Money management is an important part of being an adult. As we grow up, we have to learn how to pay our bills, take care of our basic needs, and more. Yet, for many people, money management skills don’t come naturally. They’re something we have to learn and practice over time.
Whether you are moving out on your own for the first time or well established in your career, these 10 habits will help improve your money management skills.
1. Create and Follow a Budget
It’s easy to overspend or grow overwhelmed about finances when you don’t have a clear picture of how much money is coming into and leaving your checking account. Therefore, creating a budget should always be the first step anyone takes when trying to build smart money management skills.
To create a budget, you will need to add up your monthly income and all of your monthly expenses, then subtract the two. Many people also create buckets for expenses and try to stick within certain parameters for categories like groceries or gas. In theory, you should have money left over for savings and other unnecessary expenses (like eating out) as long as you are following the 50/20/30 rule.
2. Track Your Spending Habits
Financially savvy individuals know exactly what they spend their money on each month. If you’re just starting to build your money management skills, you may not have a clue where the majority of your paycheck is going. Luckily, you can easily remedy this issue by tracking your spending habits.
At the end of the month, sit down with your bank statement, electronic payment records (like Venmo, PayPal, or CashApp), and credit card statements. Separate your expenses into categories and add up how much you spent in each category throughout the month. After doing this for a few months, you’ll get a fairly clear picture of where your money is going and can make changes so your spending habits fully match your budget.
3. Pay Your Bills on Time
Late payments add up and negatively impact your credit score. Therefore, you want to get in the habit of paying those bills on time every month. Some people do this by using automatic payment systems, while others set calendar reminders on their phones. Whichever approach works for you is fine as long as you get in the habit of sitting down and paying your bills on (or preferably before) the due date.
4. Save Money Every Month
Unlike checking accounts, savings and retirement accounts gain interest. Therefore, it’s better to set aside even small amounts of money into each of these accounts every month so they can grow over time. Most experts recommend that 20 percent of your income go towards some form of savings.
5. Don’t Abuse Credit Cards
Your credit score is important in everything from major purchases like a car to approvals for rental applications. Therefore, you must always keep a pulse on your credit score.
Unfortunately, many young adults don’t realize how much your credit card utilization affects your credit score. Credit card utilization accounts for 30 percent of your credit score calculation. The higher your balance is on a credit card, the more credit you’re utilizing. The more credit you utilize, the more it may lower your credit score.
In general, experts suggest maintaining a credit utilization of 30 percent or less, with 10 percent being ideal. Also, paying off the balance each month is better than letting a balance sit on your credit card and accrue interest.
6. Cut Costs Where You Can
We’re almost all guilty of spending money on things we don’t actually need. Unfortunately, these small expenses can quickly add up, especially if they are recurring monthly subscriptions. Therefore, you should frequently evaluate your expenses and look for ways to cut costs when you can. It may be something as simple as discontinuing service with a streaming platform you no longer use or shopping for a less expensive mobile phone service provider.
7. Have a Plan to Pay Down Debt
Unfortunately, we all accumulate debt at times. Debt isn’t necessarily bad, but you need to understand how debt impacts you over time. Anytime you take on debt, you should develop a plan to pay it off in a timely manner. This will save you interest and make life less stressful.
8. Set Up an Emergency Account
Emergencies happen. People lose jobs, need to take time off for surgeries, and more. If you don’t have smart money management skills in place, though, even just a few weeks without work can really impact your finances. This is why an emergency fund is a smart move: it gives you something to fall back on when needed.
Most experts recommend you build an emergency account with anywhere from three to six months of savings in place.
9. Save for Large Purchases
Some people use credit cards or other financing offers to make large purchases. Although this is sometimes necessary, it often makes your purchase cost significantly more due to interest charges. Therefore, you’re better off if you can save for large purchases instead.
Let’s say you want to buy new living room furniture. You could finance it, or you could decide how much you want to spend and set aside a small amount each month until you reach your goal. Similarly, if you want to purchase a car or a home, you will want to determine how much of a downpayment you need and save that amount up before you go shopping.
Frequently Asked Questions
What are the steps involved with building a budget?
When creating a budget, you need the following information: your income, your expenses, and your financial goals. Based on all of that, you can determine how much of your income you spend on necessary expenses, then plan what to do with any remaining funds.
How bad is it if I don't pay off my credit cards each month?
Carrying a consistent balance on your credit cards does two things: it costs you money in interest and it raises your credit utilization percentage. Although this doesn’t sound bad, it can get expensive and lower your credit score. People with lower credit scores often pay higher interest rates or have less luck obtaining loans in the future.
What should I do if I spend more than I make each month?
If you are spending more than you earn, chances are you are struggling to keep up with bills. This causes stress and can feel overwhelming. If possible, look for ways to cut back, consolidate debt, or earn more money.
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