Understanding your personal finances can be overwhelming. Many people don’t know where to start, which can be discouraging. This can keep people from learning about their finances until they are forced to.
But learning about your personal finances doesn’t have to be scary! With a bit of planning, a good strategy, and a basic understanding of what’s involved, you should be able to develop the skills you need to manage your finances.
Why is Financial Planning Important?
There are a number of reasons why financial planning is essential. Early financial planning can help set yourself up for lifelong success.
The benefits of financial planning include:
- Increased family security
- Credit score goes up
- A higher standard of living
- Better investment control
- Managing income
- Confidence in finances leads to confidence in other areas of your life
10 Financial Lessons & Skills You Need to Know
It’s easy to look back and wish you would have done things differently. But, lucky for you, we’re here to tell you all of the things we wish we knew about our finances earlier.
Here are some financial lessons and skills that everyone should know sooner rather than later:
Set Clear Financial Goals
The first step in financial planning is to set realistic goals. If you don’t have a clear idea of where you want to end up, you’ll never know what steps you have to take to get there.
Try setting S.M.A.R.T. financial goals by making sure your goals are:
Using these guidelines can help you start your financial journey on the right track.
Create a Budget
A budget is not just for people who are struggling. The truth is, everyone needs to have a budget so you can identify what you’re spending and where you’re spending it. Unfortunately, most people who don’t have a budget or track their spending underestimate the amount of money they spend.
The 50/30/20 rule is an excellent guideline for those who are just starting to budget. If you follow this budget guideline, you would divide up your after-tax income and spend no more than what is outlined in these 3 general categories:
- 50% for needs
- 30% for wants
- 20% for savings
The 50/30/20 rule is just a guideline, so you should tweak each category based on your needs and goals.
Learn about Compound Interest
Compound interest is a powerful tool. Compounding interest is the process of regularly adding more to your investments. This can increase the amount of your investments by a considerable amount.
This can especially help young people and is a lesson best learned early. Even putting small amounts of money away can build up over time and significantly impact your financial situation later on in life.
Learn How Credit Cards & Interest Rates Work
Credit can be a helpful tool when you’re paying it back every month. However, interest on credit can work against you when you carry a heavy balance. If you have a credit card, you need to know:
- You have to pay back every dollar you charge to your card
- Interest accrues daily when you carry a balance
- Don’t spend what you can’t afford just because you have the option to
Learn How to Build Your Credit
To add to the last point, you also need to learn how to build your credit. According to the Government of Canada, the best ways to improve your credit score are:
- Make your payments on time
- Make at least the minimum payment if you can’t pay the total amount
- Don’t go over your credit limit
- Try to use less than 35% of your available credit
- Use different types of credit
- Limit your number of credit applications and credit checks
Start an Emergency Fund
Another tip that can set you up for success is to always have an emergency fund. The general consensus among financial planners is that you should aim to have 3-6 months’ worth of your household income saved. Some financial planners even suggest having 8-12 months set aside if possible.
An emergency fund can protect you in unexpected circumstances such as:
- Job loss
- Health problems that stop you from working
- Significant expenses like car problems or natural disasters
When calculating how much money you should put aside, you should account for the following costs:
- Rent or mortgage payments
Spend Less Than You Make
One of the most important lessons to learn is that you need to spend less than you make. Don’t end up in debt because you are trying to keep up with a lifestyle you can’t afford.
Get the Most From Your Employer
Getting the most from your employer is one of the best things you can do when planning your future. Depending on where you live and work, your employer may offer 401k matching.
Contact your employer if you have any questions about what financial benefit programs your workplace offers.
Understand Investing & Stock Market Basics
A skill every person should have is a basic understanding of how investing works.
Some resources you can use to learn more about the basics of investing include:
- Wall Street Survivor
- Government of Canada: How Investing Works
- Investopedia: An introduction to the basics
- “The Money Game” by Adam Smith
- “Financial Freedom on $5 a day” by Chuck Chakrapani
Invest in Yourself
One of the most significant investments you will ever make is in yourself. It can be anything from investing in formal education to taking a course online. The most important thing you can learn is that there is so much more to learn.
If you have any questions or concerns, please feel free to contact us today!