Growing up, my parents made sure I learned how to play sports, they ensured I got good grades, I even got some useful education about sex, but they didn’t deem it necessary for me to learn some simple and practical money skills.
Given the central importance of my financial health to my success in life, I wish they did. For a significant portion of my life, I failed miserably at managing my money.
I got my first job at the age of 18, and I can’t remember how I spent my earnings. I went to college, graduated, and got a good job. Two years later, I had over $70,000 in credit card debt. Something had to give.
I just had to change. I had to reevaluate my experience and develop the necessary skills and principles that will help me manage my money better.
Years have passed, and I have learned a lot about money since then. Lessons on money skills I wish my parents had taught me earlier. At least, it could have saved me several years of poor money habits.
Some people are simply born good at handling money, while others acquire these practical money skills at a very young age. Unfortunately, I didn’t.
Why Parents Should Teach Their Kids Practical Money Skills
I could not emphasize enough the importance of practical money skills in a person’s life; unfortunately, despite how critical money skills are to our well-being as adults, it’s hardly ever taught in our schools. Financial literacy prepares our kids to have the ability to build wealth for a sustainable future.
With financial awareness, it is very possible for them to create something really amazing. They will learn that there are better financial choices in life at an early age.
If parents want their kids to succeed, they must become financially educated, no other choice.
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Here Are Some Practical Money Skills I Wish I Learned Earlier in Life:
How to keep track of bills and pay them
This is number one on my list of practical money skills that kids need to learn. The sooner, the better. It is tough when you have never been independent, to find yourself living on your own all of a sudden with bills to pay. Keeping track of bills requires organization, having records of paper bills and digital bills, and knowing when to pay them. Without an organized system for paying bills, this can be very difficult. I had to learn the hard way after paying late fees and making painful sacrifices.
An excellent way to keep track of bills is to have a place you store your bills. You can have a box where you keep your paper bills and a folder on your laptop, tablet, or phone where you store your digital bills. You also need to schedule a specific time every week to pay bills. These will help you to pay your bills on time and avoid late payments.
It is one thing to pay bills, and it is another thing entirely to have enough money to pay the bills. This is where budgeting becomes very important.
Most people nowadays use bill payment apps or schedule their payments to their creditors online. We call this paperless billing. You may want to look at this option as a lot of providers are offering discounts on their services if you choose this option.
I save 10 percent every month on my cable and home security using paperless billing.
How to make a budget
Budgeting is the foundation of sound financial management. It is one of the most important practical money skills one must learn. A budget will help you properly allocate your income, track your expenses, and meet your financial goals.
Before I start budgeting, when I get my paycheck, I will pay my bills, pay off part of my credit card debt, save transport money, and I will live off the rest supplemented by credit card debt.
A resolution to change my habits and a well thought out budget changed all that.
Making a budget requires time and some thinking. You can use a spreadsheet, or you can use a budgeting app like Mint or YNAB.
If you feel this will not work for you, then you can use the envelope method. You will withdraw your cash and divide it into major categories of expenses. You will then put the money you have allocated for each expense type inside an appropriately named envelope.
That way, you easily keep track of what you spend under each category.
Another budgeting strategy that I’ve been using for the past five years now is the 50-30-20 budgeting method. The method works like this; you set aside 50 percent of your take-home pay for expenses like mortgage or rent, food, and other basic needs. Then 30 percent should go to your personal needs such as clothing and entertainment, and 20 percent towards your savings and debts.
Budgeting needs to be taken seriously if you want to get to where you want to be financially. You don’t budget simply because others are doing it, and you feel like you should. Creating a budget is what responsible people do, though it may require a lot of self-discipline.
How to manage credit cards
Credit cards can be beneficial, or they can become a debt burden; it all depends on how you handle them. It can be helpful if it helps you build an excellent credit score that you will need to get reasonable rates for your car loan or your mortgage.
Credit cards can also be very detrimental and often are when you have no control over your credit card debt, consistently make late payments, and have little knowledge on how to manage your credit smartly.
The keys to managing credit effectively are a budget, self-discipline, and an airtight plan to keep your debt at a manageable level.
Make sure that you pay your bills on time, and as much as possible, do not pay the minimum payment. This will take you forever to pay off your debt, plus you will end up paying a greater amount of interest rates than you should. Paying only the lowest amount required a month is such a bad idea.
You need credit in our modern society, but what you want is good credit. Banks rely on your credit history to determine your creditworthiness when you apply for loans, and if you have an excellent credit score, you will get favorable interest rates.
Unfortunately, many people struggle with credit card debts. If you feel that you fall into this group, it’s time to get your act together. You can start by stopping your bad spending habits. You can also call your credit card providers and ask them if they can lower your interest rate.
How to save
Saving and investing are two different things. When you save money, you are parking your cash in a savings account or in a safe and stable short term security where you can easily access your money when you need it.
Investing is somewhat different. When you invest, you are putting your money in an asset that you believe will generate more income for you over time, and you will still recover your principal.
We save for emergencies, we save to raise enough money for significant expenditures, we save for retirement, and we save to raise enough money for investing.
The best strategy to save money is to pay yourself first. This means setting aside and saving a certain amount of money before you pay your creditors, your electricity, and other debt obligations. Your first payment each month must be to yourself by depositing it into your savings account.
Saving money is not easy; we all know that. It is a constant challenge due to the almost never-ending expenses and debt obligations, which demands a considerable amount of your monthly paycheck.
Learning to save is a pillar of personal finance, and it’s vital to start early.
How to pay off debt
It is good advice when they tell you to avoid debt, but I have learned that the advice is quite useless when you have student loans, credit card debt, car loans, and other obligations to pay off.
More useful advice will be to teach me how to repay my debt.
My road to conquering debt started with the decision to delete all my loan apps, write down a debt repayment plan, and create a budget that made that plan realistic.
I dispensed with the habit of only making minimum payments on my credit card debt, and I stuck to a plan to bring my credit card debt to a bare minimum.
Below are some of the best strategies in paying off debts:
- Create a budget; this is the first thing you need to do and make sure to enforce it strictly.
- Stop credit card charges; as easy as it sounds, but this is a must if you want to get ahead with your debts.
- Never pay the minimum required; if you can afford it, pay more than the minimum. You’ll save on interest, a higher credit score, and pay your debt faster.
- Negotiate with your creditors; ask your credit card provider if they can lower your interest rate and, if possible, create a payment plan for you.
- Consolidate your debt; if you have a mortgage, you may be able to take advantage of your home’s equity to consolidate all your outstanding loans.
- Discipline; this is extremely important; it takes a lot of commitment and self-discipline to pay off debt. Stay focused on your goals on a daily basis.
How to prepare and file taxes
Filing taxes can be quite overwhelming. To be honest, I hate dealing with taxes. I mean, you could do it manually, you could use a much-hyped software, or you could hire an accountant, whatever you choose to do, it is still your signature, and you will be responsible if anything goes wrong.
I had to learn the importance of keeping all my tax-related paperwork in a safe place. My student loan statements, receipts for charitable donations, medical bills, and others suddenly became vital documents I had to keep.
I also had to understand the many IRS forms and which ones applied to me.
For the actual tax filing, I narrowed my options to three. I could file my taxes manually by using IRS instructions to fill my Form 1040; use online software like TurboTax, which will walk me through the process and file my form electronically, or I could secure the services of an expensive accountant. I go with the software.
Filing your taxes nowadays using a tax preparation software is much easier than it was 10 years ago. They are more user-friendly, and a step-by-step guide is within your fingertips. Depending on your filing requirements, there may be some cost involved. You can also go to IRS.gov to see if you qualify to file your taxes for free using their own software.
Lack of financial discipline was the root of all my financial woes. I wish someone had told me as a kid, ‘young man, if you don’t have enough money to buy something, then it simply means you can’t afford it.’ It sounds like common sense, but I didn’t understand that then.
I finally stumbled on a simple principle – spend less than you earn.
Of course, there are debts like student loans and a mortgage that are crucial to building a life for yourself, especially if you don’t have wealthy parents to bail you out. But outside your student loan, your mortgage, and if necessary, a car loan, every other type of expense should not exceed your income.
Budgeting is key to financial discipline. You must set aside money for your savings, money for debt obligations, the money you are saving to meet life goals, and portion the rest into your different categories of expenses.
If you want to have sound financial health, you will need fiscal discipline. You need to save for retirement, and you need to plan for your responsibilities if you have a family. You also need to add cash to your emergency fund – the list is substantial. If you lack the discipline to keep your expenses in check and stick to a budget, then you will keep having financial difficulties.
How to create an emergency fund
Life has its highs and its lows. In life, events you didn’t plan for can happen, and if you are not prepared, you will find yourself stranded.
It could be a layoff at your place of work, it could be a health issue, it could be a divorce, or it could be your car that needs major repairs. The point is a rosy situation can change in the blink of an eye. But if you have a cash hoard somewhere accumulated for such an event, then you will have the confidence to tackle the unknown.
If you ask those financially savvy types, they will tell you to save up to six-month wages, and it’s probably a good idea. The reality is that the right amount will depend on how much you earn relative to your expenses.
If you earn just enough to get by, saving up to six-month wages will be a tough task. What you need is to save enough money that you know will pay for your necessities and supplement any sort of external help you can get during an emergency.
If you are not living paycheck to paycheck, then great. You will need to set a target to save between four to six months of wages and periodically pay into an account specifically created for that purpose.
How to get started with the emergency fund:
- Know your monthly expenses; list all your expenses from mortgage or rent, car note, food, entertainment, utilities, insurance, and other expenses.
- Know how much you can afford to save; go over all your bills, expenses, and income to see how much you can save towards your emergency fund.
- Open a savings account: this is the place where your emergency fund should go and make sure to set up automatic deposits. Check out high-yield savings accounts such as the American Express personal savings.
How to invest wisely
It is crucial that you save for retirement and that you build an emergency fund, but if you want to create wealth and achieve financial freedom, then you need to know how to invest.
Investing can be as simple as buying fixed income securities that will pay you a higher interest rate than your savings account. This type of investment is low-risk, but it will not help you build significant wealth.
But if you want more significant returns and you want a substantial change in your financial status, then you will need to explore other avenues of investing with much higher returns.
Investing in the stock market offers a lot of options nowadays. You can either trade on your own or use financial apps and start for as low as $5. Learn and choose your risk tolerance. Just remember to only invest in what you understand.
Just remember to only invest in what you understand.
Most parents also do not teach practical money skills to their kids, having little or no financial education themselves. However, it’s never too early to learn about money. Parents should make sure their kids are financially literate to enable them to avoid the cycle of debt and poverty.