If you want to reach your financial goals (big or small), it’s time to get schooled in financial literacy.
Don’t worry. It isn’t as complicated as it sounds. Read on for three quick and easy tips you can follow to give you the knowledge, skills and tools to manage your money and plan for the future.
Know where you stand. Before you can do anything, you need to know where you stand today. Not just the numbers in your bank accounts, but your holistic financial picture. This means knowing three key numbers: your income or how much money you’re making, your credit score and your debt-to-income ratio, also called DTI.
While the credit score is one of the most commonly known indicators of your financial health, it often doesn’t paint your full financial picture. That’s where your debt-to-income ratio comes in. This number shows whether you’re living within your means, essentially whether or not you’re spending more than you earn.
Ideally, you want to keep your DTI at 36 percent or less. To figure out where you stand, divide your monthly debt obligations by your gross monthly income and multiply that number times 100 to get your number.
Why is it important to know all of these numbers? They can impact things like the loan rate you get when you go to by a car, a home or refinance student loan debt.
Know where your money is going. To reach your financial goals, you’ve got to know your spending habits. That means setting a goal, developing a budget and tracking where you’re spending and saving. Here’s a quick checklist to keep in mind while you’re budgeting and tracking:
- Track all your expenses and set reasonable spending guidelines. Keep a record of your monthly spending that includes everything from groceries, transportation (gas and/or ride-hailing services), clothing, dining out, medical bills, monthly payments, debt owed and more. You want to be sure that your record is an accurate picture of how you spend your money.
- Eliminate unnecessary expenses and identify easy ways to cut down areas that may be too high, such as limiting how often you go out to eat.
- Start saving now. Try to save at least 15 percent of your gross pay for short-term goals, long-term goals and unexpected expenses. By setting up an automated transfer or manually moving the money to your savings account as soon as you get your paycheck, rather than waiting to save what’s left of your paycheck, you can prioritize building your savings.
And don’t forget that it’s OK to revise your budget as necessary. If your bills increase or you pay off a looming debt, your day-to-day budget will likely change as well. The same goes for any increases or decreases in your income. Your budget must be flexible in order for you to stick with it.
Know where you want to be. Before you start putting money away, ask yourself what exactly you’re saving for. Do you want to buy a home but also need to lower your DTI? Are you and your partner considering starting a family and want to boost your savings?
Goal-based financial planning maximizes how effectively you manage your money and creates a guiding point to help you track your funds, especially with milestones that are a year or two away.
In order to start saving for the future, the general rule of thumb is to save about 20 percent of your income. But if you have a lot of debt to pay off, you can adjust the 20 percent rule to make it work for you. By regularly setting aside money for savings and paying your bills on time, you may also see your credit score increase and DTI decrease over time.
By keeping these three tips in mind, you will become more aware of your current situation and have a better sense of what your future financial decisions will look like, so you can make money moves with confidence and be on your way to becoming financially literate.