How do you get started on the road to financial literacy?
The first step is to take stock of your current finances. You may also want to think about the next 5–10 years and if you have any goals, such as buying a house or car.
Here are five questions to ask yourself to help you get started!
1. Are you worried about money?
A lot of people don’t want to admit it, but behind closed doors, they’re worried about money. There are a lot of contributing factors–it could be credit card debt, retirement, or sending kids to college. We are trained not to talk about money, so we’re often afraid to ask when we need help or advice. However, if you are worried about money, that is a clear sign that it’s time to seek help through free online resources, your bank, or a financial advisor.
2. What is my debt-to-income ratio?
A great way to quickly see how your finances are faring is to calculate your debt-to-income ratio. All you have to do is divide the total amount in debt you have to pay back every month, including credit card bills, mortgage payments, and student loans by your total gross income (how much money you make before taxes).
Let’s take Adebola, for example. Combined, he pays $2,000 per month for his credit card bill, mortgage, and car loan. He earns a monthly salary of $5,000, which means his debt-to-income ratio is 40%. The lower this number the better, but most experts recommend staying below 43%. If your debt-to-income ratio is higher, you risk not being approved for loans, a lower credit score, and high interest rates.
3. Do I have an emergency fund in case something happens like losing a job?
Experts recommend that you should have enough money saved to cover 3–6 months of expenses in case of an emergency, such as an illness or losing a job. The reality is most people do not have such a large amount set aside just for emergencies. Many more don’t have any savings at all. If that’s the case, you should consider ways in which you can start saving, even if it’s a small amount every month.
4. Have I created a budget and tried following it?
We’ve all heard that if we stop buying expensive coffees, we would have a much better chance at being millionaires. However, it’s highly unlikely that this trick has actually worked for anyone. The truth is that it doesn’t matter what you spend your money on, as long as you’ve budgeted it properly. So go ahead and treat yourself to that coffee if that’s what makes you happy, but make sure you have paid all your bills and still have set aside some for savings.
The easiest budgeting trick is the 50-30-20 rule!
Just take how much you earn AFTER taxes and allocate 50% for the necessities like groceries, utilities, and bills, 30% for anything else you want like going out to eat or seeing a movie, and 20% for savings.
5. Where do I want to be financially in 1 year? 5 years? 10 years?
Lastly, think about where you want your finances to be in both the short and long term. For some people, paying off at least one credit card is a huge accomplishment that will free up more of their money for things they want, while for others it’s saving to put a down payment on a house. No matter how big or small the goal, it’s important to have them so you are constantly working towards something.
What’s the next step?
Hopefully, these questions have gotten you to take a step back and think more critically about your current finances. Maybe you realized you were much better off than you thought, or maybe you realized there are some improvements that can be made. That’s normal. Almost all of us can improve our financial situation in one way or another!
Even though they hardly ever teach it in schools, financial literacy is one of the most important things we can learn in our lifetime. When we understand the basics of finances, we make better financial decisions, which usually means more money in the bank and fewer credit card bills piling up.
Fortunately, there are a ton of free online resources to help you get started, including articles, worksheets, and expert advice!
And don’t forget, MAJORITY is also here for you!
We offer an FDIC-insured spend account to keep your money safe with no overdraft, minimum balance, or foreign transaction fees. Plus, your account comes with a Visa® Debit card that gives you exclusive access to discounts in your own community. And these are just some of the ways we help you save. Learn more and get started today!