1. You have to know your financial baseline
One of the most common threads across all finance books is the importance of knowing your starting point. This is your financial baseline. Start by looking closely at your accounts, loans, lines of credit, and assets. (This step is best done with a glass of wine or calming tea, in my opinion.) Then, calculate whether you have a negative balance or a positive balance. You have a negative balance if you owe more than you currently have. If you have more than you own, it’s a positive balance. This is called your net worth. Simple! Don’t stress if you are starting with a negative net worth. Student loans and credit card debt contribute to this. The important thing is knowing where you stand financially.
2. Everyone needs an emergency fund
Almost every financial expert agrees on the benefit of having an emergency fund. An emergency fund is exactly what it sounds like: money set aside to be used in times of need. Ideally, if you need to keep yourself afloat, you could dip into your emergency fund instead of going into debt (or you could sell your friend’s engagement ring to pay for your urgent down payment *cough* Carrie *cough*). I used my emergency fund when I was suddenly impacted by a mass layoff, when my car needed unexpected repairs, and to pay for an unplanned surgery for my dog.
Opinions differ on how much money should be in your emergency fund. Generally, 3-6 months of your take-home pay is recommended. Ensure this money is in an easily accessible account—not invested in the stock market. If saving 3-6 months of your pay seems overwhelming, start by setting aside whatever you can each month until you reach that three-month goal.
3. You need a budget, regardless of what you make
Everyone’s first thought when they think about money management is budgeting. I started off hating the word. It seemed synonymous with depriving myself of joy and spending my days glued to a spreadsheet. Part of me thought that budgeting was only necessary if you had to watch every penny like a hawk, which I did in my younger days. However, I learned that budgeting allows you to spend on what you value in life rather than aimlessly spending without a plan. Budgeting is essential, even for those who are living “comfortably.”
There are different methods of budgeting. Finding the one that works for you might take some time, but there’s no denying that it’s essential. To achieve your financial goals, you need to know where your money is going. A common budgeting tactic I’ve used in the past is the 50/30/20 rule. For this tactic, 50% of your income is dedicated to fixed costs (rent, food, utilities, etc.), 30% to fun, and 20% to savings (investing, travel, etc.). Having a plan ensures your money is going towards the best things for you.
4. Credit can be a good thing
This was hard for me to wrap my head around. I didn’t know much about credit cards, but I knew they could get you into trouble quickly. While this is true, careful usage of credit cards allows you to build a healthy credit score. This can come in handy by getting you better interest rates, among other things. And a lower interest rate means more money in your pocket! Credit can be a good thing when used wisely.
What are some ways to use credit to your benefit? Put recurring expenses on a credit card. Pay the balance in full. Try as hard as possible never to put more on your credit card than you can afford to pay off. (There’s mom and dad’s advice!) Some cards also offer nice perks like travel miles or cash back, which is a handy bonus when you use your card responsibly.
5. Not all debt is bad
I was genuinely surprised the first time I came across this idea. But, when it kept coming up again and again across various books, I knew there must be some weight to it. Essentially, there is “good” debt and “bad” debt. “Good” debt, such as student loans or a mortgage on a house, is used to grow your value. A house will appreciate in value over the years. Student loans will likely secure you a higher-paying job.
On the other hand, there is “bad” debt that will not help you in the long run. This can include overdue credit card debt for clothes or a line of credit for a wedding. Typically, “good” debt has a lower interest rate than “bad” debt (which often carries an interest rate of 20% or more). Now, more progressive experts recognize the gray zone between these areas. Even if you now realize you have some “bad” debt, don’t beat yourself up over it. Sometimes, expenses need to go on a credit card—especially if you didn’t have an emergency fund at the time. If you have debt, experts advise you to pay off higher-interest debt before you start tackling lower-interest debt.
6. You can’t cost-cut your way to wealth
I repeatedly noticed the importance of saving money in financial guidance books, but not in the usual way of cutting coupons and avoiding lattes. Instead, financial experts discussed the importance of growing your savings by generating more money, thereby creating a surplus. You can decide to save, invest, or spend that surplus each month—or combine all three!
There are only so many ways you can cut costs. However, if you simultaneously focus on increasing your income, the ceiling is limitless. I put this advice into practice. Before this advice, I focused primarily on finding the cheapest items at the grocery store and haggling my cell phone bill down a few dollars each month. When I knew I could be paid more elsewhere, I changed jobs, negotiated my starting salary and subsequent raises, and started a side hustle to diversify my income sources. It’s safe to say that focusing on growing my income paid off way more and allowed me to keep what I enjoyed in my budget (hello, lattes).
7. Diversify your income
This theme dovetails nicely with the previous point. Most financial experts will encourage you to look into diversifying your income so your eggs aren’t all in one basket. This could be small, like creating a side hustle with skills you already have. Or, it could be more advanced, like trying your hand at real estate investing. The goal is to work towards generating income beyond your day job.
This extra money can provide security during uncertain economic times, help you save for a vacation or a wedding, or contribute to your emergency fund or investments. As someone who was once part of an unexpected company layoff, I can testify first-hand as to how thankful I was to have had a profitable side hustle already established. While it didn’t replace my full-time income, it did provide some breathing room (along with my emergency fund) to maintain my lifestyle while looking for my next role.
8. Set money goals
Most financial experts agree that setting clear goals for your money is crucial. No, this doesn’t mean you need to have the next five years mapped out to a tee, but having a general plan can help you make the best decisions for your money.
Do you see a wedding in the next year or two? If so, you’ll want to start setting aside money in a high-interest savings account. But, keep it out of the stock market, so you don’t have to pull it out during a dip. Do you want to buy real estate? If you’re unsure how to make it happen with your current salary, speak to a mortgage broker. Then, ask for a raise at work or find a way to bring in extra income. At the end of the day, none of the strategies previously mentioned will work if you don’t have the motivation to implement them. Goals provide this motivation.
9. Think about “future you” as much as you think about “current you”
Once you’ve got the basics down—knowing your net worth, having a budget, and creating an emergency fund—it’s time to level up financially. Our next key takeaway is the importance of investing. Investing is often geared toward saving for retirement or other long-term goals. The earlier you start, the more time your money has to build compound interest. This is where the magic of investing really happens. The longer you can let your money grow, the more you’ll have when you need it. There are many great articles about investing (such as this one on getting started with investing and this one on retirement accounts), so once you’ve covered your finance 101 basics, it’s time to start thinking about your future!
10. Work on your money mindset
Finally, the most subtle theme I noticed throughout the books is the importance of having a positive money mindset. Money, and our relationship to it, can be tricky. If you grew up without much extra money, it might be hard to imagine ever having the resources to invest or build an emergency fund. I remember wanting a particular lifestyle but not coming from a family who lived that lifestyle. So, it felt unattainable.