Knowing how to properly manage your money is a skill that many people struggle to master. According to the Financial Capability in the United States 2016 report, 18% of Americans spend more money than they earn. This is obviously a recipe for disaster. To get you back on the right track, we have 4 tips for improving your money management skills.
Set financial goals
One of the best ways to improve your money management skills is to tie it to a financial goal. When you have something you’re working towards, you’re less likely to spend money carelessly. Come up with a few short-term and long-term goals that are meaningful to you and write them down. Hang your list in a place where you’ll be forced to see it regularly so you remain focused.
Create a budget
Usually when you hear the word budget, you automatically assume you have to give up everything you love and become a penny pincher. However, there are some budgeting methods that allow you to enjoy your money while making sure all of the bills are paid. A prime example is the 50/20/30 rule. With this method, 50% of your monthly income will go towards necessities, 20% towards financial goals and 30% towards lifestyle choices. To get started, follow these simple steps.
Step 1: Grab your pay stubs and calculate your monthly take-home pay.
Step 2: Divide your income based on the 50-20-30 split. For example, let’s say your monthly take-home pay is $2,500. You’ll allocate $1,250 for necessities, $500 for financial goals and $750 for lifestyle choices.
Step 3: Go through your monthly expenses and divide them into three groups: necessities, financial goals and lifestyle choices.
Step 4: Calculate your expenses in each category and adjust your budget accordingly. If you’re having trouble making it work, start cutting out nonessential items.
For many people the hardest part is differentiating your needs from your wants. Just so we’re clear, needs are things you have to have. In this case, necessary expenses are your rent/mortgage, utilities, groceries and transportation. Wants or lifestyle choices are things that are nice to have but aren’t really important such as designer clothing, cable or the latest gadgets.
Automate your bill payments
When you have a million things going on, it can be easy for bill due dates to slip your mind. A simple way to avoid making late payments is to automate your bills. This option works best for expenses that remain the same on a monthly basis. For example, your insurance premiums, mortgage, student loans and things of that nature. Simply create an online account with your bank, then schedule your bills accordingly. Every month the money will be automatically deducted from your checking account and the bills will be paid on your behalf. This doesn’t give you permission to throw caution to the wind, you still need to monitor your transactions to ensure there aren’t any mistakes.
There’s nothing wrong with taking out a loan to help cover big expenses but you need to borrow wisely. To ensure you don’t get in over your head, we rounded up a few good rules of thumb for the most popular types of loans.
- Car loans – Use the 20/4/10 rule. This means you’ll make a down payment of 20%, finance the vehicle for no more than 4 years and spend less than 10 percent of your gross income on related expenses.
- Student loans – Follow the 1st year salary rule. In other words, don’t take out more in student loans than you expect to earn in your first year on the job.
- Mortgages – Put 20% down and don’t borrow more than 2 times your annual salary.
By keeping these tips in mind, it will be a lot easier to live within your means.