While many people believe that they are “just bad with money,” in reality, financial skills are something you can learn and improve through practice. So even if you have no idea what you’re doing and are afraid to look at your bank account balance, there is hope.
Here are seven money management skills everyone needs
1. Budgeting (Knowing Where Your Money Goes)
Whether you have a traditional budget or not, one of the most important money management skills is knowing how much money you have coming in and where it all goes.
This awareness of your cash flow is what allows you to be more intentional with your money and start building a life you love. When you know how much comes in and where it goes, you’re better able to make decisions about where you want it to go.
This is key to meeting your financial goals, whether it is to save more, get out of debt, make a major life change, etc. It all starts with having a complete picture of your money in and money out.
Related:
Budgeting for Beginners Part 1: Figuring Out Where Your Money Goes
Budgeting for Beginners Part 2: Tell Your Money Where to Go
2. Saving for the future
Another skill for managing money is saving for the future, and the key is to create a habit of saving. Some of us were lucky enough to learn this early in life as we watched our parents save money for their own futures.
But if that wasn’t you, there’s still hope.
To get started, identify how much you’d like to start saving and make a plan for when and how it will happen. You could schedule time in your calendar for when you will transfer money to a savings and/or retirement account. Or, you could automate it and have your bank do it for you on a regular schedule.
Remember, it’s okay to start small if you don’t have much to save right now. Create the habit of saving now, even if it’s just $10. Then work over time to increase the amount.
3. Having backup money for when things don’t go as planned
Having backup money (or having an “emergency fund” or “oh crap fund,” as many people call it), is what helps you pay the bills when things don’t go as planned. Maybe you lost your job, your house was destroyed by a tornado, you accumulated expensive medical bills, or the furnace went out in the middle of winter.
Whatever happens, you’ll need some money to get you through it. Which is why you need backup money—savings that will cover anything out of the norm.
Plus, I can’t state enough how much more secure you will feel about life when you have the confidence that things will be okay if something goes wrong. It’s incredibly helpful for your mental health and general well-being.
4. Understanding opportunity costs and being intentional with spending
Most of us cannot afford to buy whatever we want whenever we want, so we have to make choices with where we spend our money. You have to understand that every time you spend money on one thing, you’re giving up the opportunity to spend money on something else. This is called the opportunity cost.
Identifying the opportunity costs allows you to intentionally spend your money in ways that support your best life. You can decide if buying that daily coffee is more or less important than saving for the vacation you want. You can decide what you’re willing to give up while you work toward being debt free.
Aligning your money with your values and life goals is key to living a happier, more meaningful life.
5. Living within your means
It may feel like living within your means is a money skill only poor people need, but there is no correlation between the amount of money you have and who lives within their means. I’m looking at you with the boat and the jet ski and the cabin and the second mortgage, but no retirement savings.
If you want to build wealth, you have to live within your means. You have to spend less than you earn.
That does NOT mean you can’t take on debt to buy a home, renovate a home, buy a car, go to college etc. It DOES mean that you need to make sure you can afford the payments AND save for retirement, pay the bills, etc.
Related Articles:
How to Stop Living Paycheck to Paycheck
It’s Not Too Late to Start Saving for Retirement
6. Using a credit card responsibly
Many people have gotten themselves into major trouble when they’ve used credit cards as a free ATM, which is why using credit cards responsibly is such an important skill for managing money.
Using a credit card responsibly means:
Thinking of it like a debit card, where the money is immediately deducted from what you have available.
Paying off the full statement balance every single month.
Because so many people have accumulated high amounts of credit card debt, certain finance “gurus” (Dave Ramsey and company) advocate not having one at all. And if you find yourself in debt, getting rid of credit cards (at least temporarily) may be necessary. However, there is no reason you can’t have a credit card if you understand the rules and use it responsibly.
7. Investing and Building Wealth
With people living longer, getting less support from employers and the social support system, and inflation eroding our purchasing power, it’s more important than ever to invest and build wealth.
In addition to taking care of future you, investing can help you save for longer term goals and create the life of your dreams. Building wealth that can be passed on is also what will help future generations get ahead.
Investing is a scary idea for many people because it seems risky, but not investing is risky too because it means you might not have enough to live on in old age, let alone meet your financial and life goals. So I encourage you to start learning how and to find an advisor who can get you the help you need to start building wealth for the future.
