8 tips for understanding money better and becoming financially responsible
Do you feel like money controls you instead of you having control over your money? Are you stressed out just by the thought of looking at your bank account at the end of the month? Then I have some useful tips for you to get better at money things. This is not a roadmap for guaranteed riches, but I can promise it will help you get a much better understanding of what’s happening with your money and at which stages you can take control of it.
Secure a steady flow of income
Step 1 for getting better at money things: earn money. I’m stating the obvious here, but it is the most important. You can’t learn to understand money if you don’t have it. If you don’t have it, you’re constantly worrying about when your next paycheck is going to come in and if it will be enough to not go hungry at the end of the week. That kind of stress doesn’t leave any room for personal development, such as understanding money and learning to be financially responsible. You don’t need a lot. On the contrary, it might be better to have just too little of it, so you’ll understand the importance of being financially responsible.
I am contradicting myself a bit here, though. You see, I gave up my stable income to pursue the life of a freelancer. Most of the time, I don’t know what assignments I have for the next week, or even if there are going to be assignments at all. I never know if I can reach my monthly goal. Some months are easy, and some months I have to hustle to the last day to make sure I can cover all my expenses.
There is one important thing to know here: I didn’t start out this way. I started educating myself about money when I still had that steady flow of income from my full-time job. I took the time to learn all about income, expenses and managing your money in a financially responsible way. I learned the true value of money, or at least what that value means to me. Because of that, and other safety measures I put in place, I felt secure enough to take this leap into the freelancing world.
Track your spending
Now that you’ve got a steady flow of income, it’s time to see where that money actually goes. Ever wonder at the end of the month where that entire paycheck went? All you did was pay the bills, got food, and maybe went out to dinner once or twice this month. How could it be that all that money was gone so fast?
Tracking your spending habits isn’t the most fun thing to do, but everyone involved with anything financial agrees on this: knowing where your money goes is the most important thing in order to get a grip on your financial situation. Whether you do it by spreadsheet or go old-school with a notebook doesn’t matter, as long as you track every single euro/dollar that you spend. And I mean everything.
Bills
Groceries
Coffee runs (I’m looking at you, Starbucks)
Transportation
Eating out
Subscriptions
Your kids’ allowance
Bank fees
That loose chance you gave to a person in need
…
I want you to write down every cent/penny that goes out. Only then you’ll have a full understanding of what’s happening to your money. It’s a huge and daunting task, which is why most people only do it halfway or just ignore it completely, but I can not emphasize how important this step is. This is not a thing you do over the weekend, it’s not even something you can get done in a month because some costs only come in quarterly or yearly, so it’s a continuous process. Once you get going though and realize there are so many “leaks” in your money streams, it becomes a game, and that’s when it gets fun.
Pay your bills every month
This one seems obvious, but unfortunately, reality learns us it is not. Too many people prefer to indulge in “wants” before they pay for their “needs”. The result? Overdraft credit cards, ridiculous fees, and a horrible credit score. Here lies the root of all (financial) evil.
The advice is simple: just don’t do it. Prioritize your bills and reduce that credit card debt. Everything else comes after that.
Save money
Now we’ve come to the “everything else comes after that” part. You have a steady income, you are tracking your spending habits, and you’ve taken care of your basic needs by paying the bills every month.
The challenge lies in not spending everything you have left over. Life is not a game in which your bank account should be empty at the end of each month. On the contrary, you better make it a game to have as much left over as you can. Why? Because by saving money, you can create an emergency fund, plan big purchases, and start investing your money. These are all vital steps for gaining control over your financial situation.
Create an emergency fund
Bad things happen. Maybe your car breaks down or you get sick or you drop your phone down the toilet. More than half of all Americans cannot cover an unexpected expense of $1.000. Chances are your car needs a lot more than $1.000 to get fixed and don’t even get me started on American health care bills.
Being financially responsible means you are prepared for these kinds of events. When you start saving money, this is the first thing you save for.
Invest
Once you secured a stable income, taken care of your needs, and created an emergency fund, it is now time to make your money work for you. There is only 1 certainty when it comes to money: if you put it in the bank, you lose it. The bank’s interest is nowhere near inflation, which means your money loses its value year after year. The only way to combat inflation is by investing your money. It’s not a guarantee, investing never is, but it sure beats letting your money lose value for sure in a saving account.
You can invest your money in several ways. The first one that comes to mind is probably the stock market. You can invest in specific stocks, global funds, or ETFs. There are about a dozen other products available, but if you want to keep it simple, just stick to the basics. Movies like The Wolf of Wall Street and The Big Short make it seem like the stock market is one big evil thing that makes a few elite people rich while ruining others. That’s not how it works. I was pleasantly surprised when I started educating myself about the stock market by how easy and relatively safe it is for just average people to invest in the stock market.
If you don’t trust Wall Street, which I can’t blame you for, there are other ways to invest your money. Reals estate is the next logical step. Over the last several decades, houses have increased in value. Yes, there was the big housing crisis of 2008, but since then house prices have gone up drastically and keep on rising. Investing in brick and mortar is a solid option, but you need a bigger starting capital than when you invest in the stock market.
A third option is to invest in certain products. Think stuff like gold, art, or even expensive wine. Investing in these kinds of things requires a better understanding of what exactly you are investing in. It’s no use buying expensive wine or exclusive art if you do not know where the wine comes from or who the artist is.
Plan for big purchases
Every once in a while, you’ll have to make big purchases. A big purchase is something that is not periodically and typically of a much higher value than what you can save monthly. On average, western salary, a big purchase can be a new car, a kitchen renovation, or a high-end new laptop. Not everybody has an average salary, though, so for some a big purchase can be getting a TV or new glasses.
The common thread of these purchases is that they don’t fall under the emergency category and that you don’t have enough savings to just buy them. You have to plan for it so you can set aside a bit of money every week or month until you reach the necessary amount.
Do not take this money out of the money you’ve set aside to invest each month! A big purchase is a “want”, otherwise, it would fall under your emergency fund (“need”). The basis of being financially responsible and gaining control over your money is by prioritizing investments over things (products and experiences) you want.
Treat yo' self
I hope I’ve made it clear what a responsible way of handling money is: needs and investing always come first. That doesn’t mean you can’t splurge on a “want” every once in a while.
Life is not a way to get more money. Money is a means to an end so you can live. The general idea of putting needs and investments first is so you become less and less dependent on a job and a salary and more and more in control of making your own revenue streams. You become financially independent. But these things take time, and living extremely frugally takes a toll. It’s important to remind yourself every once in a while WHY you are doing this. So yes, treat yo’ self to that fancy coffee or expensive beach trip. If you read all the way to the end of this article, you’ve earned it.