Personal finance management is essential for every person, yet academic institutions often fail in setting baseline knowledge. This leaves financial education in the hands of parents, who often come with their skewed perspectives and habits. Even worse is a situation where individuals lack any instruction on personal finance whatsoever. These unfortunates are left to their own devices, heading into their working years on a wing and a prayer.
That’s tragic, as a lack of financial knowledge can lead to mismanaged budgets, debt, and even financial ruin. If you’re in need of a financial do-over, there are some key things you need to know. Once you’ve learned these components of personal finance, you can make progress toward your goals and build good habits.
1. Manage Your Obligations
If there’s one constant in life, it’s that bills must be paid. And while paying bills is unavoidable, you can do yourself a favor by developing a budget. A budget helps you stay on track because you know what you’re bringing in and what you owe.
Use automatic bill pay to ensure you pay credit card and utility bills on time, both of which can cause major issues if missed. The same holds for debt obligations like your home, auto payments, and student loans. Missed or late payments can rack up late fees and result in bad marks on your credit report.
2. Know Your Credit Score and Make Moves to Improve It
Your credit score is tabulating in the background, even if you aren’t paying attention to it. If you’ve spent months or even years clueless about your score, you need to remedy the situation. Being unaware of your credit score can lead to financial heartbreak years into the future.
Your credit score reflects your habits and is a key indicator for determining how reliable you are to creditors. It consists of five factors, two of which are the most powerful: on-time payment history and credit utilization. Boost your credit score while taking care of basic necessities like groceries by using a credit builder card to pay for them. Because they’re secured, these cards are easier for those with little or poor credit to qualify for.
Once you have your card, you can use it to build up your on-time payment history. Aim for lower than 30% credit utilization across your revolving credit accounts to earn a great credit score.
3. Pay Yourself First
You may have heard the recommendation that you “pay yourself first,” but what does it mean exactly? It means that you treat your separate savings account as a bill you must pay every month. Set up an automatic transfer that coincides with your pay date to make it seamless. Start small to build your new habit and increase the amount you save over time.
The same practice works for retirement savings. Think of “future you “as someone you need to pay. The 65-year-old you is depending on present you to think ahead for your retirement years. Saving for today’s surprises and tomorrow’s retirement will help you be prepared for whatever life brings.
4. Maximize Your Tax Advantages at Any Income Level
No one likes paying taxes, but like bills, they’re unavoidable. However, understanding the current tax system and available deductions and credits can help you manage your finances better. Consider your current and future income and filing status to make advantageous tax moves.
Individuals with average incomes can get credits each year for saving for retirement, making certain donations, or paying for childcare. Review your tax status, paying special attention to actions that qualify you for credits. Credits either reduce your tax burden or, if you owe nothing, are refunded to you once you file your taxes.
While you shouldn’t depend on these credits as a part of your budget, they can help you toward your financial goals. Use any tax refunds to boost your savings account or pay down debt instead of splurging on a short-lived impulse buy.
5. Tap Into Your Employer’s Resources
Your employer likely offers you a tax-advantaged retirement account, complementary contributions, and access to additional services. When was the last time you reviewed their offerings? Don’t wait until open enrollment to see how many you can take advantage of.
Most employers provide access to health savings and flexible savings accounts for both health and dependent care expenses. These tax-advantaged accounts can save you thousands each year by sheltering a portion of your income before it gets taxed. Use your contributions for qualifying expenses, further maximizing the power of your income.
Also review your employer’s employee assistance program, which can get you discounts or free consultations for high-dollar services. Many offer access to health coaches, attorneys, and therapy services free of charge. Using these resources can help you reserve your remaining budget for things that are important to you.
6. Get the Right Insurance Coverage
Insurance is essential and often required for many things in life, such as home or car ownership. Shop around for the best rates, coverage, and deductibles based on your needs. Having adequate coverage will be a lifesaver in the event of a disaster or accident. Without it, you might quickly experience financial ruin.
Find the sweet spot between a low premium and a reasonable deductible. Consider how easily you’d pay a $500 deductible versus a $2,000 one. If your savings balance can support a larger deductible, take advantage of lower rates. If it can’t, stick with a low deductible so a hailstorm doesn’t drain your savings. Get quotes from several insurers and compare their offer against one another before you make a decision.
7. Review Your Financial Picture Regularly
Your financial picture is one you should know as well as the plot points of your favorite TV show. Make a date with your finances like you do your latest streaming binge. Review your budget, your progress toward financial goals, and your credit score at least once a month. Under your watchful eye and intentional efforts, your financial picture will soon be looking bright.