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Basic Financial Literacy: 12] Tips For Managing Your Money And Building Wealth

Dan Miller6-Minute Read
January 14, 2016

More and more people are realizing the importance of teaching and learning financial literacy in early adulthood. Without a basic understanding of how to manage your money and build wealth, you may be doomed to make costly financial mistakes early in your life. These financial tips can help put you on the right path toward financial success.

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Why Do I Need Financial Planning Tips?

Basic financial literacy is one of the most important tools for success, and it's not always taught in school. It's best to learn these financial tips by early adulthood, but you can benefit from them at any age – to reach financial goals, avoid debt stress and build good credit. Start by following the money, then invest wisely including investing in yourself.

As you begin to learn more about financial basics, you’ll soon see the many ways they impact your life. Whether you’re starting a budget, saving for a rainy day, getting free from debt or preparing for the future, use this information to get you where you want to be.

Follow The Money

Many people have trouble understanding where their money is going, and getting a handle on that should be your first priority. Start to build a budget by figuring out where your money is going now.

Tip 1: Track Your Spending With An App Or Old School Pad and Paper

It's hard to create a budget if you don't have any idea where all of your money is going. One tip to help with this is journaling — literally writing down every penny spent for a period of time. You can also use an online tracking app like Truebill, which can help you find and cancel unused subscriptions as well.

This exercise can help you get a handle on what you’re spending and will be important data as you take advantage of our next financial tip. While there are many conveniences to using an online financial tracking app, you might prefer, for data privacy reasons, to just jot it down in a notebook whenever you spend money in any amount.

Tip 2: Create A Realistic Monthly Budget

Now that you are armed with the data from step one, you can create a monthly budget. Start by cataloging your monthly income. Include your regular paycheck or any money you know you can reliably count on. Then you can start tallying some of your fixed expenses, like rent and car payments. Take a good look at your journaling results and decide what’s not necessary spending and what you simply can’t live without. Remember that a budget is just a tool to help you not spend money on things that aren't important to you, so you'll have money left for the things that are important to you. Again, budgeting apps can be very helpful in this process.

Tip 3: Save For A Rainy Day

Hopefully you were able to create a budget that includes more money coming in than you are spending each month. One of the first things that you should do with your monthly savings is establish a satisfactory rainy day fund, or emergency fund. How much you need in your emergency fund can vary, but a good goal to start is $1,000. Then, over time, you can build it up to where you could cover 3 – 6 months’ of expenses.

Build Your Credit

When setting long-term financial goals, one of the most important things that you can do is build your credit. You'll need good credit for many of the big-ticket items that you’re considering in the future, like buying a house or starting a business. Your credit score is calculated using a variety of different factors. One of the biggest things that you can do to increase your credit score is to pay your bills in full and on time, each and every month. Lowering your credit utilization is another way to build your credit.

Tip 4: Get Credit Cards But Use Them Sparingly

Responsibly using credit cards can be a great way to build your credit and increase your credit score. However, they can also cause financial stress and credit card debt if they're not used correctly. One financial tip is to use credit cards only when you have the financial ability and discipline to pay them off in full every month. Having credit cards and using them responsibly is an easy way for college students and young adults to build credit.

Tip 5: Pay Your Bills On Time And Make More Than The Minimum Payment

Paying your bills on time has a large impact on your credit score. Late payments (especially 30 or more days late) are a big red flag to lenders looking to extend credit. Lenders want to see that borrowers are conscientiously paying their bills on time and reducing their overall debt. After you build up an emergency fund, focus your financial efforts on making more than the minimum payment and paying down your debt.

Tip 6: Watch Your Financial Wellness Indicators

Two financial indicators to keep in mind are the percentage-of-income rule and debt-to-income ratio. These rules of thumb say that no more than 28% of your gross income should go toward your monthly mortgage payment and your total debt-to-income ratio should be no higher than 36%. Together, these are referred to as the 28/36 rule, and can be an important indicator of overall financial health. While the 28/36 rule is most commonly used by lenders when you're applying for a mortgage, it's generally a good thing to shoot for as well.

Start Investing

Once you've gotten your spending habits under control, developed a budget, amassed your emergency funds and established credit with controlled debt levels, you might feel ready to begin investing.

Tip 7: Join Your Employers 401(k) Plan

An easy way to get started in investing is to join your employer’s 401(k). If you’re younger, you might think you don’t need a retirement plan yet, but we’re here to say that the best time to start is when you are young. In addition to saving for retirement, there are tax benefits as well, since you won't pay income tax on any money you contribute to a 401(k) plan. If your employer matches contributions, you definitely want to contribute at least up to your employer’s matching contribution. That money gets a 100% return on their investment immediately upon contributing.

Tip 8: Decide Whether To Work With A Financial Advisor

If you don’t really care to follow money matters closely, you may prefer working with a financial advisor. There are several types of financial services available; be sure to ask any prospective advisors questions about how they are paid and what their credentials are.

If you don't want to hire a financial advisor, simply asking a friend or family member who's good with spreadsheets and managing their own money to help you get started is a good idea. This can hold true if you haven't amassed enough savings to warrant outside investment advice. Just don't let embarrassment prevent you from asking for the help you need.

Tip 9: Manage Your Own Portfolio

If you don't want to work with a financial advisor and are financially savvy, you might consider managing your own investment portfolio. One simple way to achieve this is by choosing index ETFs or another indexed fund, if you're interested in a broad market-based strategy with low fees. Another option if you're more advanced might include something as complicated as commodities trading.

Your Career Is Part Of Your Financial Wellness

In addition to investing your money wisely, remember that your career is part of your financial wellness. Investing time and money into yourself and your skills can be one of the best ways to increase your overall financial health.

Tip 10: Invest In Yourself

If your education or lack of formal education is holding back your career, it's a good idea to invest in yourself by pursuing meaningful credentials. This could include finishing a college degree, pursuing graduate school or attaining certifications that are meaningful within your industry.

Student loans are generally considered a form of good debt because they pay for degrees needed to advance professionally. There is a fairly large difference in salaries for college graduates versus high school grads.

Tip 11: Get Paid What You’re Worth

It can be eye-opening to use a website like Glassdoor or Indeed to understand what the average salary is for your position in your geographic area. If you are making less than the average, you should consider meeting with your supervisor to ask for a raise. Or alternatively, ask what you would need to work on to be eligible for a raise during the next scheduled round. If your supervisor or company aren't amenable to that, consider looking for a different employer that will pay you what you're worth.

Tip 12: Review Your Benefits Package

If you have full-time employment, it's likely that your salary is only part of your total compensation. Your benefit package can include things like health insurance, vacation time and other benefits. It's a good idea to regularly review your benefits package to make sure you are making the right choices for your unique financial situation.

The Bottom Line: Start Here To Meet Your Financial Goal

Building a strong foundation in budgeting, saving, building your credit and investing is necessary for financial wellness. Without this base, you are likely to struggle with your finances, which can have a drastic negative impact on your life. It's also difficult to meet your ultimate goals without grasping these basic financial tips.

Learn more about saving and investing in our Learning Center.

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Dan Miller

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free/cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.