Banking 101: Top Money Management Tips
Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
Feel like you could use a refresher course on money management? You’re not alone, since 55% of Americans say they’re “financially coping,” while just 28% are “financially healthy,” according to a recent survey by the Financial Health Network. Managing your money is an important skill to master — your future depends on your personal finances — and getting help means helping yourself.
“High schools don’t require courses and most colleges make personal finance optional,” said Jonathan Clarke, Ph.D., associate professor of finance at Georgia Tech Scheller College of Business. Fortunately, money management doesn’t have to be difficult. Here are ten effective money management tips you can use to build your bank account and boost your financial literacy.
- Track your spending
- Write a budget
- Cut the excess
- Build an emergency fund
- Set financial goals
- Get out of debt
- Pay yourself first
- Think through big purchases
- Check your credit reports
- Stick to the plan
Top 10 money management tips
1. Track your spending
The first step in taking control of your finances is to get a good look at where your money is going. If you don’t know how you are spending your money, you can’t get control over your financial life.
“It’s helpful if you can commit to tracking your spending for a month,” said Clarke. “It provides good insights. You don’t have to track on a detailed basis every month of the year, you just need a basic idea. This will allow you to see where the money is going and see if there is anything you can save on.”
List out your monthly expenses, says Daniel R. Hill, president of Richmond, Va.-based investment advisory firm D.R. Hill Wealth Strategies, LLC.
“This list should be inclusive of housing; vehicle, home and health insurance; utilities; homeowner fees; data plans; student loans; transportation costs; as well as groceries and entertainment,” he said.
2. Write a budget
Tracking your spending naturally leads to the next step: creating a budget. You need to have real numbers about your real life as you decide how much money should go into each item in your budget. You can also scale back some areas if you discover you’re overspending there. A budget can be as detailed as you like.
“Everybody’s budget is different,” said Clarke. “What works for me is to keep things relatively simple. You can have broad buckets, like mortgage payment, utilities and fixed expenses that happen every month.”
A good budgeting guideline is the 50/30/20 rule, a strategy that helps you divide and allocate your monthly income. Fifty percent goes toward fixed costs, such as your mortgage or rent, car payments, debt payments and taxes. Thirty percent goes to discretionary spending, such as going on vacation or dining out. And 20% should be deposited into savings, including your emergency fund or investments.
Regularly monitor your budget, says Ken Tumin, founder of DepositAccounts. “You can start out with a basic budget, which is better than no budget at all,” he said. “But make sure you’re saving more than you’re spending.”
3. Cut the excess
Once you know how much you are actually spending and have started to make a budget plan, you’ll also have a better understanding of where you can cut or reallocate funds in order to optimize your spending plan, says Hill.
For example, can you take public transportation to work? Is there an option for you to work from home at least one day a week, instead of traveling into the office everyday? Pack your lunch instead of eating out.
Another area to cut back is paying fees, says Tumin. “Avoid fees from banking and investment products,” he said. “Minimizing fees is a good general strategy, and that’s where utilizing online banks and brokerages can help as well as finding higher yield accounts. Do your homework and make sure you’re getting lowest fees.”
And make it an annual task to review expenses, such as insurance, cable and phone to make sure you’re getting the best rates. Companies want to keep their customers, and a simple phone call to your internet provider, for example, could result in a reduction in your bill that adds up over time. Plus, there are savings apps to help you with this process.
4. Build an emergency fund
After you have your budget, your first priority is building an emergency fund, says Tumin. “If you have emergency expenses, you will have savings to draw from so you do not have to go further into debt,” he said.
Your budget will determine how well you can fund your emergency fund. Several financial experts recommend saving three to six months’ worth of expenses. Tumin is more conservative.
“I’m in the savers camp and believe it’s important to have a bigger emergency fund — six to 12 months of living expenses,” he said. “It may be too much, but I think it’s better to be on the side of safety, having closer to a whole year of your living expenses. Be conservative in case you get hit by unemployment, a medical emergency or other things that come up.”
Keep your emergency fund in a savings account that is liquid and readily accessible, but only use it for emergencies.
5. Set financial goals
Once the emergency savings account is attained, you should work toward establishing savings accounts for life planning goals. These can be short-term, such as saving for a vacation, and long-term, such as saving for a home, college or retirement, says Hill.
One of the mistakes that people make with their budgets is that they’re short sighted, says Clarke. “It’s important to have a long-term focus and think about some things coming down the road, five or 10 years from now,” he said. “It’s easy to scrape together money and buy that fancy car, but it’s easy to forget that you want to have kids down the road and that can bring a whole set of new costs. It’s being intentional, forward looking and trying to anticipate those longer term goals and how to achieve them.”
6. Pay yourself first
The best way to meet your financial goals is by setting up good financial habits, and one of the best is to make saving automatic.
“Make sure you are saving money and that it comes out of a bank account when you first get paid,” said Clarke. “If you wait until later, you can always find excuses to spend money. Get in the habit of paying yourself first. Make sure it comes out periodically where don’t have to think about it.”
Ideally, save 20% of your take-home pay, says Clarke. “It’s a reasonable estimate and a good starting place,” he said. “If you can save that much while you’re in your 20s and 30s, you’ll be okay. If you wait until your 40s, you will have to save a higher percentage.”
7. Get out of debt
To become financially healthy, you need to increase your available funds, and the best way to do that is to reduce unnecessary loans. The average American has $38,000 in debt, excluding their mortgage, according to a 2018 Planning & Progress study by Northwestern Mutual.
“For those in debt, the priority should be reducing their debt,” said Tumin. “It is the step that should come after creating your emergency fund. In general, reducing debt is the second-most important step in money management.”
Start by paying down high-interest accounts, suggests Tumin. “Pay down credit card debt first,” he said. “Some debt might not be a priority to pay off right away, such as a low-interest mortgage. You can work toward paying off lower interest debt and building your retirement savings can work in parallel.”
8. Think through big purchases
Before you make a big purchase, slow down and consider all of your options, suggests Clarke.
“The Boy Scouts have a personal finance badge and part of the badge is that they have to think about how they would pay for a significant purchase,” he said. “They have to comparison shop. They have to think about how they can find the best price. Should they buy new or used, or wait for a sale? This is good advice for us all. If you’re buying a car, for example, should you buy new or used?”If possible, it can help to coordinate your purchase with the best time of year for that item. For example, televisions often go on sale close to Super Bowl Sunday, and dealers want to clear off last year’s car models in October to make room for their new deliveries.
9. Check your credit reports
Finally, having a good financial plan means knowing where you stand. Tumin suggests checking your credit report every year to make sure it’s accurate. Trouble with credit reports is the second-most frequent source of consumer complaints to the Consumer Financial Protection Bureau (CFPB), after debt collection. Of these complaints about credit reports, 74% concern incorrect information on a report. An error could result in being offered a higher interest rate if you need to take out a loan. And you may also find suspicious information that could alert you to fraudulent activity.
Another report you can order that is often overlooked is ChexSystems, a consumer reporting agency that gathers information on consumer checking and savings accounts.
“ChexSystems is a standard tool that banks use to approve applications and they flag any kind of negative banking history,” he said. “It’s just like your credit report, and it’s available to you for free once a year.”
10. Stick to the plan
The best way to manage your money and get ahead is to have a plan and stick to it. According to a study by Careerbuilder, 78% of Americans live paycheck to paycheck. It’s hard to get ahead if you don’t have money left over each month.
And as you receive raises or additional consistent income throughout your life, review your saving, budgeting and spending plans to better reflect your current financial status and future financial goals, says Hill.
“Remain consistent with those savings,” he said. “The important take-away […] is to keep contributing, even when financial goals are attained.”
“My best general advice is to live beneath your means and save,” said Clarke. “That’s the best way to achieve long-term financial goals.”
The bottom line
Managing your money — and doing it well — is one of the most important steps you can take to secure the future for you and your family. Your financial needs will change as you enter different cycles of life. So be sure to review and adjust your budget, goals and spending plans. Your financial plan is a living document that helps you create your best life.