Practical Money Skills

Do you find yourself wishing you could save more money and grow your wealth over time, but just aren't sure where to start? Below are some practical money skills you can start putting into place TODAY, to stretch your income further, and make the savings you do have grow faster than before. Teaching yourself financial literacy and money management skills is one of the best ways to make a difference in your financial situation.

✏️ Track Your Spending So You Can Cut It

Understanding where you are in your financial situation is the first step to getting where you want to be. Even if you don't increase your income, if you can find a way to spend less money, you'll have more left over to pay down your debts or invest to make you even more money in the future.

One of the easiest ways to understand how much money you make and where you are spending it, is to track it carefully. This sounds really difficult and time consuming, but fortunately, there are tons of tools that can make this very easy, and even a little bit fun!

Budget Trackers

Our personal favorite way to track your finances is with an automatic budget tracking app like Mint.

When you use an app like this, all your income, spending, debts you owe, and even property you own is tracked automatically, like magic!

You can input your account information and passwords into Mint, which will then be able to log in as you and read all of the transactions, even from many accounts. This has many advantages:

1. See how much you spend in each area of your life - The categorization features of this app are amazing. You will know how much you spend on restaurants vs groceries, shopping, rent, gas, you name it.
2. Set up budgets to automatically monitor spending - You have the ability to say how much you want to spend in certain categories like eating out, and instantly see how far over or under you are from the budget, anytime you want to check.
3. Keep tabs on your net worth - The app automatically shows you your net worth by keeping track of how much you have vs how much you owe. This helps you stay on the right track and understand your progress.
4. Set goals - Using an app like Mint, you can pick a goal you're saving for, and the app will automatically tell you how close you are, and if you're saving enough to be on track to meet the goal by a certain date.

Cutting Spending

Now that you're armed with this real time information about your expenses, you can look for places to cut spending and meet your goals.

Looks for places to cut back

When you track your spending and take a step back, you can see where the biggest opportunities are to cut back. Do you eat out a lot at restaurants? Maybe your Amazon shopping is a little more out of control than you thought. You can find the places that will have a big impact, and that you are okay with sacrificing a bit, and set a budget for the next month so you spend a little less.

Identify subscriptions you don't need

Recurring subscriptions can be a real silent danger for our finances. Did you sign up for a gym membership, then get too busy to go for a few months? Maybe you signed up for HBO Max to binge watch all of Game of Thrones, but you finished last year, and never went back? Look through your transactions and get rid of subscriptions you no longer need! Mint can even help you find these automatically

Think about cheaper alternatives

Consider if there are ways to get most of the value you're getting for your money in a different, less expensive, way. For example:

• If you're spending a lot of money going out to eat, can you instead buy groceries and cook at home?
• Instead of going to the movie theater, can you rent movies on youtube instead?
• If you live in an area with public transportation, consider taking public transportation a few days a week to save on gas.

If you want to read more about expenses and budgeting, check out our beginner course article.

💳 Use a Credit Card

Credit cards are really bad for your finances, right? Wrong! ...as long as you do not hold a balance, pay off your credit card statement in full every month, and keep your overall credit utilization under 30%, they can actually be a positive!

Credit Score

One of your most important financial assets is your credit score. This is a score that goes up or down based on how good you have been about borrowing money in the past, and banks will look at it in the future to decide whether or not to lend you money, and how much interest they will charge you.

However, if you don't have enough history borrowing or using credit, your score will be low and they won't trust you enough to lend you money at a good rate! Using one or more credit cards can be a great way to build this credit score and increase it over time as you consistently pay off your bill and take care not to charge too much.

Rewards Points

Another reason to use a credit card is that most of them out there will give you "rewards points," just for making a purchase. These "points" can be redeemed for gift cards, Amazon purchases, airplane tickets, and often just as straight money deposited into your bank account. On some cards/purchase categories, this can be up to 5% or 6%. This is like just getting a 6% discount on whatever you are buying, without even thinking about it!

✅ Pay Off Your Credit Card In Full Every Month

When you use your credit card, most likely it has an annual interest rate that is at least 13%, often times much higher like 25% or even 30%. Read more about credit card interest here.

This is huge. In comparison, long term investing in the stock market has an estimated expected return of 9%-10%.

Give it a try below to see how much you would pay in interest over a given amount of time:

Results

However, as long as you pay the statement balance by the due date, IN FULL, you won't pay any interest at all!

You should try to pay as much as you possibly can towards your statement balance so that you don't pay any interest. When you are buying with your credit card, think of it like money coming out of your bank account. If you can't afford what you are buying with your cash, you shouldn't buy it with your card.

🧾 Understand How Taxes Work

Like it or not, taxes are where a big portion of your income will end up. You should take a little time to understand how much you pay, why you pay that much, and how to pay less (legally!) so you can keep more of that hard earned money.

Tax Brackets

Have you ever heard anyone say that they wouldn't take a raise because they would get "bumped into a higher tax bracket" and thus would make less money?

We'll let you know now, that is completely wrong in the United States. As you make more money, you only pay more taxes on the money in the next bracket.

This is called a progressive tax system, and it means that overall, the more money you make, the more taxes you pay. However, it's always worth it to take that raise, you'll make more, plain and simple.

Read more about the tax system here.

Tax Advantaged Accounts

If you're saving for retirement, education, or healthcare, the government has created special accounts that let you avoid paying taxes! This can add up to a huge amount of money over time, so you want to use these to the fullest extent possible!

1. Retirement - Using an IRA (no job required), a 401k (provided through your job), or some other less common accounts, you can invest money for your retirement, and avoid paying many of the taxes you normally would! For most people this means you'll be able to use way more of this money in retirement.
2. Education - 529 plans are the government's answer to preparing to pay for college or other future education for children or yourself. Invest money in these funds and you'll avoid paying taxes on the investment gains you make, saving you quite a bundle.
3. Healthcare - The healthcare savings account or flexible spending account let you store money to be used on healthcare expenses like doctor visit copays, medicine, or even contact solution, but you'll avoid paying taxes on any money you put in. You can save money on all of these things that you're already buying if you have access to these accounts!

Read more about tax advantaged accounts here.

💰 Save For Retirement As Early As Possible

If you are convinced by the above that using a tax advantaged account like an IRA or a 401k is worth it, then you should know that you should start as early as possible for two reasons: compound interest, and annual contribution limits.

Save More With Compound Interest

When you save for retirement and invest in the stock market, your money gets bigger every year. Then, this new, larger amount of money gets bigger. Like a snowball rolling down a hill, this kind of growth can be very powerful. But like a snowball rolling down a big hill, it needs a long enough time (or a really long hill!) to harness the full power and grow as large as it can.

Try it out: compare how much you'll have at the end of 15 years vs. 30 years, if you saved for retirement early. Notice how the growth curve gets steeper and steeper, the longer you invest!

Annual Limits Make it Hard to Catch Up

Let's say you decide not to save in your IRA or 401k for a few years, and plan to just make up for it when you're older and have more income. That will work right?

Wrong! The IRS imposes limits on how much you can save every year.

In 2021, the maximum you can save is $6,000 if you're under age 50, or $7,000 if you're older. Similarly, 401ks have a limit each year of $19,500. This means that even if you want to save more later, you will be limited to a certain amount every year in the valuable tax saving account!

This is one huge advantage to starting your saving early.

If Your Employer Matches Retirement Contibutions, That is Free Money

Does your employer match retirement contributions to a 401k or other retirement savings plan? This means that when you put in one dollar to save, they will put in a dollar too! This is like simply being paid more money than you otherwise would. Usually companies will pay this up to a limit, as a percentage of your salary (for example, 5%).

If you don't save for retirement, at least up to the matching limit, you are giving up free money! Don't let this money go to waste!

Read more about retirement savings here.

📈 Make Money With Your Money By Investing

Investing is one practical money skill that you should make sure to use. Either in a retirement account (above) or in a regular, taxable account, investing will make sure that your money grows over time, instead of losing value.

Beat Inflation

Losing value?? How is that possible? The answer is inflation. Inflation is happening, to the tune of around 2% each year, meaning that goods and services in the US are expected to get 2% more expensive every year.

You can think of this like your money is losing value at 2% each year. Compared to the rate of interest in a savings account, your money is worth less and less over time if you don't invest it!

There are many possibilities to invest in, including some lower risk, more short term investments, like bonds, or the possibilty of investing longer term in the stock market.

Invest Early and Often

Lots of people wonder: is this the right time to invest? They think maybe they'll just wait a little longer until the market is a bit lower.

Well, it's been shown that the best time to invest is actually right now, because if you invest what you have early on, as soon as you can, and then repeat as soon as you have more that you want to invest, you'll most likely make more than if you tried to find the perfect time. Don't wait!

Invest for the Long Term

If you're investing in something riskier, like the stock market, then you might be worried about losing money as it goes up and down over time.

This is a real concern, but if you zoom out and look at the long term, the stock market as a whole has historically increased over large lengths of time. Try to invest for at least 15 years! Put money into the market that you can afford to wait for, and reap the rewards later.

Read more about why this is true here.

🔄 Consider Refinancing Your Debt

If you have a mortgage for a home or a credit card debt that will take you some time to pay off, check the rate of interest. Compare that to what current rates are that you could possibly get on the market. If you can reduce your mortgage rate from 4.0% to 3.25%, you could potentially save hundreds of dollars a month, and over the lifetime of your loan. This investment of time and energy today could pay off enormously for your finances over time.

Here is one how to article about refinancing a mortgage on Nerd Wallet.

📊 Pay Off Debts in the Right Order and Make a Financial Plan

If you have a number of debts, such as a mortgage, a student loan, and a credit card, it may feel overwhelming to think about how to pay it all off.

Paying Debts in Order

If you have extra money saved after your expenses this month, which debt should you use it to pay down? Or, maybe this is a trick question! Maybe you shouldn't pay down any debt at all, and instead put it towards your retirement savings match at work, because that's free money!

It is really important that you carefully plan where your money will have the biggest impact. If you pay extra towards the mortgage instead of the credit card, you likely might be making a mistake, because the credit card will have more interest charged, even though the mortgage is a bigger loan! Here's an example of how you might decide to use your extra money in a fictional scenario, with explanations why.

Make a Plan for Your Finances

Based on your situation, it's possible to come up with a plan that will account for everything and optimize your money to build the most wealth over time!

Here's our recommended strategy:

Read more about our financial strategy recommendation here!

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