"How to Start Managing Your Money, For Those Who Never Learned Growing Up" by @lifehacker

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.

You were probably taught some basic math 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 skills. If you’re in need of a Money 101, 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 math.

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, or avoid that deal. 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 paycheck as soon as you get it.

How to Find 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. A bank (or credit union) can hold your money and allow you to access it with an ATM/debit card. Setting up a bank account is easy. You can usually apply online, or go to a branch, ask a teller to open an account, and they’ll guide you through the process. 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 (or at least refunding fees for using other bank’s ATMs), paper checks, and a web site where you can see your account balance. While some banks charge monthly fees or require you to have a minimum balance, there are plenty of banks that are worthwhile without either of these requirements. We’ve discussed more about what to look for in a bank here.

Chances are, most adults in your life have recommendations on which bank they prefer. However, if you can’t get a decent suggestion, the FDIC has a tool here that you can use to search for insured banks in your area. The site can find branch locations near you, and give you links to the company’s websites where available. NerdWallet also has a great online tool here that compares checking accounts from a variety of banks.

Of course, keep in mind that not every bank has physical branches. Some banks—like Simple, Ally, or Capital One 360—are online-only. These often come with certain trade-offs (like, you know, not having physical branches), but many offer fewer fees and better services. They also typically offer better interest rates—meaning the money you save earns a little extra money just for keeping it in your account—than traditional banks, because they don’t have as many operating costs associated with physical buildings.

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, including your name, social security number, date of birth, and some form of photo ID like a driver’s license to prove you are who you say you are. You can check with the bank you want for specifics.

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 categorizing 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 we’ll get to more advanced tools you can use in a bit.

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 things 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—like whether you can afford to live in that expensive city.

Once you get the hang of tracking your expenses, you can try using a service like Mint to manage it for you. Connect your bank account and it will automatically tag your transactions, so you can easily see how much you’re spending on bills, groceries, restaurants, shopping, and other categories. You can also use it to set budgets for different things like groceries or entertainment and get notified when you’re going over. You can read more about how to use Mint with our beginner’s guide.

So you’ve gotten into the habit of tracking your spending, and now 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, gas, power, groceries, your cellphone 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. If you have any investments like a company 401(k) that come out of your paycheck, you can count it here.
• Savings (5-10%): Short- and long-term savings should go in this category. This includes saving up for vacations, 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, budgeting 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 dime you spend at the gas 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. In fact, they may even give you rewards for doing so.

If you don’t pay it back, the credit card company will start charging you extra money known as interest. Interest is typically indicated as an Annual Percentage Rate (or APR), but that’s a bit misleading, as it’s calculated on a per-day basis, not per-year. 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 math 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 cash back, it could be airline miles, hotel points, or even Amazon gift cards. 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 completely 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 company and you can get those charges revoked.
• You can get protection for all kinds of purchases: Hidden in the fine print of many credit card contracts are some sweet features that protect your purchases. Many cards will offer extended warranties on bigger ticket items like TVs (which is yet another reason you shouldn’t pay for them through the store) damage protection on your cell phone if you pay your monthly bill with your credit card, or travel insurance if you lose your valuables on a flight you paid for with your card. Your credit card may have a ton of benefits that aren’t immediately obvious, so check your contract.

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 $1,000 credit limit doesn’t mean you have $1,000 to spend. It means you can borrow $1,000 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 Your Credit Score Works

Credit cards are also useful for improving your credit score. Banks typically don’t like doling out money without some kind of assurance they’ll be paid back. So, various financial companies created what’s called a “credit score.” This is essentially a report that details your history of borrowing money and estimates how likely you are to pay money back. Financial institutions use this score to determine how much you can borrow, how much you’ll be charged in interest, and how many lines of credit (like credit cards, car loans, or mortgages) you can have open. The better your credit score, the better credit cards you’ll be able to get, and the better loans you’ll be able to get for a house or car, and even to gauge what type of cell carrier plan you can get or whether you have to put down a deposit on your utilities. In some cases, your credit score may even be used by landlords to determine whether or not you can rent an apartment in certain complexes. In other words, your credit score can have a profound impact on your life.

You don’t just have one credit score, either. You have several. There are three major nationwide credit agencies that are typically used to gauge your credit. By law, you are allowed to pull your own credit report from one of the three agencies once every twelve months without it affecting your credit record. However, you shouldn’t ever need to pay anything to monitor your credit score.

When you first start out in life, you won’t have any credit score, which can make it difficult to get new credit (a classic catch-22). If you’ve been with a bank for a while, you may be able to get a low-limit credit card that you can use to start building credit. You can also get what’s called a secured credit card, which is similar to a regular card, except you pay in advance. It’s actually not very much like a credit card at all, but it does count positively towards your credit score. Paying your utilities on time will also help build your credit.

Credit reporting agencies will grade you a variety of factors. The exact math depends on the agency, but generally speaking, there are five main areas that affect your credit score:

• Payment history: Paying your bills on time is typically the largest chunk of your credit score. The longer you go without paying at least the minimum due, the worse it gets. No matter what type of credit it is, always try to pay at least the minimum (or more if you can.)
• Debt-to-credit ratio: Put simply, this is how much money you’re currently borrowing across all of your accounts, versus how much you’re allowed to borrow in total. This is the second biggest factor in determining your credit score. If you all of your credit cards combined have a limit of $5,000 and you owe $4,500, your ratio is 90%. This is bad. An ideal number is around 30% of your total available credit. You don’t want it to be zero, because then you’re not building credit at all. However, the farther past 30% you get, the more the agency sees you as a risk.
• Length of credit history: The longer you have lines of credit open, the better for your score. If you’ve paid a credit card off, don’t close it out. Use at least one recurring charge to keep it active, and pay it off every month.
• Types of credit: The mix of credit accounts you have can also benefit your score. If you have $25,000 in credit available in credit cards, that may be seen as more of a risk than if you have a $15,000 car loan, $8,000 in credit cards, and $2,000 in installment loans (like for furniture or cell phones). This is typically pretty easy to manage as long as you don’t do something reckless like buying a car with a credit card.
• Credit checks: Every time you try to open a new line of credit, that request is logged with the reporting agency. More credit checks usually means more of a risk (because they assume you’re either borrowing too much or have been turned down too many times). However, there is an exception. Multiple related credit checks like buying a car, applying for an apartment, and applying for student loans are often treated as one request if done within a 45-day period. Life changes often require multiple credit checks, so that’s taken into account. Just don’t try to open three credit cards in a year.

If you handle your finances well, you usually shouldn’t have to do much to manage your credit score. Much like indoor plumbing, it usually only becomes a headache when something goes wrong. If you end up with black marks on your record that keep your score down, there’s usually something you can do. Though in some cases, that may involve waiting until some negative marks fall off your record after several years. In most cases, the best thing you can do for your credit score is to start paying down debt and make payments on time.

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 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.

To start with, you remember those sections in your budget that you made earlier called Savings and Investments? Start by saving saving those automatically. If your employer uses direct deposit (which means your money goes directly to your bank account, rather than giving you a check you can cash), you can ask to have a portion of your pay sent to multiple accounts. You can use this to send money to a separate savings account that you don’t have a debit card for, or that’s not easy to transfer to your regular checking account. The money you never have access to is the easiest to save. Even if you can’t set aside whole chunks of your paycheck, services like Acorns can round up your everyday purchases to the nearest dollar and automatically save the difference.

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

Investing doesn’t have to be complicated, either—it doesn’t mean picking winning stocks or timing the market. If you’re just starting out, you can use a “robo-advisor” service like Betterment or Wealthfront to do it all automatically for you. It’ll guide you through the process of setting up an investment plan based on your age, goals, and risk preferences. It will then automatically pick which companies or industries to invest in. If you want to get more hands on, we detail more tools for managing your investments here.

Long-term investments can also come from your employer. Many companies offer 401(k)s that you can fund with money deducted from your paycheck before taxes. In many cases, employers will also match how much you contribute, which means you’re literally getting free money just for having an investment account with them. If your employer offers a 401(k) contribution, it’s advisable that you at least contribute as much as your employer will match.

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 okay 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.

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