Money Skills Everybody Needs to Know and Master
Financial health and security are so important, but very few people learn the applicable skills to master their spending. Since money is such a driving force in our daily lives, it’s crucial that we master basic money skills. (Why this isn’t taught in schools I’ll never know!) Then we can live better and more securely with a solid financial plan. Here are seven simple money skills everyone should know.
7 Money Skills Everybody Needs to Know and Master:
- How to budget
- How to balance your checking account
- How to manage debt
- How to build credit
- How to use credit
- How to make more money
- How to invest
Keep reading for the details…
How to Budget
You can’t manage money if you don’t have the budgeting basics. The good news is that you don’t need spreadsheets and tons of math skills to manage a budget. All a budget really is, is knowing how much money you have to spend versus what you need. That might be nothing. That would be fine. The important thing is knowing how much is coming in, and where that money should go. A lot of budgeting is handled for you automatically. That’s deceptively crippling because it allows you to get away with not knowing exactly how your personal finances work. Without budgeting your money, you can sink deeper into debt for a long time before you realize that there is even a problem.
Once you decide to keep a budget, it’s easy to do. you have transaction records, you simply have to see where the money is being wasted and where you could better use the money you have. Budgeting is the most important money skill, but it takes 6 other important money basics combined with budgeting to make a difference in your financial life.
How to Balance Your Checking Account
A lot of people confuse balancing with budgeting. It’s not the same thing at all. However, one can not truly exist without the other. balancing is less about allocating funds and more about making sure you don’t have a negative balance at the end of the month. Both balancing and budgeting start out the same way, buy identifying what is coming in and what is going out. Balancing your checking account is a good place to start in order to avoid escalating debt. track your spending aggressively to see how your funds diminish during the month. Your bank will have monthly statements, but by then it is too late. They only show you what you’ve done. The important thing is to monitor what you are doing. start checking your account balance every day and track your spending whenever you use your debit card.
Where balancing differs from budgeting is in the end goal of staying in the black. A budget may include debt, but balancing is about steering clear of debt. What you should strive for in developing both skills is to combine them and create a balanced budget. A balanced budget manages your income and distributes expenses in a way that results in a zero balance, or a surplus, which can then be invested, or redistributed in your next budget plan.
How to Manage Debt
Balancing your budget is an excellent sign of financial health and working toward a positive balance if you are in debt. But managing debt is not always easy and it can really throw a wrench into your plans of having an effective workable budget that will actually help you save money and increase your wealth. Debt has two basic facets to it that you need to understand: the principle and the interest. Interest is how investors make money. when you take out a loan, the bank is investing in you. That’s why credit is so important. The idea that banks sell loans to people they know can’t pay it off is a myth. banks monitor credit in order to assess the likelihood of a return on their investment.
If you only pay the minimum payment each month that will keep you in the bank’s good graces, but it won’t do much to eliminate your debt. In order to bring that debt down to zero, you have to chip away at the principal AND account for the interest, which comes back every month. That is why low-interest credit cards and loans are so important. The higher the principle the more interest will be added to your balance.
If your interest rate is also high, that is a tough mountain to climb. That’s why you want to always tackle high-interest debt first on your journey toward debt-free living. It’s also the reason you should pay your balances off quickly before they snowball on you. creating a budget is key to knowing how much you can afford to put on credit beforehand to avoid collapsing under the weight of unpaid debt.
How to Build Credit
Although you don’t want to be in too much debt, debt is a useful option when it comes to investing. There is value in financing a car purchase or a home. There is also value in student loans and even some credit card debt as long as you keep it manageable. The better your credit is, the more willing banks will be to invest in you. That means you can get larger loans and better interest rates which could help you financially in the long term as long as you budget responsibly and manage that debt wisely.
Good credit is as simple as starting out with a good debt-to-income ratio and having a good purchase/payment history. Without history as a consumer, you need to build credit so you can qualify for important loans you need. You can build credit by starting with a credit card specifically for that purpose. Make sure to always pay the full balance and avoid accumulating debt with interest. If you have some savings and not enough credit history, you can put it down on a secured credit card and use that until your credit score reaches a desirable level.
Rebuilding credit is different. That is something many people struggle with because they focus on that when they should really be concerned with getting out of debt. good credit is about taking on debt, so if you are working your way out of debt, don’t be too distracted with your improved credit rating. It will naturally rise as you pay off debt, but don’t be in such a hurry to jump back in it again.
How to Use Credit
Your Credit Score determines how much leverage you have when financing, or if you can even get approved for a loan. a good credit score is power. In order to improve your score, you have to know how to use credit. In turn, you also need to know how to wield the power of good credit to result in financial gain rather than just more debt. Managing your credit is different than managing your debt because you can factor it into your balanced budget and account for the spending in increments rather than in full.
The important thing is to know how much you need to set aside and how quickly you plan to pay it off. Adding more debt to your credit line while you are paying it off becomes a burden when you no longer have a management plan for the line of credit. Once you have mastered the use of credit and achieved a high credit score, you can use the score to your advantage on loans that help you invest in your future.
How to Make More Money
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Part of financial health is growing your earnings. You can invest what you earn, or you can increase what you earn to achieve this goal. If you have crippling debt, besides managing your expenses, one thing you should also look at is your earnings. growing debt is a symptom of spending outside of your means. You can either slow the spending or increase the means. both are viable solutions to debt management. Increasing your earnings should be part of your financial health plan regardless of your level of debt. It is always wise to keep moving ahead, climbing the ladder and showing some hustle.
One way you can increase your earnings is to start a business, which would put good use to the high credit rating you’ve worked so hard to maintain. Business is simply a way to increase capital by investing money to yield more money in return. If you have a workable plan you can obtain a business loan with the idea that what you earn with that money will be much more than what the bank gives you. You can also start small on your own and grind out profits little by little.
Another way to make more is to get ahead in your career or your field. You can accomplish this with a little hard work and a lot of charm. Dedication to your job is always a good quality to have, but don’t underestimate the value of people skills. Learning to read a room and becoming a good listener are good ways to get promoted beyond your current station.
How to Invest
Investing is a concept too few people are really familiar with because they are all too often on the other end of the equation. investing in the future is a crucial aspect of financial security. You can invest in the short term or long term and you can earn a variety of gains. typically the higher the gains, the bigger the investment, or risk. You can invest in a savings account and earn a fraction of a percent on your balance, or you can move much more money into a money market account which pays a higher interest rate but requires a minimum balance of $10,000. The stock market is a place with varying degrees of risk and return.
Investing in a retirement plan is a wise choice once you have a balanced budget and money in the bank. You should have at least six months of income in a savings account for emergencies, but after that, a portion of your budget should account for retirement planning. You can do this in basically two ways. an IRA account is funded with pre-taxed money, so the tax is deferred until you withdraw the money. That means what you have in the account is not all yours to keep, but it saves you from paying the initial investment on your tax return. A Roth IRA is a retirement investment made with after-tax money, so you don’t get the initial tax benefit for the investment, but the account is not taxable when you withdraw the balance later in life.
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Unexpected job loss, medical expenses, divorce, student loans, and bad budgeting (overspending) are just some of the many reasons that force individuals and families to declare bankruptcy.
I’ve read a couple of your articles and this one really hits me. I would imagine myself mastering all those money skills! This really helps.
Thanks for sharing!
Hi Sam! Thank you so much. We all had to learn those skills. You GOT this!
Thanks for the motivation, Anna!
Thanks for sharing! I feel like you really hit them all: Make Money, Using Credit, Investing, etc. Super useful – thanks again for sharing these tips!