It’s easy to look into the past and wish you would have bought Bitcoin in 2008, Tesla stock in 2010, or even GameStop stock in late 2020, but getting rich quick is not the name of the game when it comes to financial literacy. Being able to pay bills on time; build equity in land, a home, or stocks; and save some money each month can be critical for achieving financial freedom. With all that in mind, let’s look at some core fundamentals of financial literacy.
Having a household budget and sticking to it is 100% crucial. First, you need to look at how much net income (after taxes and insurance) you have coming in every month. For those who are paid every two weeks, I recommend solely budgeting off of those two payments per month. (If you happen to get a third paycheck during a month, enjoy!)
Second, you must be honest and evaluate your spending habits. Look at your debit and credit card statements to uncover your eating habits, monthly subscription costs, travel expenses, utility payments, etc. Make sure to add up every expense to create an accurate budget.
Next, create a budget with the net income and expenses you just identified. Calculate your net gain or loss per month. If you have a loss and have a fixed income, you may need to adjust your expenses so that you show a net gain per month.
Finally, develop a game plan to get to a net monetary gain or even increase your leftover money every month. Some tips to help do this can include cancelling automatic subscriptions you no longer use, buying more generic brands at stores, and eating out or ordering take out less. Ordering takeout alone is five times more expensive than it is cook at home. Using these tips to your advantage can lessen your monthly expenses and increase your bottom line.
Paying off debt
Currently, the median household consumer debt in the United States is around $67,000. There are many views people take when paying off debt including chipping away at the largest debt first, paying down the debt with the highest interest rate, putting money into the smallest debt first, or just making minimum payments for several years. There is no right or wrong way to pay down debt, but bear in mind only making the minimum payment keeps you in debt longer, racks up potential interest charges, and also puts your credit score at risk. Being able to cancel out a debt gives you extra cash per month to tackle other debt or save money.
Building an emergency fund
An emergency fund is something that should only be used if a crisis occurs. This should be cash in your bank account that serves as a safety net. There are many views on how much you actually need to save in order to start spreading your money. Some experts say three months of your total necessary bills, others will say six months, and some even a year.
According to Investopedia, “the historical average annual return” for the S&P 500 is about 7% after inflation. That means if someone invested $1,000 in the S&P 500 Index in 1957, it would be worth approximately $75,956 today including inflation. So, what does this mean for you? If you’ve budgeted correctly, saved an emergency fund, and are now building your nest egg, you may potentially make more on your hard-earned cash by investing it. The goal is to make your money work for you.
All in all, putting financial literacy to work in your life can be the best investment. If you live below your means, you will find that you will have money in your bank account each month to pay off debt, save, or go out for a nice dinner comfortably as you enjoy the financial freedom you’ve earned.
Michael Wanderski is a financial analyst at Mr. Cooper and holds an MBA in finance. He also serves as treasurer of our EPIC (Early Professional Insights at Cooper) Diversity and Inclusion resource group.
*Investing in the stock market, cryptocurrency, or anything else can be extremely risky. Consult a financial advisor or professional before investing.