Many Americans are not educated on best practices when it comes to finances. They are expected to figure it out by themselves unless their parents helped prepare them. There is a major lack of financial literacy in this country because of this. Keep reading to see the financial tips you won’t learn in school.
Understand your Income
You need to have a strong understanding of your monthly and yearly income to be able to break down how you are spending it. You need to know where you are getting it, when you are getting it, and how much you are getting. This will all help you determine how you budget it.
Build a Budget
Once you know your income, you can now evaluate your debt and expenses. A budget will allow you to see the inflow and outflow of your money and be able to manage your money more effectively. Understanding your spending gives you the opportunity to cut out unnecessary expenses or see where you can save money.
Establish an Emergency Fund
An emergency fund should be separate and in addition to your traditional savings account. An emergency fund is generally recommended to be funded with 3 to 6 months’ worth of living expenses. At Firethorn, we go a step further and recommend clients have 1 to 3 years of living expenses in the emergency fund. If something unexpected happens, your expenses can be paid over a short amount of time. These savings should be extremely liquid, so you have quick access to the funds. We recommend an FDIC insured savings account or a CD up to six months.
Take Advantage of 401(k) Matching
If your employer offers 401(k) matching, that means that the company will contribute up to a certain percentage of your income to your 401(k) account. The company match can be viewed as a raise or free money going into your retirement savings. Time is key when it comes to retirement planning so there is enough time to compound your money over decades. It is recommended to contribute at least up to the matching maximum so you can receive as much company money as possible into your 401(k).
Build Good Credit
Most people are not taught about credit and credit scores until they need a credit card or a loan. Good credit begins with borrowing money in small amounts and paying it back on time. A best practice for building good credit is to pay your credit cards off in full every single month. Having good credit will make it easier to get loans in the future for a home or car. You will receive a better interest rate because there is proof that you pay off your debt quickly and on time.
Having quality knowledge about your finances is important to be able to create a good life for yourself. If you have a great financial standing, life gets much easier to live. Starting off with good habits will make it easier to continue to have good finances throughout your life.