People tend to talk about being financially savvy in black and white. Either you’re good with money or you’re not.
But as with most things related to your finances, it's a little more complicated than that. You could be great at making money and terrible at saving it – or vice versa. You could have formidable net worth and terrible credit. You could be the world's greatest budgeter and the world's worst investor.
In other words, "being good with money" can mean many things. Let's take a look at some of the most important factors to consider.
Metrics to Track
While there isn't a single number that shows you are good with money, there are a few numbers that you can track to see how you are doing (Mint tracks these for you):
Your net worth is your total assets minus your liabilities. Assets include the money in your bank accounts, investment accounts, collectibles, home equity, and more. Liabilities include what you owe such as your credit card balance, car loans, student loans, mortgage balance, and more.
To calculate your net worth, add your assets and liabilities separately. Then subtract the liabilities from the assets. Don't be surprised if your net worth is negative. That means you owe more money than you currently have. Graduates and young adults often have negative net worth, especially when they have a lot of student loans.
But as you get older, your net worth should increase as you reduce debt and invest consistently. Try to track your net worth a couple of times a year. You can make your own spreadsheet or use Mint's net worth tracker.
"Over time, you will find that your wealth really starts to grow," said Ryan C. Phillips, CFA, CFP and founder of GuidePoint Financial Planning. "The resulting success can be very motivating and will often lead individuals to save and invest even more."
Your credit score shows how responsible you are as a borrower. Prospective lenders, utilities, cellular operators, auto insurers, and home owners will check your creditworthiness before agreeing to you.
A credit score does not take into account your savings rate or your investment performance, so it is not a holistic number. But it does show if you are good at borrowing money and paying it back. Even if you want to avoid taking out credit, you may still need good credit.
Achieve your personal goals
Managing money well does not mean achieving the same financial goals as everyone else. For example, many believe that owning a home is necessary to financial success, but if you move frequently for work, buying a home can have a negative impact on your finances every time. In this example, renting can be a better use of your money.
"Money is simply a tool that you can use to achieve your personal goals and live a simpler, happier, and more stress-free life," said financial planner Kyle Simmons of Simmons Investment Management LLC.
Make a list of your goals, such as self-employment, traveling abroad once a year, or switching to part-time work. Then, think about how your finances can help you achieve these goals.
Monitor your expenses
Even if you are not on a strict budget, it is advisable to look at your transactions at least every month. You will only notice fraudulent purchases, mistakes and unexpected expenses if you actually read your statements on a regular basis.
Ideally, you should know how much you are spending on key categories like housing, transportation, groceries, insurance, and entertainment. You should also be aware of how much you are saving and whether this savings rate is in line with your goals.
How to get good with money
Would you like to be better with finances? Here are a few starting points:
Start a budget
Creating and following a budget is one of the first steps in getting better with your finances. By creating a budget, you can reduce your expenses and increase your savings. You can start saving for long term goals like retirement or short term goals like starting your own business.
Use Mint to review your current spending and see where you can reduce debt and save more. Mint will notify you when you are almost over budget and almost reached your goals.
Don't be afraid to invest
Paying off debts and saving money are relatively easy tasks for many consumers. If you want to pay off debt faster, just add more money to your monthly payment.
But investing is more complicated, so many consumers avoid tackling it. If you don't invest, you will likely never save enough to fully retire. Learning how to invest and what options are available is a non-negotiable aspect of money management.
Be ready to learn
The world of personal finance is huge and changing all the time. Investing in cryptocurrency was unknown to most people just a few years ago and is common practice today. Prior to the 2018 Tax Act, homeowners often had their tax deductions itemized. Now most consumers take the standard trigger.
Stay up to date on personal financial news by following personal financial influencers, reading financial publications like Kiplinger & # 39; s Personal Finance, and reading the latest money bestsellers.
If you want more personal advice, consider hiring a paid financial planner. You can find a trusted planner through the Garrett Planning Network, XY Planning Network, and the National Association of Personal Financial Advisors.
Getting good with money takes time
With most schools not teaching personal finance and many parents not talking about money to their children, it is no wonder most of us leave home without the financial skills necessary for a secure future. "I think too many people say they're good at money or not like it's a natural skill, but it really is something to work on," said AllStreet Wealth's financial planner Thomas Kopelman.
Finding out more about personal finances is like learning a new language. You would not be ashamed if you were not fluent in French after just a few lessons.
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Zina Kumok (146 posts)
Zina Kumok is a freelance writer who specializes in personal finance. As a former reporter, she has covered murder trials, the Final Four, and everything in between. It has been featured in Lifehacker, DailyWorth, and Time. Read how she paid off $ 28,000 in student loans at Conscious Coins in three years.