Two years ago I had no idea what it meant when it comes to financial knowledge. There is still a lot of things I am learning about financial literacy but here is a cheat sheet to help people get a good understanding of how to achieve financial goals.
1. Budgeting Basics
- Income vs. Expenses: Track all sources of income and categorize your expenses (e.g., rent, groceries, utilities).
- 50/30/20 Rule: Allocate 50% of income to necessities, 30% to wants, and 20% to savings/debt repayment.
- Tools: Use budgeting apps (e.g., Mint, YNAB) or spreadsheets.
2. Saving and Emergency Fund
- Emergency Fund: Aim for 3-6 months’ worth of expenses saved in a liquid account (e.g., savings account).
- Automate Savings: Set up automatic transfers to savings accounts or retirement funds.
3. Debt Management
- Types of Debt: Understand the difference between good debt (e.g., student loans) and bad debt (e.g., high-interest credit cards).
- Snowball vs. Avalanche: Snowball method (pay off smallest debts first) or Avalanche method (pay off highest interest debt first).
- Interest Rates: Focus on paying down high-interest debt more quickly.
4. Credit Scores and Reports
- Credit Score: A number that reflects your creditworthiness. Range is typically 300-850.
- Factors: Payment history, credit utilization, length of credit history, types of credit, and new credit.
- Check Reports: Review your credit report annually.
5. Investing Fundamentals
- Types of Investments: Stocks: Shares of ownership in a company.
- Bonds: Loans to corporations or governments.
- Mutual Funds/ETFs: Pools of investments managed by professionals.
- Diversification: Spread investments across various assets to reduce risk.
- Risk Tolerance: Assess how much risk you’re comfortable taking.
6. Retirement Accounts
- 401(k)/403(b): Employer-sponsored retirement plans with potential matching contributions.
- IRA/Roth IRA: Individual retirement accounts with different tax advantages (traditional: pre-tax, Roth: post-tax).
- Contribution Limits: Stay updated on annual contribution limits for tax advantages.
7. Taxes
- Understand Deductions and Credits: Explore potential deductions (e.g., mortgage interest) and credits (e.g., education credits).
- Filing: File taxes annually and consider using tax software or a tax professional.
8. Insurance
- Health Insurance: Covers medical expenses.
- Auto Insurance: Covers vehicle-related damages and liability.
- Home/Renters Insurance: Protects property and belongings.
- Life Insurance: Provides financial support to beneficiaries upon death.
- Coverage: Ensure adequate coverage based on your needs.
9. Financial Goals
- Short-Term Goals: Savings for vacations, gadgets, or other immediate expenses.
- Long-Term Goals: Savings for buying a home, education, or retirement.
- SMART Goals: Specific, Measurable, Achievable, Relevant, Time-bound.
This cheat sheet covers fundamental financial concepts and practical tips for managing money effectively. As you become more comfortable with these basics, you can dive deeper into specific areas of interest.
