Financial Education E-Book.
Copyright © 2021. Financial Education USA. All rights reserved.
Your Financial Education
When it comes to getting out of debt and taking care of your money, what you don't know can hurt you. Unfortunately, many people don't grow up being taught how to take care of their money. As a result, by the time that they get to their adult lives, their finances are a mess. However, this doesn't have to be the case. Even if you’ve spent most of your adult life not understanding how to take care of your finances you are not doomed to repeat the pattern for the rest of your life. The 5 tips in this article will give you a good idea of simple ways that you can take care of your money starting today.
1. Assess Your Money Situation
It’s impossible to hit a target if you can't see it. In terms of finances, how would you know how much you owe for bills each month, for debt, and for other expenses if you don't assess your finances? To do this, start by getting out your receipts and your check register to see how much you spend each month. You should do the same with your credit card statements.
If you have never been taught how to deal with your money, then it's entirely possible that you actually don't know how much you spend on things each month. Looking at your credit card statements and your ATM card and/ or your checking account register will give you an initial assessment of your finances.
That said, out of habit you may still spend in the same way you always have, at least at first. To change this habit, you must learn to think about your money differently. Some people learn to retrain themselves about money by starting a money journal. They keep this journal with them and every time they make a purchase that they write it down in their money diary. Doing so forces them to be conscious of the money they spend. If you don’t know where your money goes each month, then keeping a money diary might help you as well.
2. What is Your Credit Score?
It is nearly impossible to live in modern society without having a good credit score. Fortunately, in the age of the Internet you can check your credit score anytime you want using many different services.
The other thing that you should know is how credit scores are broken down. This is also called your FICO credit score. If you have a credit score of 750 to 850 or so, then your would-be creditors - credit card companies, potential landlords, etc. - would think that you have excellent credit. A good credit score lies in the 700 and 749 range, and credit scores that dip down to 650 get a fair credit rating.
Fortunately, there are some concrete steps you can take to elevate your credit score. First, you want to make sure that all of your bills are paid on time. Second, you want to keep your debt ratios low. Third, work to develop your credit over a long period of time.
3. Develop Financial Goals
It may feel tempting to try to dig yourself out of debt without really asking yourself why you want to do it. Granted, having creditors calling you each month may motivate you in the short-term: No one likes to get calls like that when they’ve fallen behind on their bills.
However, taking such a stance with your finances doesn’t motivate you much in the long run. If you don’t have some goals for your money (and by extension, your career), then basically, your money motivation is to just make enough money to pay your bills. That’s not very motivating.
Goals give you a reason to look beyond the debt that you have towards a time when you can pay for things you like, such as a nice vacation or a new car. Goals also teach you to look far into the future to the time when you will retire. Knowing how much money you want to have for all of these goals is the first step.
The examples above show you what having short-term, mid-term, and long-term financial goals look like. It’s important that you write out what milestones for each of these steps will look like.
For example, let’s say that you want to buy a quality used car. You know it’s going to cost you about $5,000 and that you don’t want to make car payments. Therefore, you decide that you will save a bit of money each month to buy the car outright. Giving yourself a 12-month timeline for this goal means that you must save about $417 each month for a year in order to buy the car at the end of the year. A 24-month timeline for the same goal means you need to save about $210 per month for two years.
To realistically reach each of your financial goals, you should write out plans for all of them just as you would in the car example above. If you don’t know how to set financial goals, then you may find it beneficial to talk to a financial advisor about this.
4. Making a Budget (Spending Plan) and Tackling Your Debt
The final basic stage of getting control of your finances is setting and sticking to a budget. In the steps prior, you've learned to assess your financial situation and to make goals for your finances. Now, you're ready to make a budget using the information that you got from the previous steps.
First, you want to look at your bill statements, your money journal, your credit card statements, and other related financial information. From these various sources of information you want to determine which of your bills must be paid, like your rent or mortgage, your utilities, your credit card balances, any student loans or other kinds of loans that you have, and other bills that you must pay. (This isn’t to be confused with the money you spend on entertainment.)
Next, you will look at how much extra money you are spending that you don't need to. For example, if you take yourself to breakfast every morning, it's probably an expense you don't need. Instead, eat at home and save money. You’ll probably save yourself between $5 and $20 a day by doing this. Any extra money that you would have spent on going out, you put toward your debt instead. Do this with all of your extra spending until you pay down your debt.
Using this information, you’ll now make a budget that you’ll stick to so that you can pay down your debt.
From there, you’ll decide how you want to tackle your debt. Some people prefer to pay down their debts with the highest interest rates first. Others preferred to do what's called the debt snowball. That's where you take your lowest bill and you pay that off first. For example, let's say that you have a credit card that has $1,000 balance, another credit card with a $3,000 balance, and a loan of $5,000. You would first pay off the credit card with the $1,000 balance. Then, you would pay off the credit card with a $3,000 balance, and then the $5,000 loan.
Instead of just paying the minimum on the $3,000 balance, you're going to pay the extra amount that you would have paid toward the $1,000 card toward that $3,000 card. You repeat the steps using any extra money that you have to go toward the bill that you're concentrating on paying off at the moment. Any of your other bills, including utilities and rent etc., you pay only the minimum amounts.
Finally, depending on what your financial goals are you may want to either get a second job and/or start paying your bills off with any extra money you get. For example, if you get a tax return back every year, then put all of your tax return toward your debt. Doing that allows you to pay off your debts faster and get control of your finances in a shorter amount of time.
5. Managing Your Money
Most people never learn how to take care of their money. As a result, many people find themselves in debt and don't know how to get out. However, there are some simple steps to take to get control of your finances. They include assessing your financial situation, adding any extra money that you have toward your debt, and not spending extra money that you don't need to. The truth of the matter is the people who are best at taking care of their money don't get gigantic windfalls. Instead, they have learned to take care of their finances month by month and then year-by-year until they have solid financial footing.
