How To Manage Your Money, For Those Who Never Learned

How you manage, spend, and invest your money can have a profound impact on your life, yet very few schools teach these important skills. Learning financial savvy can take a while, but the basics are fairly simple and never change. Here’s where to get started.

Illustration by Sam Woolley. Photos by Sam Howzit, frankieleon, AAG.com

You were probably taught some basic maths growing up, but too many people make it all the way to adulthood without ever learning basic money management. Skills like creating a budget, investing for the future, or even how credit cards work are startlingly rare. If you’re in need of some Money 101 education, we’ll cover the basics for beginners, while also giving you the resources you need to learn more.

The Golden Rules Of Personal Finance

Managing your finances feels like nothing but a lot of paperwork and numbers. You make X amount of dollars, you spend Y amount, and you try to make sure Y is less than X. However, your finances are just as much about psychology, habits, and the values you choose to live by. Put another way, your mindset matters just as much as the maths.

Beneath all the software and the budgets, there are a few rules that will always help improve your financial life:

• Spend less money than you earn: If you earn $30,000/year and you spend $31,000/year, you’ll end up in a spiral of debt that’s hard to walk away from. If you spend exactly as much as you earn every year, you’ll never be prepared for emergencies or major life changes. Spending less than you earn allows you the freedom to save, to prepare for the future, and deal with the inevitable crises that life throws at you. The bigger the gap between your income and your spending, the better.

• Always plan for the future: This doesn’t just mean retirement. When a store offers to let you pay off some gadget in 6 months with no interest, you need to know you can pay it off. Establishing an emergency fund will allow you to deal with unexpected car repairs or medical bills. Having a retirement plan will ensure you have income when you’re unable to work anymore. Your finances should always look forward beyond the current month.

• Make your money make more money: Want to know how the rich keep getting richer? It’s because money can grow while you sleep, provided you save some of it. Properly invested money earns more money over time. Don’t just sock all your cash away in a low-interest savings account. Invest in things that will earn you more money than you had before. Sometimes that’s an investment account, but sometimes it’s starting a business, or even getting an education to get a better-paying job.

The most important personal finance rules don’t change. What your grandparents did may not work for you. There will always be newer, better tools to manage your money. However, spending less than you earn will always be beneficial. Investing your money will always be better than doing nothing with it. And planning for the future will always be better than blowing your pay as soon as you get it.

How To Choose A Bank Account

It’s neither safe nor advisable to keep all your money under your mattress. You’ll need some kind of account to stash your spending money and short-term savings — and virtually all jobs these days will pay you into a bank account rather than in cash. Setting up a bank account is easy. You can often apply online, or go to a branch. Choosing a bank is tougher.

Picking a bank means finding an institution that has the services you need with the fewest fees. Common services include debit cards, ATM access, and a web site and apps where you can see your account balance. While most banks charge monthly fees or require you to have a minimum balance, there are options that cut those fees, especially online. Our regular Ratehacker column highlights good banking deals each month.

Once you’ve decided on a bank, either go into a local branch or visit the company’s site and ask to open a new account. You’ll need to provide basic forms of identification: birth certificate, passport, driver’s licence and Medicare card are all useful.

If you’re still not sure which bank to go with, don’t worry too much. Most banks generally offer similar services and if you decide you don’t like one, you can always change to another.

How To Set Up A Budget

Do you know where your money goes, or does it kind of just disappear from your account? A budget — even a basic, barebones one — is one of the best ways to make sure you’re spending less than you earn, and starting early is important. When you’re young and your career is new, you don’t have a lot of money. Getting into the habit of categorising your bills and tracking your expenses will help prevent a lot of financial problems before they start. If you’re making a budget for the first time, it may be easier to start with paper, a pen, and a calculator, but there are also useful and more advanced tools available.

Start by calculating how much money you make in a month. If you get paid hourly, multiply your wage by the typical number of hours you work each month. Then, write down all of your regular expenses. This includes recurring costs like your rent or mortgage, utilities, car payments, and and so on.

For more complex areas of expenditure like food, you may need to track what you spend over time. Gather up your receipts for the past few weeks, or use your bank’s transaction history if paperwork isn’t your thing. If you can’t get a precise number, estimate in the meantime. Then, keep track of all your expenses for the next month or two. At the end of each month, add everything up to see how much you’re spending in each category.

Ideally, the amount you spend in a month should be lower than the amount you earn. If it’s not, start going over your list and see which expenses you can cut down on until it is. If you have to, cut ruthlessly. For some, it may be as easy as cutting those lattes, but for others, you may have some big decisions to make.

Once you’re in the habit of tracking your spending, it’s time to create that budget. There are a few different philosophies here. Some people prefer to have a very detailed transaction history with strict allotments for expenses like food, clothing, and entertainment. Others, like financial expert Ramit Sethi, believe that being overly strict doesn’t work. Instead, Sethi suggests dividing your money into four categories:

• Fixed costs (50-60%): This should include every cost that you know is coming each month, that rarely change. That means rent, petttrol, power, groceries, your mobile phone bill, and anything else that generally stays the same. Some of these may vary a bit from month to month, but are at least somewhat predictable, and are necessary for regular life.

• Investments (10%): As you build your savings (which we’ll discuss later on), you’ll eventually want to invest some of your money so it grows over time.

• Savings (5-10%): Short- and long-term savings should go in this category. This includes saving up for holidays, gifts, or large purchases like a new TV or computer. You should also include an emergency fund — which is just a block of money you keep in a savings account for unexpected emergencies like car repairs or sudden bills — in this category.

• Guilt-free spending (20-35%): This category is where you can put whatever you want. Dining out, drinking, or splurging on entertainment is often seen as a financial vice, but the truth is, we do these things because we enjoy them. As long as you have the other three categories covered you can spend this money without feeling guilty about your budget.

Those are Sethi’s recommendations for young people, but you can (and should) adjust the percentages based on your age, your financial goals, and what you find important. Remember: the more you save, the more money you’ll have later on to buy a house, retire early, or achieve other goals. (We’ll talk about this more in a bit.)

Ultimately, setting a budget just means knowing where your money is going and planning ahead. If you don’t want to go to the trouble of writing down every single dollar you spend at the petrol station, this model will still cover most of what you need to budget for. The only thing you need to decide is how much you’ll place in each category. We’ve included Sethi’s recommended percentages as a guide, but you can adjust as needed. If you can’t afford to save or invest 10% of your income after expenses, save what you can. You can also add more to your savings rather than forcing yourself to spend 20% of your budget on guilty pleasures. The more you can save, the better!

How to Use Credit Cards Without Going Into Debt

Despite how easy it is to get a credit card, it’s also easy to get overwhelmed and wind up owing way too much money. This kind of debt can put you in a hole that’s hard to climb out of. However, credit cards can also be really useful — when used correctly. Here’s the short version: don’t use a credit card to buy things you couldn’t otherwise afford. Instead, only buy something if you have the money in your account right now, and pay off your card’s balance every month.

If that’s all you take away from this section, you’re already ahead of most people. Here’s how the nitty gritty works, though: credit card companies will give you a certain amount of money — known as “credit” — that you can spend without paying it back immediately. If you do pay it back — by paying your credit card bill at the end of the month — you don’t have to pay anything extra.

If you don’t pay it back, the credit card company will start charging you extra money known as interest. Each month, the company will charge you the previous month’s interest on whatever balance you’re carrying. What that means is every month that you don’t pay off what you owe, you get charged more money.

Worse yet, you have to pay the interest first (or else your balance will just get higher). If you only pay the minimum amount due, most of your payment will go towards interest. This means your balance will remain high, and keep generating interest. We break down the maths in more detail here, but the gist is, only paying the minimum amount due is the worst thing you can do. Even if you can’t afford to pay off the whole balance in one month, at least pay more than the minimum.

So if you’re only supposed to pay for what you can afford, then what’s the point of having a credit card instead of a debit card? Well, when used properly, there are a few key benefits:

• You can earn rewards: Most credit cards come with different kinds of rewards based on how much you spend. It could be airline frequent flyer miles, free travel insurance or other bonuses. This is meant to tempt you to spend more money, which can be problematic if you have trouble controlling your spending. However, with a disciplined budget, it’s basically like getting free money for going about your daily life.

• You’re protected against fraud: Sometimes, a bank will offer to refund debit card purchases, but for the most part, they’re treated the same as cash. Credit cards, on the other hand, are protected, so you’re never liable if someone steals your card and goes on a shopping spree. If you see charges on your bill you didn’t make (or if you lose your card), you can call the provider and have those charges revoked.

Credit cards can be incredibly useful tools for a properly planned budget, but they can also be destructive if you don’t use them carefully. Try not to think of them like extra cash. Having a $1000 credit limit doesn’t mean you have $1000 to spend. It means you can borrow $1000 for a month. If you can learn to use credit cards responsibly, they can be immensely useful. If you can’t, however, avoid the temptation entirely by removing them from your wallet, or even destroying the physical card if necessary.

How To Save For The Future

So, you’ve started budgeting your money, you’re building credit, and you’re spending less than you earn. Maybe it took you a couple of months, but you’re finally in control of your finances. Great! Now comes the next part: saving for the future. If you’re anything like I used to be, you probably haven’t thought much about the future. Maybe it seems too far away to matter, or maybe it feels impossible and overwhelming. However, the earlier you start saving, the more money you’ll have later on in life — and the less effort you’ll spend trying to get there later on.

Having your money in a savings account will help you save for little things, like your emergency fund or a new computer. But your real, long-term savings are going toward something far more important: retirement. Yes, one day, you’ll want to stop working, and you’ll need a big chunk of savings to keep you going in your golden years, and a little savings account isn’t the best way to do that. While your employer will contribute to a superannuation fund, that alone may not be enough.

That’s where investments come in. If you can put your savings into some fairly simple, low-risk investments, it will make money for you while you sleep — and over the course of years and decades, that can add up to an awful lot.

Getting started with long-term investments will often be one of the hardest parts of your financial life because, when you’re just starting out, you don’t have much money. For that reason, it’s important that you re-examine your investments every time you get a raise or a new job that pays you more. When you make more money, it’s tempting to upgrade your life with a new car, apartment, or expensive toys to match your new budget. This is what’s called “lifestyle inflation.” While it’s OK to move up, you’ll also never have a better time to boost your long-term savings than when you’re already living on a smaller budget than you’re earning.