Here’s the truth. Many of us were not taught how to have a good relationship with our money. Some people tend to take the work hard/play hard mentality. While there are others who feel that you cannot take it with you, so why save it. Finally, you have those of us who try to live frugal lifestyles and put our duckies aside for a rainy day. No matter where you fall on the spectrum, it is important to learn good money management skills. I am lucky to be married to a financial advisor, who keeps me in check and makes sure that we are planning for the future. I have learned so many great things from him, so it is only fair that I share what I know with all of you.
Before we begin
I ask that you be open-minded and willing to understand that while change does not happen overnight, you have to take control and the proper steps to get from Point A to Point B.
If you are not already doing these things, it is time to take control of your finances and put yourself on the right track toward your financial goals. This is critical for everyone, but especially for those of us in the over 30 crew.
How Can I Practice Good Money Management Skills?
Create Financial Goals
What do you want to do in the long run? Retire early? Send your children to college? Buy a home? One of the keys to good money management is setting goals and sticking to them. When you have a clear picture of what you are working toward, it will keep you motivated to hit your goals faster.
In doing this, I do not want you to feel like you have to set goals that are far-fetched or hard to attain. If you are new to saving money and creating financial goals, start small and work your way up.
Perhaps you have a credit card with a small balance, how much of an extra payment would it take you to pay it off in 6 months instead of 1 year?
More examples of good financial goals are:
- Starting to invest
- Saving to buy a house
- Putting aside money for a rainy day fund
Take the time to write your goals down. Set both short and long-term goals because we all have to start somewhere. Put a timeframe on each of your goals, and when that time frame is up, do a check in with yourself to see how you did.
Myth: Financial Advisors Are Only For Rich People
How many people believe this? Believe it or not, sitting down with a personal financial advisor can significantly benefit you, even if you are not a millionaire.
They can help you come up with a plan to get you to where you want to be and help you plan for your retirement. Additionally, there are many ways that most of us are not taught to save money and plan for the future.
Think about it this way, when you are sick, you see a doctor, so why wouldn’t you treat your money the same way and seek the advice of a professional.
Sometimes people are too ashamed or prideful to let others see their full financial picture, but this is the EXACT reason why you need to get the help of a professional. Do not be afraid to seek help. You will be glad you did, and you can put yourself on a path to having peace of mind and financial freedom.
Have an Emergency Fund
Emergencies happen all the time. A relative passes away, and you need to take a last minute trip, you lose your job, your car clunks out.
What would you do if you were in this situation? Are you prepared?
While you cannot predict the future, you can certainly be prepared for it.
The best way to do this is to work towards saving up 3 – 6 months of living expenses. This means that if you lost your job today, you would be able to live off of your emergency fund for several months while you look for a job to get back on your feet.
Planning for the future is essential when it comes to developing good money management skills.
Don’t Blow Your Tax Refund
Many people view their tax refunds as money that they can blow or splurge with. Blowing your tax return is not good money management because when it’s gone, it’s gone.
If you are someone who does not make a consistent income throughout the year, it is crucial to spend wisely when you get a lump sum of money.
Getting a lump sum of money could be an opportunity for you to set up an emergency fund. If you have a pretty consistent income throughout the year. You could also take the chance to invest your tax return to start saving for retirement.
Remember, stay away from ideas of instant gratification, think about the future, and be smart about how you handle receiving lump sums of money.
Develop A Good Relationship With Credit Cards
How many people remember turning 18 and being flooded with credit card offers? When you are young, it is easy to fall into the credit card trap unless you have someone to tell you otherwise.
Credit cards are not free money. While credit cards can be a very good way to build your credit, you must know how to use them the right way.
Think of it this way; when you purchase something on a credit card, you are borrowing money from the bank. This is money that must be paid back. If it is not paid back by the end of each month, the bank begins to charge you interest.
If you do not pay your balance in full at the end of each month, you end up accumulating more debt based on how high or low your interest rate may be.
How to use credit cards
Credit cards can be great when used responsibly. I like to use my American Airlines credit card to accumulate miles for travel, but keep in mind that I said: “when used responsibly.”
What this means is that you should not bite off more than you can chew. If you are using your card to gain miles or cash back, only spend what you can comfortably afford to pay back before your statement closes.
I repeat, only spend what you can comfortably afford to pay back before your statement closes.
If you decide to use credit cards, be sure to monitor your credit regularly using free apps like Credit Karma.
Avoid Bad Debt
What is bad debt? Bad debt is accumulated by purchasing things that depreciate in value. Credit card debt is bad debt.
If you have a credit card with a $10,000 limit, and you go out and buy $9,000 in material goods, you have just created $9,000 in bad debt for yourself.
Understand that all debt is not bad debt. Good debt is debt that will benefit you financially in the future. Some examples are student loans or a mortgage.
Mortgage loans can be a little tricky because there are so many factors to consider. Mortgages are typically regarded as good debt because interest rates can be lower for a longer amount of time. And the interest from mortgage debt is also tax deductible, which can help you get a higher tax refund to help you boost your ability to save and invest.
Student loans are another example of good debt. The interest rates tend to be lower, and you get an ROI for getting an education. The belief is that when you get a college education, you increase your potential to earn more money over the span of your life.
So you may be reading all of this and thinking how do I get control of my finances?
The 50/30/20 rule
The 50/30/20 rule goes as follows:
50% of your income goes towards the necessary things in life like housing, bills, groceries, etc.
30% is for whatever you please
20% goes towards savings/retirement
I like to flip the 20% and the 30% by trying to save 30% and sticking to a budget where 20% is discretionary money.
You can use this as a guide to figure out how you are spending your paychecks each month, and also how much you can afford to save, and spend on leisure activities.
Spend Less Than You Earn
My motto is “if I need to charge it, I cannot afford it” what this means to me is that, if the only way I would ever be able to afford something is by putting it on a credit card, I cannot afford it. Keep in mind that this applies to being able to pay off what I spend before my statement closes each month. If I know that I cannot afford to pay my balance in full based on a purchase, the purchase is not going to happen.
We must step away from the need to have instant gratification. It is ok to have something that you want and set a short-term goal to save up for it.
Budgeting yourself to ensure you have money to save each month is the key to break the cycle of living paycheck to paycheck.
You must also be able to evaluate wants vs. needs. This is especially important for those of us who love to shop. We have to be able to stop and ask ourselves if I have 12 black dress, do I want another black dress, or do I need another black dress?
Understand that there is no such thing as having too much money for retirement
For a short while, I lived in the suburbs and commuted to work in the city on Metra. Something I noticed each morning was the people that appeared to be well past the age of retirement still going to work.
I found this to be very sad because we spend so much of our lives working, that the latter half of life should be spent being enjoyed and full of leisure time. Of course, you have those busybody people who have tons of money saved, but they go and work at Home Depot just to be able to talk to others. This is fine, but what about those who want to retire and cannot?
Think about yourself when you are of age to retire. What do you want to do? Where do you want to live? Do you want to be in a position to travel as much as you want? All of these things require money, and having money requires good money management skills.
Whether you are 25 or 35, now is the time to start thinking about the future, and making sure you are prepared.
Fail to plan and plan to fail.
Life Insurance can be a huge benefit to you even when you are alive
Many people do not have life insurance policies, and they do not understand the value of having them.
The potential benefits of having life insurance are covering the worst case scenarios that may arise in life. Additionally, the right kind of policy can be considered a good conservative investment.
If you are a parent of a young child, taking out the right insurance policy can help your child with funding their college education, or buying their first home when they are older.
Some may look at this and feel that it is morbid to take out a life insurance policy on a child, but having life insurance is about building security for the future and planning.
Wrapping things up
Start to take control of your finances by getting a good sense of where you stand financially. Work on creating a good relationship with money so that you are set up for the future, and you are not the 72 year old taking the train to work at 6 am with a bunch and 20 and 30 somethings.
I hope that you have found this information useful and actionable, and I also hope that this post has inspired you to treat your finances like you treat your health and get the help of a professional advisor if you do not know how to do it on your own.
I am not a Financial Advisor, but I am lucky enough to be married to one who would be happy to answer your questions and get you on the right path.
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