Experience is a good teacher—it helps you learn life’s lessons in unforgettable ways. When it comes to your finances, however, experience can sometimes come at a cost you can’t afford. Fortunately, you can master good money management skills by learning from the experiences of others. Take a look at three of these important lessons about money that may help you avoid money problems and keep your finances in check.
#1: Have a budget and know where you spend your money
The most important lesson about money that you can learn, is how to budget and keep track of where you spend your income. If you’ve never budgeted before, the first step has to be keeping track of what you are currently spending, and where you are spending it. After keeping track for 2 or 3 months, you should have a pretty good idea of:
- Whether you are spending more that you earn – credit cards make this a common problem.
- How much of what you spend in discretionary – that is, non-essential.
- Whether what you are spending actually represents your priorities.
After keeping track for 2 or 3 months, you are ready to establish a budget. Besides listing all of the basic essentials, like rent, car payments, electric bills, and groceries, you need to set some saving priorities. There are many items that we need or want, which don’t fit within our monthly income. For those, you need a savings plan. Here’s a general list of budget categories:
- Basic household expenses that recur each month
- Funds that need to be reserved for annual expenses — gifts and back to school supplies are good examples of these. These are expenses that are not optional, but which are also not monthly.
- Funds to set aside for short-term goals. An example of a short term goal might be paying off a credit card, or taking a weekend away.
- Funds to set aside for medium-term goals. These might be things like a “new” used car, new furniture, or a family vacation
- Funds to set aside for long-term goals. The obvious example here is retirement funds, or education funds for your children, but things like that vacation of a life-time, or your dream car could also fit in here.
Once you have your budget, you test it out for a few months. No one ever gets their budget right the first time. It takes some adjustment to develop a budget that works for you. Even once you have it working, you need to remember that your budget is not cast in stone. It will need adjustments every time your situation changes. It’s a good idea to set aside a bit of time at least once a year to update and renew. If you let your budget get out of date, you will find yourself ignoring it, and then it is not doing you any good at all.
#2: Avoid using credit for things you could save for
One of the best ways to get the most out of your money is to save for future purchases or emergencies. Buying the things you want without relying on credit cards or loans allows you to avoid paying interest. It’s a lot nicer to bank the money you save on interest than to pay it to your creditors.
Emergency expenses often end up as credit card purchases. By setting aside funds each month in an emergency savings account, you can build a fund that covers anything from new tires to an expensive furnace repair. Paying for emergencies with cash you have saved helps you avoid additional debt and builds confidence in your ability to meet financial challenges.
Even if the rate you earn on your savings account is low, you are still adding instead subtracting to your balance. Every dollar you save or earn in interest moves you closer to good financial health.
#3: Credit Card Interest Is Too Expensive
Using a credit card to buy what you want may be easy, but it’s expensive. Perks you earn may make credit card use attractive, but unless you pay off your balance monthly, you will end up paying an interest charge. Often, the cost of interest is greater than the value of any perk you may earn – greater even than the value of your original purchase!
Before you make the decision to use credit, try using a debt calculator to determine how much you’ll pay in interest. Once you discover the real cost of using your cards, it’s a lot easier to start paying with cash.
These three lessons about money can help you build a smarter budget and avoid common money management mistakes. By adding additional money-related goals and habits to your life, you add stability and strength to your overall financial health.
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