Being money smart doesn’t necessarily mean being rich, investing in elaborate schemes, or even owning a business. Your financial well-being tells a different story that’s unique to you and your relationship with money. You don’t need to have everything figured out. We’ve compiled some tips to help you learn how to be smart about money.
What does it mean to be smart with finances?
There’s no one-size-fits-all when it comes to finances. What works for one person might not work for someone else. But in general, there are a number of tools that you can use to help sort out your finances and learn how to be smart about money.
Being money smart means finding ways to incorporate various tools and resources into your life. It also means setting up financial goals that are specific, measurable, attainable, realistic, and timely, often referred to by the acronym SMART.
No matter the type of financial roadmap you’re looking to create, you have a higher chance of success when you use a SMART goal.
How does being money smart improve your life?
Having your finances sorted can help you sort out what you want with your life and when you want to accomplish it. For example, let’s say you want to buy a house but have $20,000 in credit card debt.
By setting up a goal to get rid of your credit card debt, you can free up money to save for a downpayment, and raise your credit score, increasing your chances of getting a decent mortgage from a bank. Knowing how to be smart with your money can help you with your long-term goals.
How to be smart about money
If you want to know how to be smart with your money, you first need to have the right tools and habits. These habits can help you figure out how to successfully manage your money.
We’ve broken down everything you need to know about being money smart, from setting up a budget, to spending money, and investing!
1. Setting up a budget
One of the things you should do right away if you want to know how to be money smart is to set up a budget. Having a budget helps you understand your cash flow – where your money is coming from and where it is going.
Are you spending money on things you want to spend money on or are you spending aimlessly? A budget can help you solve that.
Keep track of your monthly income and spending
Start by keeping track of your monthly income and spending. You can use an app or personal finance tool to help you or you can do it yourself using a budget template. Make sure you keep track of everything and try to figure out what areas you are spending the most.
Figure out where to cut back
When you know where your money is going, you can figure out how to cut costs. This is where it helps to have your expenses broken down by category.
Are you spending a lot of money on ordering in? Maybe try cooking more meals at home. Or do you have a lot of subscriptions? Evaluate if you use them enough to justify the cost.
Write down all due dates on a calendar
One of the biggest strains on a bank account is late fees. Avoid having to pay extra by writing down all bill due dates in your calendar. Or better yet, automate your payments so you don’t have to worry about it.
And it’s still important to keep track of your spending, so make sure to account for any automatic payments. Seeing it all on your calendar can help you see the big picture.
Create financial goals
Once you know how much money you have coming in and out, it’s time to set up your goals. Make a list of where you would like to be in 1 year, 5 years, and 10 years.
Do you want to own a home? Have a certain amount of money in your retirement account? Get out of debt?
Once you know what you want to accomplish you can work towards reaching those goals, such as putting money into an IRA account or paying off your student loans.
2. Paying off debt
Debt is probably one of the biggest things that can prevent people from reaching their financial goals and being money smart.
Know your debt number
Before you start paying off your debt, you need to first figure out how much you owe and to whom. What type of debt do you have?
Credit card debt is not the same as having a mortgage. And student loans can often have varying interest rates and terms. Write down all of the debt you owe, and the type of interest and amount.
Figure out a debt reduction strategy
Once you know how much you owe, you can start to reduce your debt. There are a few strategies to reduce debt.
One is to pay off the lowest bill first. Once the smallest debt is paid off, you can use that extra money to pay off the next biggest debt. You should also pay the minimum each month in order to ensure you don’t rack up extra fees.
Prioritize high-interest debt
More people are paying off their credit cards. Prioritizing high-interest debt can help you get out of the debt cycle and free up more money in your wallet.
Find ways to pay off as much of your high-interest debt as possible by cutting your spending, getting a higher-paying job, or starting a side gig.
Find out about student loan refinancing options
If you have student loans, you might be able to refinance for a lower rate. This can save you money in the long term.
However, if you refinance with a private loan provider, you may not be eligible for federal loan forgiveness programs. Make sure refinancing works for you and your situation.
3. Setting up savings
The average amount of money that an American has saved up is $62,086. While that might seem like a lot for some, it’s not nearly as much as experts recommend, especially for people who are older.
If you want to know how to be smart about money, one of the things you can do is make saving a priority, even as you tackle paying off your debt.
Open a savings account
Opening a savings account is a great step toward being financially savvy. Having your money in a separate account from your general everyday spending account ensures that you don’t accidentally dip into your savings. Look for accounts that offer interest and perks, like a high-yield savings account to earn extra money.
Create an emergency savings fund
Life can be unpredictable. Unexpected car accidents, hospital bills, or plumbing repairs are not only annoying to deal with, but they can be expensive. That’s why it’s important to keep an emergency savings fund for these particular situations.
It can be any amount, but experts generally suggest having three to six months of living expenses saved for emergencies.
Automate your savings
If you can, automate your savings. With many bank accounts you can set up a portion of your paycheck to go into your savings account right away, so you don’t even realize the money is gone. It’s a smart money move to make sure that you’re preparing for the future.
Save extra money when you can
Did you get a bonus or maybe you spent less than you expected on a trip? Instead of spending that extra money on something else, set it aside in your savings account so you can start to build up your savings.
And once you have a good amount of savings built up, you can even consider investing that extra money instead.
4. Know how to shop, find deals, and buy what you need
Spending money is part of life. But it doesn’t have to be a drain on your bank account. There are steps you can take to ensure you’re spending money wisely, instead of just living from paycheck to paycheck.
Look for the best price
Before buying a large ticket item, like a new couch or phone, do some research and figure out if you can get a good deal somewhere. If you can, try to wait for the sale season to buy items.
Black Friday and the weeks after Christmas are generally when stores have a lot of items on sale. And you may find the same or similar product in another store for cheaper.
Buy second-hand or off-season
While we all love to get things that are new, consider buying second-hand. You can often find deals on Facebook Marketplace or through apps like Vinted. Not only is buying used environmentally friendly, but it’s also a smart way to save money.
You can get many items that are second-hand for half the price of buying new. If you can’t find what you need used, then consider buying it off-season when it’s likely to be on sale.
Keep track of what you spend
Keep track of how much you spend and when. Incorporate this into your budget so you can know right away if you’re spending too much.
Make it a point to periodically review your spending habits and see if there are areas where you can cut back on how much you spend each month.
Check your credit reports annually
Having a good credit score is vital for getting bank loans. Keep track of your credit reports to see if your score has changed. If you have a low credit score, look for ways to improve it, such as paying off your credit card debt.
5. Investing for the future
If you want to know how to be smart about money, you also need to know about investing and saving for retirement.
By investing your money, you’re letting it work for you, without needing to do much. And investing is one way that you can plan for your financial future.
However, investing can be risky, so make sure to talk to an expert and do your own research first.
Set up an IRA
Setting up a Traditional IRA (Individual Retirement Account) is a smart money move that you can use to build your future. These accounts are tax-efficient, meaning you can choose to pay taxes on the money now or when you take the money out, depending on the type of IRA.
You can invest in a number of different assets, such as ETFs, index funds, stocks, and more. Learn more about the IRS guidelines for IRAs.
Invest in your 401(k)
If your company happens to offer a 401(k) plan, invest as much as you can, especially if your employer offers a matching program. While each company plan is different, it’s one of many ways to prepare for your retirement.
Automate your investments
Just like automating your savings helps you build up your wealth without needing to think about it, automating your investing can help you build your investment portfolio.
Depending on your bank, you may be able to have a certain amount of money invested in your investment account.
Do your research
When it comes to investing, one of the best things you can do to be money smart is research and educate yourself about investing.
Learn how to be smart about money
Knowing how to be smart with your money isn’t just about having a lot of money in your bank account. It’s also about how you approach your finances, from setting up realistic financial goals to paying off your debt and investing in a retirement account.
While your personal finance journey varies from others, these simple tools can help you navigate and hopefully help you set up your finances for long-term success.