Knowing how to manage your finances sounds simple, and it can be. However, there must be intentional decisions and prior planning. In this, you can effectively and efficiently know how, when, and where to place and spend your money. The first step is to set your goals.
“The greatest investment you can make, is an investment in yourself”
Warren Buffet
What we know today as financial literacy was coined in the early 20th century. The Smith-Lever Act of 1914 created an opportunity for university students to study finance through a practical and useful lens.
Today, studying finance means something entirely different than it did in the early years after this act. The majority of the courses created were taught in layman’s terms, allowing the average consumer to have a basic knowledge of personal finance. These courses taught students how to fashion a budget and sometimes how to explore the opportunities that investing presents.
This same education has been condensed and presented to high school-age students in public schools around the United States. Unfortunately, many high school graduates report not having a proper education in finances. As a result, many adults do not understand how to be financially responsible.
How To Set Up a Budget
Setting up a budget is one of the most beneficial things you can do when deciding how and where to spend your money. Without a goal to work towards, it can be a challenge to determine how to structure your finances. Here are some steps you can follow to make creating a budget much easier.
First, write down your short-term and long-term goals. When you write down a goal, it is more likely that you will stick to it. These goals should be as detailed as possible.
For example, if your goal is to buy a house in 5 years, you need to determine a price range and how much you would like to save for a down payment. The typical suggested down payment for a house is 20% of the full cost. Therefore, if you want to spend $500,000 on your future home, you should save $100,000.
When your savings goals are determined, now you can begin to draw the outline of your budget. Determine how much you will be spending on bills each month. Bills include items you cannot live without, such as:
- Rent/mortgage
- Utilities
- Groceries
- Phone Bill
- Car payment/Car insurance/Transportation fees
This will look different for everyone, but it’s important that you think of your bills as fixed expenses.
After you have laid out your fixed costs, take a look at what is left over. There are a few options for how to choose how much goes into your savings every month. Experian, a credit referencing agency, has great resources on how to go about creating a budget. Visit “How To Make A Budget‘ by Ben Luthi to further explore how to build your budget.
How To Determine How Much You Want To Save
One option is to look at your short-term and long-term goals and calculate how much you would need to put away to be able to reach those goals in the time that you want. Something to be aware of when taking this route is that an emergency fund will need to be created before any future saving is done. Experts say that between 3 to 6 months’ worth of expenses should be in your emergency fund.
Another option is to save a fixed percentage of every paycheck. Oftentimes, 20% is suggested. However, this number looks different depending on what you can afford and what you prioritize.
What To Do With The Rest
You’ve now figured out how much you’ll be spending on bills and savings. Everything that is left over is fun money. Ideally, at this point of the process, you’ll be left with 30% of your paycheck.
This follows the 50/30/20 rule that many financial experts suggest to follow. This means 50% of your money goes to bills, 20% goes to savings, and the leftover 30% goes to fun. Fun money includes anything that does not fall under bills and savings. This may sound obvious. however, when it comes to a decision between going out for a nice dinner and saving up for Christmas gifts, these decisions can become a bit trickier. This further explains why it is so important to have a budget figured out and to have expenses classified under specific categories.
I Want to Invest, Where Do I Start?
Investing does not have to be intimidating. Many people are afraid of investing because of the potential loss. This is a valid fear; however, there is plenty to gain from investing. Knowing where to invest your money is the easiest way to make your money work for you. Leaving large amounts in low-yield savings accounts may sound like the safe choice, however, over time your money is going to decrease in value. $10,000 today is not what it was 20 years ago. A good rule of thumb to live by is the earlier, the better. The sooner you invest, the more it will compound and the higher the gain on your return.
Diversification
Another important key to investing is diversification. Keeping your portfolio diverse will improve your outcomes. Diversifying your profile can look like a couple of things.
Think of it this way: You don’t want to put all of your eggs into one basket. When investing your money it is important to make sure that you have investments in different places. This makes the likelihood of success in your investments much higher. For example, you could invest in a tech company, a start-up, and a medical company.
By placing your money in three different places, you’ll have better results. All three of these fields are not going to drop at the same time, so if one stock is doing poorly, the others will likely still be up. This keeps your gain high.
Don’t Get Discouraged
Don’t panic when prices are dropping because they will go back up. Investing is a long game, not a “get rich” overnight scheme. NPR’s Planet Money divulges the latest news in the investing world. Translated by a “normal guy,” Planet Money makes investing easier to comprehend and predicting the market simpler. It is a great resource to follow regularly, whether you’re at the beginning of your investing journey or a seasoned pro.
When most people talk about investing, they are referring to stocks, bonds, and mutual funds. Each option has pros and cons. For this reason, it is important to do your research and decide what is the best fit for you. Some people choose to invest in all three, and some stick to one. Begin with what you are comfortable with and grow from there.
How To Invest Successfully
It’s time to set some more goals. Long-term and short-term goals will help you to envision what you want to earn from your investments. These goals will allow you to set a realistic time frame and give you something to strive for. If you are feeling nervous or want to take it slow to begin with, invest small amounts until you feel more comfortable. There are also free tools online where you can practice investing in a simulation.
Charles Schwab has a 30-day “guest pass” which allows users to explore and use their trading platforms. This option allows you to immerse yourself in the Charles Schwab platform and seamlessly open an account to do real trading when ready. Wall Street Survivor is another free stock market simulator. Unlike the Charles Schwab tool, this free simulator does not have a time limit on which users can access it.
These tools will allow you to get a feel for investing without the risk. The most important thing is to do your research and only make decisions you feel comfortable with.
Create a Plan That Works for You
There are plenty of tips and tricks to secure your budget and get your finances where you want them. The most important thing to remember is that your plan must be tailored to your wants and needs.
A great way to figure out what would work best for you is to start with research. There are plenty of finance resources available to the public for free.
Podcasts are a great place to begin. You can start consuming content and get your brain in a financial space so that these plans and tactics begin circulating. “Girls Just Wanna Have Funds” is a great resource to get your mind into the right place. The host is HMBradley’s VP of Finance, Saira Rahman. The podcast follows Rahman on her journey to educate her friend on how to become financially responsible. The podcast is easily digestible and avoids jargon that is common in the finance world, making it accessible to anyone.
It’s Your Finances, You Can Do What You Want To
Just like it is important to diversify your investments, you should be diverse in your research. Do not take one person or one resource’s advice and run with it. The more information you consume from reputable sources, the better your knowledge base will be.
Make sure to think critically about your wants and needs. Your goals are likely different from your source’s goals; therefore, you need to take their knowledge and combine it with your other research. Investing and budgeting are meant to make your life easier. Keep it simple and go slow. The sooner you begin, the better your gains will be.
