Let’s be real – financial literacy is not something that’s a part of most people’s education. Especially women. And it can seem pretty intimidating to start tackling the subject once you’re a grown-up. In fact, thinking about finances, or money in general can be anxiety-inducing sometimes! Like it’s something that is simply out of your control, so you might as well ignore it and hope everything turns out okay.
We gather around here today to put that mindset to rest.
It is never too late to get a hold of your finances, and we’re setting hot-financial-expert-girl as our 2023 mood.
Without further ado, here’s how you can start your journey to financial literacy!
Everyone has emotional luggage, even our personal finances. So it’s time to unpack it. Put your big girl pants on, take a deep breath and take a deep look at your current financial state.
1. Income vs. Outgoing
First things first, write down how much money is coming into your bank account every month and how much of it you are spending. After accessing your cash influx and outflux, is time to make some decisions.
2. Essentials vs. Luxuries
If you are here, you’re probably in one of two situations: either you’re not happy with your financial state or you have some important money goals to achieve. The fastest way to address both is to cut down on your monthly expenses. This won’t be easy, but we’ll hold your hand.
Write all your expenses in a chart similar to the one below. And we mean ALL OF THEM, even that $6 subscription for an app you don’t use. Next, write how much each of these items costs you per month and per year. Then, define which expenses are essentials and which ones are luxuries. Finally, it’s kill time – cut down on what’s no longer serving you or that you’ve decided to let go for now.
Setting Your Monthly Budget
After we’ve done some much-needed financial detox, it’s time to set your new monthly budget. There are several methods that you can personally use, and, truth be told, none of them is worst or better than the other.
It’s important that you set systems and goals that work for your financial needs and also your personality. Some people splurge by impulse on big things occasionally, while others tend to spend a big chunk of their money on frequent small purchases that are apparently harmless.
Take some time apart for self-reflection and think about what your future-you needs you present-you to do in order to create a realistic monthly budget. Here are a few method options:
1. The 50/30/20 Method
This system defines that 50% of your earnings should go to needs, 30% to wants, and 20% to savings or debt.
The upside of this method is that it is pretty straightforward and easy to implement. It’s perfect for someone who does not want to waste a lot of time setting up their budget every month. The downside is that this system does not adjust to specific cases. For example, you might want to tackle your debt situation ASAP or simply not spend such a high percentage of your income on desirables.
2. Zero Base Budgeting
With this method, you’ll feel like you’ll be spending every last penny of your income, but your financial goals will be spotless.
The Zero Base Budgeting allocates all of your money to specific expenses, whether they are needs, wants, debt payments or savings. So, by the end of the month, your income minus your expenses should equal zero. In case you spend less than what you’ve earned, that excess should be transferred to the next month’s budget or simply moved into another category, like savings.
On one side, this method is great because you can fully customize it to your personal situation and goals. At the same time, it does take a lot of time, effort, and constant monitoring.
3. The Bucket Budget
This system helps you organize your current expenses and define how much money is left for you to pamper yourself however you like.
First, you divide your expenses between the following buckets:
- Fixed: things in which you spend the same amount of money every month, like rent or your cell phone bill;
- Variable: an estimate of how much you spend on things that may vary depending on use, such as gasoline or groceries;
- Savings & Debt: the amount you want to set aside for the future or to pay off any debt you might have.
You’re going to add all of these expenses and subtract them from your income. Whatever is left it’s your “fun budget” aka money that you can spend on whatever you want.
One of the main benefits of this system is that you’re controlling your future-you by telling her: go have fun, BUT here’s your budget! The downside is that this method still requires some self-discipline. Something that might help with that will be to create a separate bank account for each one of those buckets.
Set An Emergency Fund
After you’ve created a more harmonious relationship with your money by setting a reliable monthly budget is time to think about the future.
Obviously, it’s important to think long-term and create some saving systems for things you want to accomplish in the future, like retirement or a down payment for a house. But, even more imperative than that is to ensure your financial security short term.
Here’s when the Emergency Fund enters the chat.
1. Beginner-friendly Emergency Fund
If you’re just now starting your journey to financial literacy, this one is for you. As we mentioned above, setting an EF is crucial to make sure you are somewhat protected in case something unexpected happens. However, we cannot expect you to all of the sudden channel all of your income to one single goal. So, we start with the Beginner-friendly Emergency Fund.
This smaller EF should be enough to cover unforeseen circumstances (for example, if your car broke down). Figure out a number that will make you feel more comfortable and save and try to reach it as soon as you can. Ideally, this amount should be realistic enough that you can cover it in about six months to a year.
2. Expert Emergency Fund
Down the road, once you’re more financially stable, it’s time to revisit your EF and increase it. Typically, an Emergency Fund holds enough cash to cover 3 to 6 months of your basic expenses (food, housing, essential bills, pet’s needs, etc.).
Being in debt can be extremely daunting, make you feel powerless, and even discourage you to address your financial situation at all. Therefore, we need to take care of it!
When it comes to paying debt, there are two main methods. You can introduce them both to your monthly budget and, once more, adjust according to your specific case.
1. Snowball System
Focus first on paying your smaller debts. It will be easier to see results, and you can use that momentum as an encouragement to keep going.
2. Avalanche System
Start paying the debts with the highest interest rates first. It will take longer to see results, but it will save you money in the long run.
Investing In Your Goals
After all this effort you’ve put into organizing your finances, you deserve to set a system that focuses on things that make you happy!
The Sinking Funds Method is a fun and strategic way to save in advance by putting aside small amounts of money every month. It’s the perfect way to strategize for things like vacations, concert tickets, or even the holidays. In reality, you can use this system to reach pretty much any financial goal. Plus, it takes a lot of the anxiety and pressure off making big purchases since when the moment comes, you already have the money ready!
Here’s what you need to do:
1. Define your goals (for example, a trip to Portugal).
2. Estimate how much money you need (let's say $2 000).
3. Set a deadline (for example, by October 2023).
4. Create a specific place where that money goes to.
5. Figure out how much money you have to put aside each month to make that deadline.
6. Create some encouraging visuals to track your progress.
Women To Follow
If you want to develop even more your financial knowledge, here are some amazing women you have to follow!