No matter how much money you make, if you spend more than you earn, then your net worth will be negative, and your financial situation won’t be very good. Therefore, it’s very important to understand some basic principles of personal finance and how to use them in your day-to-day life. Here are ten tips to improve your financial management skills and help you secure your future financial stability.
1) Understand how interest works
Interest is a cost, like rent or mortgage payment. When you invest in an interest-bearing account, that money won’t grow unless it earns more than it costs in interest—that is, unless your account pays more interest than you have to pay for it. The difference between what you earn and what you pay is your profit.
2) Start saving now
The most important step towards your financial goals is simply starting. You won’t be able to get from point A (where you are now) to point B (where you want to be) without taking a first step, and that step should include at least some saving. It doesn’t matter if it’s only $5 per week; start saving today. Once you begin putting money aside, you can figure out where else that money could go—and save more in turn.
3) Be smart with credit cards
Just because you can pay for something with a credit card doesn’t mean you should. A credit card isn’t a free ticket. In fact, it’s often more expensive than any other type of financing. And if you carry high-interest debt from month to month, your outstanding balance will grow even larger—meaning more interest for you! Use credit cards responsibly and only when you know that you can pay off your bill in full at the end of each month.
4) Compound interest
Compound interest is one of those investing principles that’s so simple, it seems like it can’t be true. But it is—and if you’re not taking advantage of it, you could really be missing out on a lot. Put simply, compound interest is interest on interest, and it happens when an initial investment generates earnings that themselves bring in more earnings. Essentially, your money starts making money for you without much additional effort on your part.
5) Debt payoff strategies
Paying off debt can be a challenge, but in many cases, it’s a challenge worth taking on. When you owe thousands of dollars on credit cards or student loans and are forced to pay hefty interest rates, prioritizing payoff can help boost your savings rate and improve your overall financial health. The key is finding a repayment strategy that fits into your budget—and that won’t be as stressful as just making minimum payments.
6) Use what you have to build wealth
The first step in financial management is determining what assets you have and where they are. This can be as simple as a bank account, or it could involve a lot of legal red tape depending on what kind of assets you’re talking about. The more types of investments that you have under your control, though, and the more liquid those investments are (meaning that you can cash them out without losing much value), then your wealth will increase exponentially. Focus on converting any unclaimed or unused assets into investments.
7) Live below your means
Living below your means is arguably one of the best things you can do for your financial future. Whether you make $30,000 or $300,000 per year, if you spend more than you bring in, it’s going to be tough getting ahead. It’s important that we create a budget and stick to it—so we don’t fall into unnecessary debt.
8) Invest in Yourself
Education is money well spent. Studies show that college graduates earn substantially more over their lifetimes than those without a college degree, not to mention you’ll have greater flexibility in choosing what career path you want to take.
9) Work on a Budget
Many people live paycheck-to-paycheck and don’t really have a grasp on their spending habits. If you’re like that, it might be time to work on building a budget. Start by listing all of your expenses (and saving goals) down one side of a piece of paper and put Income at the top of another.
10) No more excuses!
A lot of people who aren’t practicing good financial habits make excuses for why they can’t manage their money better. You need to look inwards and start taking responsibility for your financial situation, but it doesn’t stop there. If you want to get ahead financially, you have to take a proactive approach—and 10 Tips to Improve Your Financial Management are a great place to start.