Financial literacy is arguably the most important skill in modern society. And yet few people pay heed to their bank accounts, credit, or expenses. America has failed at financial literacy, starting with its public education — or lack thereof.
This leaves many people defenseless, picking up bad financial advice from friends and family who don’t know any more than we do. But take heart, because the cycle can be broken. Eradicate programmed financial ignorance by learning the basics they should have taught in school.
Struggling to get by? You’re not the only one. Here’s a crash course on finances 101.
1. Create a Budget
Budgeting has long held a negative connotation. “Budgeting? What are you, poor?”
Well, you might be if you don’t track your income and expenses. If you spend money blissfully unaware of how much you earn, that’s a good way to burn through your savings.
A budget starts with two things: your monthly income and expenses. Add up your biweekly paystubs to determine how much you make after taxes. You can also create your own sample paystub if your employer doesn’t supply one.
Now it’s time to track every expense, both minor and major, that you endure throughout the month. This includes essentials, such as rent and groceries, and also the non-essentials, like fast food and Hulu.
A variety of programs and apps are available to help you track a budget for free. That said, an Excel sheet keeps your information private and it’s just as easy.
Your budget will show you where your money is going and how much you have left at the end of every month.
2. Audit Your Expenses
Now that you’ve started tracking your income and expenses, you can set a budget. As long as you’re saving money, there’s no wrong way to make a budget. Everyone has unique financial situations and different bills to pay.
Still, it helps to start with a good foundation. The popular 50/30/20 method suggests that 50% of your income goes towards essentials, 30% towards desires, and 20% towards either savings or debt.
Compare your existing expenses to this method. No doubt, you’ll find your current budget doesn’t compare. You may be spending 70% on essentials or nothing on debt.
This baseline can help you make healthy financial changes. You may realize you’re paying too much for rent and should consider downsizing. On the flip side, maybe you’re not saving as much as you should.
Most people struggle with non-essential expenses. The good thing is there are plenty of ways to trim without changing your lifestyle.
Audit your existing subscriptions. How many dollars per month are you spending on services you never use? Those savings could be directed elsewhere.
Groceries are another common issue, or more accurately, fast food spending. You can cut down on food expenses by shopping in bulk at discount stores. By removing three fast-food meals from your weekly schedule, you will save hundreds of dollars every month.
3. Pay Off Debt
It’s true that debt can lead to a spiral of financial problems. But the fact of the matter is most people can’t avoid taking on a little. They may need a loan for a used car, a college degree, or a security deposit.
It’s how you manage the debt that truly matters. You should be aware of the individual interest rates for all your current debt. Loans with higher interest rates will ultimately require more money to pay off.
For that reason, always prioritize your high-interest loans. In general, it’s not a good idea to pay the minimum every month. It is, however, an effective method as long as you funnel the savings towards a major loan.
Credit cards tend to be the worst offenders, but even a small interest rate can get out of hand when a large principal is in play.
If you’re still struggling to pay down your debt, you do have options. In some cases, you can save money by transferring existing credit card debt to a new card with a 0% introductory APR. You can also take out a consolidation loan, which effectively lowers your current interest rate across the board.
4. Save an Emergency Fund
Accidents happen. Whether you’re let go at your place of work or experience a medical emergency, your existing budget won’t last forever. Income changes, and expenses do, too.
For that reason, you should always save a little extra to help you get by. These savings should be liquid and in your immediate access — a retirement account won’t do the trick.
The general rule is to save at least three months worth of your essential expenses. These savings should keep a roof on your head while you find work. If you’re in a profession where it’s more difficult to land a steady job, you may want to have a rainy day fund that covers six months of expenses.
Have to choose between building an emergency fund or paying off debt? Direct the majority of your funds towards the latter.
The faster you pay off debt, the less you’ll end up paying overall. Meanwhile, the money in your savings account won’t appreciate in any meaningful way.
Personal Finances 101
Everyone has bills to pay, but you don’t have to struggle with yours any longer. With the basics of finances 101 at your disposal, you’re in a better position to make wise monetary decisions. Soon, your financial ignorance will be a thing of the past.
Don’t thoughtlessly meander through life. Eradicate programmed ignorance with the help of our blog.