Life doesn’t seem that complicated at first, but then it picks up speed. And quickly. Jobs come and go, you get married, start a family and priorities change. There’s new responsibilities and financial needs you have to manage.
Learning the proper money skills is essential to reach your goals and handle life’s demands on your personal finances. But personal finance is a broad topic that can be confusing at times.
This article simplifies and organizes some of the most important money skills you should know. They’re categorized under the following four money principles:
Borrowing is one the most important activities we do in life. People borrow early, often and throughout their adult lives.
When you borrow, you want to get the most advantageous rates you can find. But qualifying for attractive financing depends heavily on a good credit score.
That’s why building credit, using it responsibly and protecting it are all-important money skills you should know.
Start building credit early
The strength of your credit score has a big impact on your financial life, touching many aspects of it: when renting a new apartment, getting a car loan, qualifying for the best 0% credit card offers – or even landing that next job.
Building your credit history is an all-important money skill that belongs in your financial toolbox. Here’s several approaches to consider:
A co-signer can get you started
When I was in college, my funding ran out unexpectedly and I needed a loan. Finding a lender was the easy part, but getting approved was hard. Bottom line: I had to find a co-signer. Luckily, I found the right person and was able to get the money I needed.
Besides helping me get through school, that loan kick-started my credit history and put me in a path that eventually got me a perfect credit score of 850.
Consider a secured credit card
Secured credit cards are just like regular credit cards, but they require a cash deposit. This deposit acts as your credit limit and secures your payment. If you’re starting out, a secured credit card can help you build credit.
But what if your credit application is declined? The law requires lenders to tell you exactly why. This can be valuable feedback to guide your next credit move.
Beware of store cards
Store cards can help you build credit, but you need to be careful. Especially with zero financing offers. You could get charged deferred interest if you don’t pay off your balance before the promotional offer expires.
Use store cards sparingly and only as a credit-building tool: Charge small, manageable purchases that you pay off every month.
Use credit cards responsibly
Another important skill you want to master when it comes to your money, is using credit cards responsibly to improve your credit. A higher credit score can open the doors to better credit perks, including lower interest rates.
When it comes to credit cards, the formula to good credit management is simple.
Pay on time
Your payment history is one of the most important factors determining your credit score. Make it stronger by paying your bill on time.
Keep accounts open
The length of your credit history is also important, so avoid closing credit card accounts. If you ever want to close an account to avoid an annual fee, call the lender to downgrade your credit card to a no-fee alternative.
Avoid carrying a balance
You don’t need to carry a credit card balance to improve your credit. So if you can, avoid carrying a balance.
Keep your credit utilization low
Credit experts advise using less than 30% of your credit card’s credit limit. This keeps your credit utilization low and helps you improve your credit score.
Increase your credit limit
Another way to keep your credit utilization low is by increasing your credit limit. Many lenders have in-app or online options to request a higher limit.
Protect your identity
A great credit score takes time to build, but it can drop quickly if you fall victim to identity theft. Identity thieves can use your credit to get new loans, run charges on your account and hurt your credit.
Honing this important money skill can save you plenty of financial headaches down the road. Here are several ways you can protect your identity.
Freeze your credit
When you freeze your credit file, you block certain third parties from obtaining your credit report. So if an identity thief tries to get a loan under your name, they won’t get access to your information.
Locking down your credit is simple, but you’ll need to contact each of the three national credit bureaus individually for the freeze to be effective.
Since freezing your credit also blocks legit lenders, you’ll want to lift the freeze whenever you need financing. But don’t worry about becoming invisible to potential lenders.
If other companies want to offer you pre-approved credit offers, the freeze won’t affect them. Also, locking down your credit doesn’t prevent your current lenders from accessing your credit reports.
Use two-factor authentication whenever available
Two-factor authentication can prevent unauthorized users from accessing your online accounts. Take advantage of this additional security feature if your financial institution offers it.
Set up credit card charge notifications
Setting up notifications with all your credit card accounts can help you detect charges you don’t recognize. It can serve as your early warning system against fraud.
Learning how to keep your spending under control is a key money principle that some tend to overlook. After all, it’s easy to lose sight of the “spend less than you make” mantra in our consumer-centered society.
Curbing your spending requires practice. And it can be a tough thing to do. But as far as money principles go, this one is definitely a keeper.
Here are several key money skills on spending that everyone should know and practice.
Use a budget
A budget is an important tool to help you achieve financial goals. When you have a budget, it’s easier to adjust your spending and earmark cash for key objectives: With a budget, you can set your sights on paying off credit card debt, for example or on building an emergency fund to take on unexpected expenses.
Stay within your budget
But a budget only works if you use it. Train your mind to follow through by setting up an alert to review your progress every week and stay on top of your spending behavior. If you need to, try a family budget meeting to get everyone onboard.
Maybe one week you’ll overspend on one category, like groceries. But with a budget, you can make up and adjust your spending in other areas. Stating one is easy. You can make a budget using a spreadsheet, pen and paper or an app.
If using a worksheet seems overly complex to you, try a simpler budgeting method, like the cash envelope system. It’s easy to learn and it’ll put you on the right path.
But perhaps what’s more important is that, over time, this money skill will help you develop a natural, deep-seated sense of what you can and can’t afford.
Balance your checkbook when paying bills
Paying your monthly bills on or around the same calendar day can help you keep a balanced checkbook. While using your bank’s bill pay feature is a convenient way to pay recurring bills on time, it can numb your sense of control over other expenses flowing through your checking account.
That’s why I pay most of my bills manually once a month. A monthly alert helps me stay on top of bills and keeps me from overdrawing my checking account. It also helps that I know what my basic fixed expenses are each month.
Know your expense runway
Being able to project future expenses is a relevant money skill that can help you stay on top of your personal finances. When buying a new car, for example, you can expect to have additional expenses derived from that purchase: things like car insurance, maintenance, and so on.
Projecting your future expenses might seem like a tough budgeting exercise, but if you cap it at a fixed period of time, it gets a little easier.
The longer you’re able to project expenses, that is, the longer your expense runway, the better prepared you’ll be to face future financial needs.
Keep your next life event in focus
As you plan your expense runway, it’s helpful to keep the next chapter of your life in focus. If you’re thinking of having a child, buying a home, starting a business or planning for retirement, how does your spending behavior need to change today?
Keeping an eye on what comes next in your life can help you adjust your spending so you can save and invest for tomorrow.
Ask five times: Why spend?
At times, you’ll feel like you want to buy something that’s not in your budget. It’s bound to happen. When the urge to spend strikes, take a step back and ask yourself: Why? Doing so can be healthier for your wallet.
But don’t ask the question just once. After answering, ask again: Why? In fact, ask why five times in a row.
You might be surprised by the answers you find. I once thought I wanted to drop $1,000 on a new TV. As I went through the five whys technique, I discovered I mostly wanted it to keep up with relatives – not a good reason to break your budget.
The five whys is a surprisingly great money skill to know. By using it, you’ll suppress the emotional aspect of spending – you won’t hear yourself saying that you can’t afford something.
Learn to distinguish between wants and needs
Sometimes we buy things because we think we need them. But in reality we may want them because they help us avoid pain. Not physical pain, but the pain of not having what others have. These purchases aren’t needs. They are wants.
The latest influencer-pushed product, an iPhone upgrade and a new luxury vehicle are examples of wants. Fulfilling expensive wants can lead to greater pain down the road: indebtedness, worsening credit and financial stress.
When you have a clear vision of the things you want in your life, it can be difficult to pace your spending and prioritize expenses: we’re used to instant gratification.
But taking on multiple projects and expenses at once can lead to more debt. Focus on necessities first and take your time.
Put your recurring bills on your phone screen
I have a folder on my phone screen labelled “Bills.” It has the apps and shortcuts to the bill pay pages of my utility, phone carrier, credit card company, and other providers I must pay every month.
Having a bills folder on your phone screen can be annoying to some, but it’s a great hack to stay on top of your monthly expenses.
Don’t spend money you don’t have
This seems like the most basic personal finance rule to know and follow. However, it can be difficult at times.
Another TV, a new gadget, a furniture upgrade, and more seem like things we’re entitled to have. And it can lead some people to go into debt when they’re short on cash.
Buying with cash you have or that you’ve saved can be a tough money skill to master, but it’s definitely one to know and practice.
Saving more and making it a permanent part of one’s lifestyle is a money principle that’s often postponed. It can be difficult, and it takes patience. But over time, saving consistently can have a dramatic impact on your financial life and sense of security.
Sometimes it can be tough to save because there’s hardly any money left at the end of the month. So it gets pushed back for later and your savings rate suffers.
But there are some ways to make it easier. To make saving less difficult, consider the following important money skills:
Treat saving as an expense
When you think about it, how many of your monthly bills would you say are optional? The answer is obvious: Not many. You need to meet your expenses because you have to. Having a roof over your head, for example, isn’t optional.
So why is getting a cut of your own paycheck often optional? It doesn’t have to. Set aside a fixed amount every month to pay yourself first and build your savings.
Treating saving as an expense is a money skill that will hack your brain into building your cash cushion with less effort. But don’t stop there.
Include a savings line in your budget
Create a new line item in your monthly budget and label it savings. Figure out an amount that you can work with and commit to it as though it were an important bill.
But saving in the abstract is difficult. Setting a target amount you want to reach can make it more meaningful.
Set savings goals
Aiming for specific goals will make saving more relevant and personal to you. To get started, choose a few short-term savings goals that you can reach in 6 to 12 months.
Doing so will give you faster results. And these “wins” can keep you motivated to save more and help you adopt saving as a lifelong habit.
Later, you can focus on more ambitious goals, such as building your emergency fund, saving for a down payment on a home, or investing in your retirement.
Make saving a habit
Adding a savings line to your budget takes you one step closer to achieving a savings goal. But you still need to move the money from your paycheck to your savings fund.
Make saving a long-lasting habit by trying the following simple hacks:
Use your phone to save on automatic
If you haven’t done so yet, download your bank’s mobile app and set up a recurring transfer from your checking to your savings account.
With an automatic transfer, you’ll be growing your savings consistently, even if it’s a small amount. It’ll make it easier to reach your savings goals.
Get a separate bank account
Using a separate bank account to build your savings – especially a high yield savings account, can afford you a couple of benefits.
First, it’ll make your money work harder, growing faster than in a traditional bank account. Second, the separation from your day-to-day banking institution can make it less tempting to dip into your fund and splurge on non-essentials.
Investing and its power of compounding can help you build wealth. It’s a money principle that can give you an edge to achieve your financial goals faster.
Some of the key money skills you should master when it comes to investing include the following:
The power of compounding
One of the central ideas in investing is the power of compounding.
Compounding increases the value of your investment because you earn interest on principal and accumulated interest. Over a period of time, compounding can grow modest investment contributions to impressively large figures.
Take for example, investing $100 every month at a compound annual return of 9.8% (the S&P’s long-term average annual return). Under these assumptions, you’d have $191,721 in 30 years – a sizable sum considering that you’ve contributed a total of $36,100 over the same period.
Trap cash windfalls to build your wealth
An unexpected windfall might tempt you to spend more. Stop the temptation on its tracks by transferring the money to your savings or investment account as soon as you get it.
Trap salary increases and bonuses
Getting a salary increase is a happy cause for celebration. After the congratulatory high fives, avoid giving in to the urge of spending more because you earn more.
After all, so far you’ve managed to live on what you earned before the increase. So why change it? Invest the difference between your new and your old salary. The results can surprise you.
Invest your tax refund
Few things in life can beat the feeling of receiving a tax refund check. When you receive yours, it often feels like an open invitation to spend.
A financially sound alternative is opening a brokerage account and putting the money to work.
Take advantage of free money
A 401K plan is a type of retirement account offered by many employers. Essentially, you make contributions to the account with pre-tax money, which your employer can choose to match.
You then place the money in investments chosen by your employer. Your balance grows tax-free until you reach retirement age.
If your employer offers this type of defined-contribution retirement plan, take advantage of it. This benefit can become an important component of your future net worth.
Invest in your family’s future
Making sense of life insurance is another important money skill you should learn. There’s many types of life insurance policies, but the two which are discussed most often are term and whole life insurance.
Term life insurance will pay a defined benefit after a fixed number of years. Your premium will depend on your health, age, the policy’s term and the payout you choose.
Whole life insurance includes a cash value that grows over time, like a savings account. As it grows, you can borrow against it to pay for things like your kid’s college. The cash value is a living benefit: the insurance company keeps it and only pays the policy’s net face value when the insured passes away.
Final word on the top money skills you need to know
It may feel like some of these important money skills aren’t as relevant to you right now. But over time, they’ll become increasingly important.
Time is such a huge factor when it comes to money. Mastering some of these abilities early on can have a sizable impact on your life: They can help you stay on track to reach your money goals faster.