Most of us grow up looking forward to adulthood and all the fun and freedom that appears to be associated with it. But once we reach it, we sometimes find we are ill-prepared for the most basic aspect of being an adult–managing money. Sure, we grew up watching our parents write checks to pay bills and, if we’re lucky, maybe we had a personal finance class in high school that taught us a little something about balancing a checkbook or the principles of compound interest, but many people find themselves unable to unlock the keys to sound financial behavior once they are completely independent.
If this is you, here are a few essentials you may not know about managing your money. To begin with, there are a few golden rules to financial behavior. They may sound simple, but many people do not follow them and quickly find themselves in financial constraints.
First, spend less money than you earn. If your income is $40,000 a year and you spend $41,000 a year, you will quickly find yourself in a dilemma that spirals out of control. And if you spend exactly as much as you earn, you will never have the opportunity to prepare yourself for major life changes or the unanticipated emergency. The key is spending less than you earn so that you can save for the future and plan ahead. The larger the gap between your income and your spending, the better off you will be.
Keep in mind that spending includes things like credit card debt, which many people do not consider because they are deferring payment for later. A good rule of thumb is that if you do not have that money in an account fund somewhere, you’re better off not making that purchase on a credit card, regardless of how much you feel you want or need it.
Living on a budget is not always easy, but it is important for maintaining financial freedom over the course of your life. Many people do not even have an awareness of percentage of their income they spend on any given aspect like monthly fixed expenses (e.g., rent, food, utilities), savings, investment, and miscellaneous spending, which can lead to monthly budget shortages and the overuse of credit cards.
Second, make decisions that allow your money to make money. Money that is properly invested earns more money over time. While putting funds in a savings account is a good idea, simply adding to a low-interest savings account will not allow that money to grow. Invest in things that will earn you more than your original amount. This may mean an investment account or the purchasing of a stock or bond, but sometimes it means starting a lucrative business or investing in your education so that you can earn a promotion or move on to a better paying job.
Third, always plan for the future. Saving for retirement is, of course, important. The earlier you start saving, the more you will have at the end. Many people do not even think about the significance of retirement savings until well into their 40s when retirement is beginning to loom. Sometimes taking a job that pays less but provides for benefits like retirement is a very smart idea, even if you are only 25 and retirement seems a long way off.
In addition to retirement, which is a long-term plan, you need to also think about the short-term plans. If you choose to purchase something with a “6 months no interest” agreement, you need to know you can pay it off or avoid the deal altogether. Generally, those types of offers come with huge interest rates and penalties at the end, so have a surefire plan to pay it off in a timely manner. Starting and maintaining an emergency fund will ensure that you can deal with unanticipated medical bills, appliance repairs, or car issues without having to go into debt on credit cards or disrupt your monthly budget.
Last, be aware of hidden financial pitfalls. While they may not seem like much, fines, penalties, and service charges that seem to come in dribbles or drabs, a few dollars here or there, eventually add up to some substantial financial losses. Investigate the business practices of your banking institutions with regard to overdraft policies and fees, ATM fees, and required minimum balances.
Also, be very aware of your credit card use, including the ebb and flow of your credit card interest rates. Keep in mind that interest is typically referred to as an Annual Percentage Rate (APR), which is a bit confusing because the interest is actually calculated on a per-day, not per-year, basis. The company will charge you each month for the previous month’s interest on whatever balance you’re carrying, so keep this in mind when determining how you will make your monthly payments.
What are some rules of thumb or essentials you have successfully followed in personal financial management?