Learning how to manage money is a challenge that many adults face at some point in their lives. It's an acquired skill that needs time and practice and something that should be taught in schools from a young age.
Fortunately, it's never too late to learn financial literacy. Here are some steps to take to manage your money with credit and budget planning.
Become Aware of Your Spending
The first step in improving your relationship with money is to start monitoring where your funds are going. Install an app like Mint to outline and classify your expenses in a visually-stimulating format.
Many people are unaware of how much they're wasting on expenses add no value to their lives. For example, you might be aware that you spend too much money eating takeout. However, until the numbers are tallied in front of you, you might not be aware of just how much you're spending.
Digital banking has made spending awareness more challenging, as you lack the tangible feeling of your wallet getting thinner. Start by building awareness and highlighting the worst offenses as your starting point.
Review Your Credit Report
Another aspect of building awareness is learning your credit score and monitoring your credit report. While a credit score provides a great summary of your debt history, looking at the report is necessary to clarify the biggest issues. Keep in mind that errors on your credit report could lower your credit score, and correcting those errors could lead to better debt consolidation options and interest rates.
Outline Your Baseline Expenses
Some expenses are non-negotiable, like your rent and car payments. These are the expenses that you have to pay each month to live. While you may be able to curb your consumption and cut down on water and electricity, there's only so much you can do here.
Outlining your baseline expenses will help you identify how much disposable income you have compared to how much you're spending.
Understand Your Income
Take some time to understand how much money you truly make in a month, compared to your expenses. Evaluate how you can change your bill payments to reflect your paydays and account for any fluctuations in your pay.
If you receive an hourly wage, calculate your average income as a starting point for creating a budget.
Set Budget Goals
Once you understand your baseline expenses, income, and where your money is going, start setting reasonable budget goals. It's not realistic to try and change your behavior overnight. Doing so will create too much restriction and will set you up for failure.
Start by trying to cut your expenses by 2%, using your past month as a starting point. If you spent $2400 last month on everything from rent to restaurants, that means cutting your expenses by $48— a totally attainable change. Put that $48 on your debt or in savings. Repeat the same exercise the next month, using your new expense total ($2,352).
Another approach is to focus on habits rather than the numbers. Let yourself go out for dinner once a week instead of twice. Bring coffee from home on your commute and treat yourself to Starbucks on Friday instead of every morning. These little changes yield big results.
Start an Automated Savings Fund
Take an out of sight, out of mind approach to saving money. Set up a bank account that you can't access from your mobile app or card. Create an automatic transfer that takes out money on payday and moves it to your savings. While you won't notice the $20 off each paycheck, you will notice the $500 savings account after a year.
Simplify Your Adherence
Do what you can to simplify the budgeting process for yourself. Cut up the credit cards, use automatic bill payments, and pay your bills on payday.
With these simple steps, you can learn to manage your money effectively.
