One of the biggest challenges facing young people today is how to handle money. Teaching personal finance and money management skills are often overlooked by parents and educators today in favor of marketable job skills, but money management skills are imperative for continued success.
Fortunately, it's never too late to get started. Here are five basic money principles to help you.
- Understanding Income Tax
- Creating a Simple Budget
- Choosing a Bank Account
- Understanding Credit and your FICO Credit Score
- The Emergency Fund
Understanding Income Tax
The term 'income tax' tends to cause anxiety in most adults, but it doesn't have to. If you ensure that your employer is withholding an appropriate amount of tax from your payroll checks each month, there is nothing to fear. The Internal Revenue Service is the United States government’s tax collection agency, and they have provided a free online course for anyone interested in learning more about income taxes.
Creating a Simple Budget
Making a budget sounds intimidating, but it's really simple. It only takes a few quick steps and you'll have a snapshot of your income and spending. Here is a basic plan:
- Find out how much money you have coming in.
- Find out how much your monthly expenses are (include entertainment spending).
- Remember to include irregular expenses (insurance payments, textbooks, etc.).
- Integrate some savings into your budget.
- Subtract your savings and expenses from your income.
Ideally, after step 5, you will have a sum total of zero. This is called zero balance budgeting and it’s very helpful for incorporating automatic savings into your budget.
Choosing a Bank Account
It is important to understand the different types of bank accounts available and make an informed decision about which account type is the best fit for your spending habits. It won't make any difference which account you choose, though, if you don't keep up with your bank statement and daily balances to avoid expensive fees. Igrad.com has put together an informative video to help. It's well worth an eight-minute investment of your time.
Understanding Credit and your FICO Credit Score
Credit is a privilege and should be treated as such. It is important to understand how to use credit as a tool to build your financial reputation; while not overusing it, which could have the opposite effect. If you use a credit card, don’t charge more than you can pay by the end of the month, and never pay your bill late because there are sometimes dire consequences for both. Experian is one of the three well know credit reporting agencies in the United States, and they have put together a valuable article to help beginners understand credit and how your FICO score affects your financial future.
You are going to have unplanned expenses come up from time to time. Everyone does. That’s where the emergency fund is helpful. Ideally, you’ll have at least three months’ worth of living expenses set aside for emergencies. These expenses might include illnesses, car repairs, or job loss. If you’ve successfully created your budget and included a monthly savings plan, your emergency fund should fund itself.
Armed with this information, you can take control of your financial future and keep your spending under control.