Money Management Basics

Building the foundation of financial knowledge

Whether you’re just starting out on your own or already retired, it’s never too late to start educating yourself about the basics of money management. In fact, having a solid foundation in the basics will better prepare you for the more complex topics that you’ll also find on this site.

Establishing a budget

If you haven’t established a budget, then you may find yourself wondering how and where your money is spent—and why you can never save as much as you’d like.

Knowing where your money is going is critical to reaching your financial goals. To develop a budget, you’ll need to take the following steps:

  1. Make a list of your financial goals, both short- and long-term. Your budget will then be used to help reach these goals.
  2. Add up all of your income. Be sure to include any dividends, interest, or child support you receive.
  3. Add up all your expenses, then divide into two categories: fixed (such as regular monthly bills) and discretionary (such as entertainment, gifts, and vacations). You may want to review past banking statements to see what your monthly expenses tend to be.
  4. Compare your total income to your total expenses:
    1. If your expenses are less than your income, that’s great! Then you need to look at the difference and determine whether that money is working toward reaching your goals. Is it invested and earning interest? Ask yourself how you can best put that money to work so you can reach your goals.
    2. If your expenses are more than your income, you’ll need to make some changes. First, review your discretionary expenses to see what you can cut. Then, look at your fixed expenses and see if any of them have the potential to be reduced.

Tips to help your budget

Here are a few tips that can help keep your expenses down—and help you reach your financial goals:

  • Don’t use credit cards for everyday expenses. Credit card debt can carry high interest rates, and it can damage your credit score too.
  • Differentiate between your “wants” and your “needs.” Before you buy something, ask yourself whether you really need it.
  • Reward yourself for saving money. Once a month, treat yourself to something small when you’ve reached a savings goal.
  • Stay flexible. Any budget that is too rigid is likely to fail.

Getting debt under control

Credit card debt should be your first concern because it is so expensive. To get it under control:

  • List all your unsecured debts (don't include your mortgage, student loan, and/or car loan) and rank them, starting with the one charging the highest interest rate to the lowest.
  • Consider consolidating all your credit card debt onto the lowest-rate card you can find. You may want to keep some of your cards open with no balance on them because this can increase your debt-to-equity ratio and, in turn, your credit score.
  • Make sure all your debts are current by making at least the minimum payment to bring them up to date.
  • Direct any surplus income toward the debt with the highest interest rate.
  • As the minimum payments start to go down (as happens with credit cards), don't pay less on your total debt. Instead, make the minimum payments on each debt and keep shifting the "extra" toward paying off the debt on the card with the highest interest rate.
  • If your bills are out of control and you feel overwhelmed, consider a credit counselor. A nonprofit credit counseling agency is your best bet.
  • First try negotiating with creditors yourself. Some might be willing to reduce what you owe rather than risk writing off the entire debt. Because college loans are typically at low interest rates, paying them off is a lower priority.

Paying off student loans

With the rising cost of post-secondary education, it may seem as though you’ll never be able to pay off your student loan debts. However, you do have options that may help:

  • If you’re employed in certain public service sectors, teach in a teacher-shortage area, or join the Peace Corps, some or all of your debt may be forgiven.
  • Review your discretionary expenses for areas in which you can cut spending. Instead, use those dollars to pay down the principal of your loans. Student loans can always be prepaid without penalty.
  • You may want to consider consolidating your loans. A lender can help you determine whether this is possible and would make sense for you.
  • If it is possible to take on a second, part-time job, you could use this income to pay the loan off more quickly.
  • Commit to using tax refunds, gift money, and any other “unexpected” income to pay down your loans. Every little bit will help!

Planning for retirement

Whether retirement is a far-off dream or right around the corner, it is always a good idea to take steps to prepare for it. Here are a few of the basics:

  • Determine your retirement income needs. Although this can be difficult when retirement is many years away. You can base your needs on your current expenses, then:
    • Add 3% per year for inflation
    • Deduct your mortgage expense if it will be paid off by then
    • Add an annual health care budget to account for health insurance and additional expenses that tend to be incurred as you age
  • Calculate the gap between your future income and future expenses. Future income can include Social Security, a work retirement plan, a part-time job, and any other sources of income.
  • Determine how much you’ll need to save by asking yourself the following questions:
    • At what age will you retire? The earlier you retire, the more you will need to save.
    • What is your life expectancy?
    • What growth rate can you expect from your current investments? Be conservative when projecting this rate.
    • Will you need to dip into your principal or will you be able live off your investment earnings?

Then, it’s time to start saving. You can map out a savings plan that works for you by using savings tools such as employer-sponsored retirement plans, IRAs, and annuities.

Now, you can read more about earning and saving



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