1. Budget Like Your Stability Depends On It (It Does)
Simply put, a budget is a roadmap for your money. But if you think of it as something that “limits” you, you probably won’t even get on that road, much less map it. You’re not alone. In 2013, a Gallup poll found that only one-third of Americans made a budget. But a budget is a key part of growing — and owning — financial literacy.
But let’s reframe how you think about budgeting: think of it not as a list of NO, but rather a tool that gives you a guide for when to say YES. If you make an effective budget, it gives you permission to spend once your basics and some savings are covered. You’re someone who likes a massage every now and then? Budget it in! Then you won’t have to feel guilty when you do it, and as if you “should” be spending that money elsewhere (because you’ve already covered your monthly savings item, right?).
And in the most basic way, a budget also shows you exactly what you spend your money on. Maybe you didn’t realize you spend $147 a month on lunches from Chipotle! Once you see that number, it gets easier to decide to bring in lunch a little more often, so you can go out to dinner with your family instead. A key part of financial literacy is being fluent in what you spend and what you save. So start here!
How to Make a Basic Budget
If you have never budgeted before, start by doing an audit of your income and expenses from last month. This can be as simple as creating a two-column sheet on a notepad, if you don’t like working in spreadsheets. The goal is just to make visible what you spend where. Create one column for income, and one column for expenses. Look through all your monthly statements — bank account, utility bills, credit card statements, cash withdrawals — and write it all down.
Next, categorize your expenses. Some people use the “4 Fs” to do this: fixed, fun, future and flex.
Fixed = Bills and expenses you pay each month like mortgage or rent, utilities, groceries, utilities, insurance, debt payments, gas and commuting expenses etc.
Fun = All your expenses that are not vitally necessary. Yes, you love your cell phone and can’t imagine life without it, but it could go if you were in a real squeeze. Restaurants, shopping, clothing, gifts, subscriptions and streaming services, hobbies. This is the place where you’ll find your wiggle room as you adjust your budget.
Future = The amount you set aside that goes into savings every month. You don’t do this? Well, that’s a great first step to take to become more financially literate. Having a regular savings habit is the bedrock foundation on which you can build a financially stable future. Savings is for: emergencies, college, retirement, security and resilience.
Flex = Random expenses that pop up, like a vet bill or car repair. You need to be aware of what those “unexpected extras” can look like. Every budget needs a little flex.
After you categorize your expenses, you can quickly identify which category you spend the most amount of money on — and where you need to make cuts and choices. Then you can use the audit to help you budget for the following month in a way that gets you to your goals, whether that’s getting out of debt or saving for a down payment.
2. Understand your 401(k)
Many working Americans have a 401(k) retirement plan through their employer — but they don’t fully understand the benefit of these programs. (In fact, CNBC reported that two-thirds of Americans don’t understand 401(k)s.)
Let us explain it simply: these employer-sponsored retirement plans allow you to set aside pre-tax money from each paycheck to put into your retirement account. The importance of pre-tax is this: it’s free money! You are receiving a dollar for every dollar earned, instead of the 75¢ you might be taking home due to taxes. And then that money goes and sits and earns income for you, across many years.
Second critical thing to know about 401(k): if your company has a “matching” program, that means there is even more free money for you to claim! For example, if you put away 6% of your salary and your company will match your 401(k) allocation up to 3% — then that’s $50 more for every $100 you put away! (All 401(k) contributions are based on percentage of your salary, upt to a limit of $19,500 a year, more if you’re over 50.) You can see how very quickly that turns into meaningful money that you might have just left on the table if you hadn’t had it explained to you.
This is financial literacy at its finest. Reach out to someone in your benefits or HR department and ask questions. And sign yourself up, stat.
3. Be smart about how you use credit
There is one, pretty straightforward strategy for using credit cards responsibly: pay off your credit cards in full each and every month. A budget (see Step 1) is what helps you know how much you can put on your credit card in any given month, so that you don’t find yourself carrying a balance. If the end of the month leaves you with a larger balance than anticipated, try making an extra payment in the middle of the month to stay on top of paying it down.
Here is one way to manage how you use your credit: When you want to purchase something using your credit card, look at your checking account balance first. Do you have enough in your checking account to cover the balance? If yes, you can use your credit card responsibly. If no, wait until you have the money readily available so you don’t have to worry about accruing credit card debt.
Credit Cards Are the Most Expensive Money You Can Access
Part of financial literacy is understanding that no money is “free” and that certain kinds of money are significantly more expensive to access. Credit cards are the most expensive kind of short-term loan you can get, because interest rates range from 11 to as high as 18.99%. That means that each month you carry a balance over, if your balance is $100, you could pay as much as $18.99 for that short-term loan. And then next month, due to compounding interest, you’ll pay 18.99% interest on a new total of $118.99 — so now your interest charge is $22.59 and your total debt owed is now $141.58.
See how quickly that adds up, in just two months? This is why staying focused on how you use credit cards is a key part of being financially literate — and financially savvy.
Consider a Debt Consolidation Loan
Of course, credit cards have their place, and sometimes making a big purchase and paying for it across three or four months makes sense — as long as you have figured the cost of the interest into the total purchase price of what you’re buying.
If you find yourself struggling with getting out from under burdensome credit card debt, you’re not alone. After all, 54% of credit cards that Americans use are carrying balances that don’t get paid in full from month to month. But the best plan of attack if you’re struggling with credit card debt is to make a plan to pay down your debt, and get serious about it, today.
Consider calling an advisor at Brice Capital, which specializes in debt consolidation loans, which are a solid strategy to instantly lower how much interest you are paying on your debt, by trading in all your high-interest credit cards for a single, lower-interest loan. And paying less interest is always your best move.