want to know how the rich get richer? This is because money can go up while you sleep if you save it a little. Money invested correctly brings in more money over time . Don’t put all your cash in a low interest savings account. Invest in things that will make you more money than before. Sometimes it’s an investment account, but sometimes it’s starting a business or even getting an education in order to get a better paying job.

The most important personal finance rules don’t change . What your grandparents did may not work for you. There will always be new and better tools for managing your money. However, spending less than you earn will always be beneficial. It is always better to invest money than to do nothing. And planning for the future is always better than spending money on a salary as soon as you receive it.

How to find a bank account

Storing all your money under a mattress is unsafe and unsafe. You will need some kind of account to keep money for spending and short-term savings. A bank ( or credit union ) can hold your money and give you access to it using an ATM or debit card. It’s very easy to open a bank account. You can usually apply online or go to the branch, ask the cashier to open an account and he will guide you through the process. It is more difficult to choose a bank.

Choosing a bank means looking for an institution that offers the services you need with the lowest fees. Common services include debit cards, ATM access (or at least refunds for using other banks’ ATMs ), paper checks, and a website where you can see your account balance. While some banks charge a monthly fee or require a minimum balance, there are many banks that operate without any of these requirements. We’ve discussed more about what to look for in a bank here .

Chances are, most adults in your life have recommendations about which bank they like best. However, if you cannot get a decent offer, the FDIC has a tool that you can use to find insured banks in your area. The site can locate the affiliates closest to you and give you links to company websites, if any. NerdWallet also has a great online tool that compares checking accounts with different banks.

Of course, keep in mind that not every bank has physical branches. Some banks such as Simple , Ally or Capital One 360 operate online only. This often comes with some trade-offs (like no physical branches), but many offer lower fees and better service. They also usually offer higher interest rates – that is, the money you save brings in a little more money just to store it in your account – than traditional banks because they don’t have much of the running costs associated with physical buildings.

Once you have chosen a bank, go to your local branch or visit the company’s website and ask to open a new account. You will need to provide basic forms of identification, including your name, social security number, date of birth, and some form of photo ID, such as a driver’s license, to prove you are who you say you are. You can check the details with the relevant bank.

If you’re still unsure which bank to choose from, don’t worry too much. Most banks usually offer similar services, and if you decide you don’t like one, you can always switch to the other. Here are some more resources to help you figure out what to look for and make the best choice:

How to set a budget

Do you know where your money is going, or does it just disappear from your account? A budget – even a basic, basic one – is one of the best ways to make sure you are spending less than you earn, and it’s important to start early. When you are young and you have a new career, you don’t have much money . Getting in the habit of classifying your bills and keeping track of your expenses will help prevent a lot of financial problems before they even start. If this is your first time budgeting, it might be easier to start with paper, a pen, and a calculator, but we’ll be moving on to more advanced tools you can use soon.

Start by calculating how much money you make per month. If you are paid by the hour, multiply your salary by the typical number of hours you work per month. Then write down all of your recurring expenses. This includes recurring expenses like rent or mortgage, utilities, car payments, etc. For more complex things like food, you may need to track what you spend over time. Collect receipts from the past few weeks, or use your bank’s transaction history if paperwork isn’t your thing. If you can’t get the exact number, in the meantime, estimate. Then keep track of all your expenses for the next month or two. At the end of each month, add everything up to see how much you are spending in each category.

Ideally, the amount you spend in a month should be less than the amount you earn. If that’s not the case, start going through your list and see what expenses you can cut before that happens. Cut mercilessly if necessary. For some, it may be as easy as slicing a latte, but for others, you will have to make important decisions, such as whether you can afford to live in this expensive city .

Once you know how to track your expenses, you can try using a service like Mint to manage them for you. Connect your bank account and it will automatically flag your transactions so you can easily see how much you spend on bills, groceries, restaurants, shopping and other categories. You can also use it to set budgets for things like groceries or entertainment, and get notified when you move. You can learn more about how to use Mint in our beginner’s guide .

So, you are used to tracking your expenses, and now is the time to create this budget. There are several different philosophies here. Some people prefer to have a very detailed transaction history with strict allocation of expenses such as food, clothing, and entertainment. Others, such as financial expert Ramit Sethi , believe that being too strict does not work. Instead, Sethi suggests splitting your money into four categories:

Fixed Costs (50-60%): This should include all costs that you know arrive every month that rarely change. That means rent, gas, electricity, groceries, cell phone bills and everything else that usually remains the same. Some of them may vary slightly from month to month, but are at least somewhat predictable and necessary for ordinary life.
Investment (10%): As you build up your savings (which we’ll talk about later), you will eventually want to invest some of your money so that it grows over time. If you have any investments, such as a 401 (k) company, that are made from your salary, you can recalculate them here.
Savings (5-10%). This category should include short-term and long-term savings. This includes savings for vacations, gifts, or large purchases such as a new TV or computer. You should also include an emergency fund in this category – it’s simply a block of money that you keep in a savings account for contingencies like car repairs or unexpected bills.
Guilt-Free Spending (20-35%): You can put whatever you want in this category. Dinner in a restaurant, a drink, or spending money on entertainment is often viewed as a financial vice, but the truth is, we do it because we love it. As long as you have three other categories, you can spend that money without feeling guilty about your budget.

These are Sethi’s guidelines for youth, but you can (and should) adjust the percentage based on your age, your financial goals, and what you think is important. Remember, the more you save, the more money you will have later to buy a house, retire early, or achieve other goals. (We’ll talk about this a little later.)

Ultimately, budgeting simply means knowing where your money is going and planning for the future. If you don’t want to worry about keeping track of every penny you spend at the gas station, this model will still cover most of what you need to budget for. The only thing you need to decide is how much you put in each category. We’ve included Sethi’s recommended percentages as a guide, but you can change them as needed. If you cannot afford to save or invest 10% of your income after you cover the costs, keep what you can. You can also add more to your savings instead of forcing yourself to spend 20% of your budget on criminal pleasures. The more you save, the better!

There is no shortage of personal finance tools to help you manage your budget. Here are a few more resources to look out for:

How to use credit cards without getting into debt

Despite how easy it is to get a credit card, it’s also easy to get too much money and end up in debt. Such debt can drive you into a pit that is difficult to get out of. However, credit cards can also be really useful – when used correctly. Here’s the short story: Don’t use your credit card to buy things that you might not otherwise be able to afford. Instead, only buy something if you have money right now and pay your card balance every month .

If that’s all you learn from this section, you are already ahead of most people. However, here’s how the smallest detail works: The credit card companies will give you a certain amount of money, known as a “loan,” that you can spend without paying it back immediately. If you all taki return it – pay the bill by credit card at the end of the month – you do not have anything extra. In fact, they may even give you a reward for it .

If you don’t return it, the credit card company will start charging you additional money known as interest. The interest rate is usually specified as an annual interest rate (or annual interest rate), but this is a bit misleading as it is calculated on a daily basis rather than an annual one. Each month, the company will charge you interest for the previous month on whatever balance you have. This means that each month you are not paying your debt and you are being charged more money.

To make matters worse, you must pay interest first (otherwise your balance will just increase). If you only pay the minimum amount, most of your payment will go towards interest. This means your balance will remain high and continue to generate interest. We’ll go into the math in more detail here , but the bottom line is that paying only the minimum amount is the worst thing you can do. Even if you cannot afford to pay the full amount in one month, at least pay more than the minimum.

So if you only have to pay for what you can afford, then what’s the point of having a credit card instead of a debit card? Well, when used correctly, there are several key benefits:

You Can Earn Rewards: Most credit cards have different types of rewards depending on how much you spend. This can be cashback, air miles, hotel points, or even Amazon gift cards. This should encourage you to spend more money, which can be problematic if you find it difficult to control your spending. However, with a disciplined budget, it is basically like getting free money for your day to day life.
You are protected from fraud: sometimes the bank will offer refunds for purchases made with a debit card, but for the most part they are treated the same as cash. Credit cards, on the other hand, are completely secure , so you are never responsible if someone steals your card and goes shopping. If you see on the invoice that you have not made a payment (or if you have lost your card), you can call the company and revoke these payments.
You can get protection for all kinds of purchases: in many credit card contracts, some useful features are hidden in small print that protect your purchases. Many cards offer extended warranties on larger tickets like TVs (which is another reason you shouldn’t pay through a store), protecting your cell phone from damage if you pay your monthly bill with a credit card, or travel insurance. if you lose valuables during a flight paid for with a card. Your credit card can have a ton of benefits that aren’t immediately obvious, so check your contract.

Credit cards can be incredibly useful tools for budgeting properly, but they can also be damaging if you don’t use them carefully. Try not to think of them as extra money. A $ 1,000 credit limit does not mean you have the ability to spend $ 1,000. This means that you can borrow $ 1000 for a month. If you can learn to use credit cards responsibly, they can be extremely helpful. However, if you cannot completely avoid the temptation by pulling them out of your wallet or even destroying the physical card if necessary.

You can learn more about how to use your credit card effectively without ruining your budget here:

How your credit score works

Credit cards are also useful for improving your credit score. Banks generally do not like to give money away without any guarantee that it will be returned. So, various financial companies have created a so-called “credit rating”. Basically, it is a report that details your history of borrowing money and estimates how likely it is that you will get your money back. Financial institutions use this estimate to determine how much you can borrow, how much interest you will be charged, and how many lines of credit (such as credit cards, car loans, or mortgages) you can open. The better your credit rating, the better quality credit cards you can get and the better the loans you can get for your home or car, and even assess what type of cellular plan you can get or you have to post a bond on utilities. In some cases, your credit score may even be used by landlords to determine if you can rent an apartment in certain complexes. In other words, your credit rating can have a huge impact on your life.

You don’t just have one credit rating. You have several of them. There are three major lending agencies across the country that are commonly used to assess your credit. By law, you are allowed to get your own credit report from one of three agencies once every twelve months without affecting your credit history. However, you don’t have to pay anything to control your credit score .

When you start your life, you will not have any credit rating, which can make it difficult to get a new loan (classic catch-22). If you’ve worked for a bank for a while, you may be able to get a low-limit credit card that you can use to create credit. You can also get a so-called secured credit card , which is just like a regular card, except that you pay in advance. It doesn’t really look like a credit card at all, but it has a positive effect on your credit score. Paying utility bills on time will also help increase your credit.

The credit reporting agency will rate you on a variety of factors. The exact math depends on the agency, but in general there are five main areas that affect your credit rating:

Payment history. Paying your bills on time is usually the biggest part of your credit score. The longer you don’t pay at least the minimum amount, the worse it gets. No matter what kind of loan it is, always try to pay at least the minimum (or more if you can).
Debt to Credit Ratio: Simply put, this is how much money you are currently holding in all of your accounts, compared to how much you are allowed in total. This is the second most important factor in determining your credit rating. If you have a $ 5,000 limit on all of your credit cards and your debt is $ 4,500, your ratio is 90%. This is bad. The ideal number is around 30% of the total available loan. You don’t want it to be zero, because then you are not creating credit at all. However, the further you go 30%, the more the agency sees you as a risk.
Length of credit history: The longer you have lines of credit, the better for your account. If you paid with a credit card, do not close it. Use at least one recurring payment to keep it active and pay it every month.
Credit types: A combination of credit scores you have can also improve your score. If you have a $ 25,000 loan available through credit cards, this may be considered a greater risk than if you have a $ 15,000 car loan, a $ 8,000 credit card, and a $ 2,000 installment plan (for example, for furniture or mobile phones) … It’s usually pretty easy to do this if you’re not doing something reckless like buying a car with a credit card.
Credit Checks: Every time you try to open a new line of credit, this request is filed with a reporting agency. More credit checks usually means more risk (because they suggest that you either do too much or have been turned down too many times). However, there is an exception. Multiple related credit checks, such as buying a car, applying for an apartment, and applying for a student loan, are often treated as one request if completed within a 45-day period . Life changes often require multiple credit checks, so this needs to be considered. Just don’t try to open three credit cards a year.

If you’re good at managing your finances, you usually don’t need to do much to manage your credit score. As with home plumbing, it usually only becomes a headache when something goes wrong. If this results in black marks on your records that lower your score, you can usually do something about it . In some cases, though, it might involve waiting until some negative ratings have dropped off your record after a few years. In most cases, the best thing you can do for your credit score is to start paying off your debts and making payments on time.

Check out these resources to understand how to understand your credit rating, resolve disputes, and manage your credit over time.

How to save money for the future

So, you started planning your money, you increase your credit and spend less than you earn. It may have taken you a couple of months, but you are finally in control of your finances. Great! Now we move on to the next step: saving for the future. If you’re even a little like me , you probably haven’t thought much about the future. Maybe it seems too far away to matter, or maybe it seems impossible and overwhelming. However, the sooner you start saving, the more money you will have in later life – and the less effort you will spend trying to get it later.

For starters, do you remember those sections of your budget that you made earlier called “Savings and Investments”? Start by saving, saving them automatically . If your employer uses direct deposit (which means your money goes directly into your bank account rather than giving you a check that you can cash in), you can ask for a portion of your paycheck to be sent to multiple accounts. You can use this to send money to a separate savings account for which you do not have a debit card or which is not easy to transfer to your regular checking account. Money that you will never have access to is the easiest to save. Even if you can’t set aside a whole chunk of your salary, services like Acorns can round your day-to-day purchases to the nearest dollar and automatically save the difference.

Keeping money in a savings account can help you save on little things like an emergency fund or a new computer. But your real, long-term savings are aimed at something much more important: retirement. Yes, one day you will want to quit working and will need a large chunk of your savings to continue your golden years, and a small savings account is not the best way to do this. This is where the investment comes in. If you can put your savings into fairly simple, low-risk investments, they will make you money while you sleep, and that can be very high over the course of many years and decades. … This is how you save enough to retire one day.

Investing doesn’t have to be difficult either – it doesn’t mean picking profitable stocks or timing the market. If you are just starting out, you can use a robo-consultant service like enhancement or Wealthfront to do it all for you automatically. It guides you through the process of creating an investment plan based on your age, goals and risk preferences. It will then automatically choose which companies or industries to invest in. If you want more options, we’ll detail the additional tools to manage your investments here .

Long term investments can also come from your employer. Many companies offer 401 (k) s that you can fund with money deducted from your pre-tax paycheck. In many cases, employers will also match how much you deposit, which means you literally get free money just for having an investment account. If your employer offers a 401 (k) contribution, it is advisable that you contribute at least as much as your employer will match.

Getting started with a long-term investment will often be one of the hardest parts of your financial life because when you first start, you don’t have a lot of money. For this reason, it is important to reevaluate your investment every time you get a promotion or a new job that brings you more. When you make more money, it’s tempting to improve your life with a new car, apartment, or expensive toys to suit your new budget. This is what is called ” lifestyle inflation “. While getting up is okay, you also never have a better time to increase your long-term savings than when you already live on a lower budget than you earn.

Investing is a huge area of finance, so start small and learn what you can. Here are some resources you can use to learn more about how to invest your money properly:

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