Since 2003, April has been designated as Financial Literacy Month. You may have also heard it referred to as Financial Capabilities Month or Financial Awareness Month… whatever you want to call it, the concept is still the same—becoming educated when it comes to your finances. How financially savvy are you?
Because being financially capable, aware, and literate are so important, I have put together a few financial tips that are sure to help get you on a financially sound path:
Know your finances: Create a Budget
Being financially savvy starts with knowing your financial situation. The best way to do this is to make a budget. By creating a budget, you will look at your all of your income sources and all of your expenses (money you are bringing in and money that is going out of your account each month). Any money that you have left over, after all of your bills are paid each month is your disposable income. If you find that your bills are more than you are bringing in each month, you are going to need to make adjustments—and yes, you have to include the amount of money that you are putting on credit cards each month.
If you want to know more about budgeting, check out my article on Budgeting Basics: 5 Ways to Get Your Finances Organized
Start saving early… the earlier the better.
Whenever you receive money, whether it be your salary, a commission, bonus, or gift, save a portion of it. If you can start saving in your twenties, you will be much further ahead by the time you reach retirement than the person who started saving in their thirties… or forties. This is called the time value of money. What it means is that the longer you have money saved away, the more times it will be able to earn interest. Each year that your money is earning interest, the account is growing and new interest is then earned on the new higher principle balance. This compounding effect is the reason that the person who starts a retirement account in their twenties will end up with a much bigger nest egg than the person who starts saving for retirement in their forties.
I have developed the Payday Savings Plan, to help you put a plan in place to start saving every time you get paid. We budget money in to pay our bills, we should also budget money in to pay ourselves.
Leverage Debt Responsibly.
Debt is not good. We all know that. But sometimes, you can utilize debt to your advantage and sometimes a little debt may be necessary.
Perhaps you are looking to buy a home. This is the largest debt that most people undertake in their lives. And in many cases, home ownership makes the most sense: you are investing into an asset for yourself and your future, you may qualify for tax breaks on the interest that you pay for your mortgage*, and you are building your credit history (with a history of on-time payments). Getting a mortgage for a home is an example of a time when taking on debt makes sense.
Now, let’s look at the flip-side of that. Taking on debt by charging up your credit cards, with balances higher than you can pay off, does not make good financial sense. Credit card interest is not tax deductible, interest is compounded daily, and allowing yourself to have too much debt can actually hurt your credit score.
*Consult a professional tax advisor regarding your individual financial situation to see what deductions/tax breaks may apply to you.