Financial Literacy 101: How to Start Improving Your Money Management Today by Sterling Bain
Financial literacy is a topic that affects a lot of people differently. The ability to understand financial concepts vary from person to person. This is usually due to levels of exposure to financial information or understanding how to apply said information practically. Moreover, why applying such information is even more important. This is because when we realize why we do things, we understand whether the pursuit at hand is purposeful or meaningless to whatever goal(s) we are trying to achieve in life. We can start our journey into financial literacy by improving our money management skills first. We can do this by creating a budget, tracking our spending, and by defining wants from needs.
A budget use to be a bad idea to me. Why should I restrict myself to what I can buy when I worked hard to earn my cash? However, I quickly realized that after paying bills, I could not tell you where that money was spent. It was the most awful magic trick I played on myself. I knew I hadn’t been robbed (by anyone else) yet, my funds were always depleted a week before the month began. I realized I had more month than money and, it became a common occurrence. I often had to ask a friend or relative if they could spare me a few dollars before the next pay period. Now, I had a few dollars less on the next paycheck. Yikes! Does this sound familiar?
The first step to managing your money is to see what your funds look like. Being abstract or guessing isn’t going to work. Having a budget is the best way to visualize your finances. I suggest using a Zero-Based Budget (ZBB). This simple budget means that your monthly expenses have to be equal to your monthly income. Therefore, the difference of your expenses from your income will result in zero, hence the name. With this budget, you give your money a job to do otherwise, it would find something to do. Categorizing your monthly expenses and allocating funds to each helps you see where every dollar will be spent. Knowing where the money is going gives you more peace of mind.
After starting a Zero-Based Budget you will feel a sense of accomplishment. Your mind is clear. You know where all of your money is going, right? Well, kinda. Let’s say you have a budget category for Restaurants of $400 a month. You want to make a purchase and would need to know how much is left after spending from that particular category. Tracking your spending further increases your management skills and helps you to continue the discipline of budgeting. I would suggest tracking your spending using an app on your smartphone as it can help you view your daily spending habits. Otherwise have a notebook handy to write it down. When you can review your spending habits, you may see the need to adjust your budget in certain areas. Maybe you don’t need $400 this month to eat out at restaurants. Maybe you will because of a special occasion. Your budget and spending will vary from month to month. The more you practice writing them out the better you become at managing your money.
When making a purchase there is one question that should come to mind. Do I want this or do I need this? Want vs need is the factor that is going to lead you to make responsible purchases rather than irresponsible ones. This also affects the opportunity cost of your purchases. Opportunity cost is simply the adage, “You can’t have your cake and eat it too.” When you decide out of a list of options that removes all other options. The choice to spend $5 on lunch or a phone card for instance leaves you with only one result. You don’t get both if you only have $5. This is why we have to weigh our options carefully as wants or needs. When you intentionally consider the purchases you are making you begin to see your spending habits changing. What you may have been spending towards an impulse buy now is used to fund something that you will need. You can forgo a purchase for now realizing you can get the want later when conditions are better. This discipline and intentional behavior can help you to focus on future financial goals ahead.
Improving money habits mirrors physical growth and maturity. You can financially grow up. You may start at a kindergarten level of understanding but, over time it should grow to a mature level. You may even grow to a “doctorate” level if you get invested in it; the sky is truly the limit. Financial information and concepts are in abundance. Finances connect to all aspects of your life becoming financially literate is key to your success and helps build the lifestyle you desire. Mastering these initial steps can be the start to a fulfilling financial future.
