If managing your money were as simple as deciding how to spend your allowance, we’d all probably be much better prepared for our financial lives in adulthood.
But tax planning? Saving? Budgeting? These personal finance concepts make many of us uncomfortable. After all, only 57% of U.S. adults are financially literate, according to the S&P Global FinLit Survey. Many of us lacked financial educational resources and role models growing up, and a FinanceBuzz survey found that most parents don’t talk to their kids about money. In addition, most states don’t mandate that students take specific financial literacy classes in order to graduate.
So if you’re feeling overwhelmed and trying to cope with financial stress, it’s probably not your fault. And if you’re reading this, you may be thinking that your money management skills and financial situation could use some improvement.
Kudos to you! It’s never too late to take control of your financial health and start working toward your financial goals. You can get started by following these nine steps to clear your debt, raise your creditworthiness, put more money in your pocket, and save for what matters.
Examine your expenses
Tracking where your money goes is a great place to start. If recording your expenses by hand forces you to pay closer attention to your spending, then you might find that just keeping a spreadsheet or categorizing your expenses with an app leads you to smarter spending habits. But it doesn’t end there. Getting a handle on what you buy each month will help you when it comes to eliminating both overspending and unnecessary expenses.
Once you’ve tracked your expenses for a couple of payment cycles, identify any unnecessary bills, like a gym membership you never use, and cancel them. You can also save money on utilities by calling your provider and negotiating wor just reducing your usage now that you understand your expenses. An app like Truebill can also negotiate with your utility provider for you, which would save you both time and money.
You can also use this opportunity to set limits on your discretionary spending money. Do 29 mocha lattes in one month seem like 28 too many? Have you been inventing future occasions to create footwear needs that don’t exist so you can buy shoes? Did you really drop your cell phone by accident or were you looking for an upgrade? Be honest with yourself about your needs.
The point of tracking your expenses is to get a good picture of what’s happening. Then, within various spending categories, think about the types of products you should buy based on your income. Decide which expenses you have the most control over, and start changing your spending habits to keep more money in your pocket.
Examine your income
Next, add up your household’s sources of monthly income, and compare that figure to your monthly expenses. Are you earning enough money to cover your costs? Do you have enough cash flow to cover your living expenses and also be prepared for unexpected expenses?
According to financial experts, you should have three to six months’ worth of expenses in an emergency fund and should save at least 15% of your pre-tax income for retirement, including any contributions from your employer.
If you’re not earning enough to meet these goals and still make all your monthly payments on time, you have two choices. You can reevaluate your budget and find ways to trim costs even further, or you can secure additional income. This extra money could come from a second job, passive income venture, or side hustle.
Create a budget
Budgeting is the key to successful financial management. Yet most people haven’t put a budget together. And of the 43% who do, most define budgeting simply as tracking their spending, according to a survey from the Certified Financial Planner Board.
Budgeting is actually more than that and it can be a powerful tool. When you create a budget, you allocate parts of your income to different spending categories. Creating and keeping a budget can help you make better financial decisions and manage your money better because you have a road map to work from when it comes to each spending choice you make.
There are several different ways you can create a personal budget, and you should choose the one you’re most likely to be successful at:
- Zero-based: Put every dollar toward an expense, savings goal, or debt payment. There is no money left outside of what is indicated in your budget.
- 50/30/20: Put 50% of your income toward necessary expenses, 30% of your income toward discretionary spending, and 20% of your income toward saving.
- 80/20: Put 20% of your income in savings and spend the rest freely.
- Envelope method: Label each envelope with an expense (groceries, rent, etc.) and fill it with cash up to your monthly limit. Or use an app to set virtual spending limits and stick to them.
Some people require strict rules for how they can use their money, or they’ll be tempted to overspend. Others can keep buckets for saving and spending and still stay on track. Know yourself and your habits, and pick something that will work for you.
Here’s an example monthly budget for a household that earns $4,000 per month:
|Personal care items||$50|
|Household items/home improvement||$100|
Find ways to save money
If you’re wondering how to save money, the good news is that there are plenty of opportunities to cut costs without depriving yourself. If this is your first foray into budgeting and you haven’t tried trimming your expenses yet, you might be surprised by how simple changes can save you a lot of dough.
Here are some easy money tips for saving on your expenses:
- Compare prices from the best car insurance companies and switch insurance if you find a lower premium
- Wait for sales and search for coupons, especially on high-price items
- Use cashback apps to get up to 35% back in your pocket just for shopping at the stores you already frequent and buying things you already buy
- Check out the best cashback credit cards to earn even more cashback or travel rewards on your everyday spending
- Reduce high interest rates by working to improve your credit score and refinancing your debt (more on this next)
Understand your credit report
The only way to improve your credit score is to evaluate where you’re at right now. Get signed up with Credit Karma or a similar service to get access to a free credit report. Look at factors such as credit card utilization and payment history, which have the most influence on your score.
If your credit score range is indicated as fair, it’s probably costing you a significant chunk of change every year. Your credit score impacts the interest rate you’ll qualify for on a loan or credit card, which means excellent credit could save you thousands. The Consumer Federation of America found that a low score, when compared to a high score, raises the total cost of borrowing a $20,000, 60-month auto loan by more than $5,000.
There are a few steps you can take to improve your credit score on your own, including using a credit-builder loan, getting a secured credit card, or being added as an authorized user on a friend or family member’s credit card. You should also work on paying down your balance while increasing your credit limit. Set up automatic payments so you’re less likely to make mistakes.
If you still need help, consider consulting a credit counseling or credit repair company. Credit counseling services are nonprofit companies that can help you get out of debt, while credit repair companies are for-profit companies that work on modifying the negative information on your credit report on your behalf.
Assess your debt
If interest has piled up and you’re still just making minimum payments on your debts, it’s time to come up with a debt elimination plan. Even if you’re chipping away at your debt already, having a strategy laid out can make the process faster.
Two common approaches to debt repayment are the debt avalanche method, which involves prioritizing your debt with the highest interest rate, and the debt snowball method, which involves prioritizing debts with the smallest dollar amounts. The debt avalanche method is the fastest and cheapest way to pay off debt, and the debt snowball method is the quickest way to reduce your number of accounts with open balances and can be more emotionally gratifying, which can keep you in the debt-payoff game.
You should also look for ways to reduce your interest rates, so you can devote more of your money toward your principal balance. You might choose to refinance debt with a balance transfer credit card to get a 0% APR, consolidate your debt with a low-interest personal loan, or simply ask your lender for a lower rate. Sometimes lenders are amenable to lowering your interest if you’ve been a good customer and making payments on time. You may also be able to lower your monthly student debt payment by doing a student loan refinance.
Put money in savings
Even if you’re focused on paying down debt, you still need to build an emergency fund and also a rainy day fund. A sudden change in income or an unexpected expense can happen at any time, and you’ll need something to handle these moments. Most financial experts recommend saving three to six months’ worth of expenses in an emergency fund. So in addition to having a regular savings and checking account, you should consider putting your emergency money into a separate savings account. A high-yield savings account in particular can be a great way to take advantage of the earning potential on money you won’t be touching anyway.
Once you’ve paid off your high-interest debt, you should also put money into retirement savings every month. There are a variety of retirement plans you can look into. It’s a good idea to take advantage of contribution matching if your employer offers it for a 401(k) plan. You may also consider opening a Roth IRA. If you’re self-employed, a SEP IRA can be a great savings vehicle. Whatever you chose, a good retirement account can help your money grow faster, but just remember you’ll have to wait until you reach a certain age to withdraw it without penalty.
Don’t forget tax planning
Now that you’ve got the basics of money management down, here comes the fun part: Tax planning. Although thinking about your taxes may not be exactly thrilling, tax-advantaged saving and investing can help you get ahead. And keeping more of your money is definitely worth celebrating.
Tax planning shouldn’t be an afterthought when the new year rolls around. You should stay organized throughout the year, keeping track of your income and deductions. You should also plan your budget around a contribution to a retirement account and decide whether you want to save for your child’s college education in a 529 plan. You might also choose to make contributions to a health savings account if you have a high-deductible health plan.
These strategies will help you reduce the amount you’ll owe in taxes each year and help you prepare for a healthy financial future at the same time.
Take advantage of apps
It’s smart to take advantage of the available technology to help you reach your saving, budgeting, and investing goals. You can start by giving Digit a try. The app analyzes your spending and upcoming bills to determine how much it can safely set aside for you each day. It’s one of the best ways to maximize your savings without thinking about it.
If you need help with budgeting, consider one of these apps:
- Mint: high-level transaction analysis and credit score monitoring
- YNAB: A zero-based budgeting app
- Goodbudget: Envelope budgeting with input from your family
- Dollarbird: Manual spending tracking and planning
Once you’ve got control over your budget and are setting aside money for emergencies and retirement, you can then use apps to help you get started investing. Try investing your spare change automatically with Acorns or Stash, or get started in investing with as little as $1 with Robinhood.
The bottom line
It’s a bird — it’s a plane — no, it’s you, swooping down in your money-management cape to teach the rest of your family and all your friends everything you just learned about making healthy financial decisions.
Armed with an app-filled smartphone in one hand and a deposit slip in the other, you’re ready to take on your debt while battling the impulse to spend. Those savings goals you set for your household? They’re feeling well within reach.
If knowing how to manage your money is still feeling challenging or you’re feeling ready to take more advanced steps with your money, consider speaking with a financial advisor. But whether you go it alone or get professional advice, with a little planning and a lot of ongoing discipline, you know now that it’s possible to not only avoid financial hardship but also to paint a bright financial future.