14 Ways to Improve Your Financial IQ
- January 12, 2022
- by Angela
What if you could measure how wisely you spend your money? Are you the sort who blows through their paycheck right away or someone who sets aside money for a rainy day? In this post I’ll show you some tips for improving your financial savvy so you can save money and manage it smarter.
1. Make a Budget
If you want to know where your money is going the first step is to establish a monthly budget. With a budget, you will know where and how you spend your money, but you will also learn to follow your spending habits. You will even know if there are sudden expenses and what steps you need to take to reduce debt or save money.
2. Track your spending
The first step to creating healthy spending habits is to learn to track your spending. You can do this with the help of various free applications, a spreadsheet, or even a printed form. At Wealth Meta we created a budget tracking tool to make it as easy as possible. It is up to you to choose how you want to track your spending. Once you get into the habit you will know where and how much you have spent and you will have an insight into your daily expenses.
3. First Spend on What is Important (Needs, not Wants)
When you start tracking your expenses you need to recognize whether you are spending money on a need or a desire. When you make a budget, the first thing you put on the list is basic needs (housing, food, utilities, transportation, medicine), because they represent your required monthly expenses. Wishes represent your extra costs that are “nice to have”. These could be things like entertainment, eating out, new shoes, gifts, etc. Some people include a category for savings in their budget and put that before their wants, so they “pay themselves first”.
4. Build an Emergency Fund
Sometimes there are sudden expenses (emergencies) that come up in life. Budget wise, what would happen if you suddenly had a car breakdown, lost your job, or needed to pay hospital expenses. The best solution to all this is to create an emergency fund. To know how much you want to save check out our Emergency Fund Calculator.
5. Open a Savings Account
A good first step towards achieving your financial goals is to open a savings accounts. You can open a savings account in the same bank where your checking account is located. It is okay to have multiple savings accounts for different purposes (home down payment, vacation, emergency fund, etc).
You can use our Savings Goal Calculator to know how long it might take to reach certain goals based on how much you decide to save.
6. Put Your Savings Somewhere You Can't Get to Easily
If you keep your savings in your checking account, you might be tempted to spend it. That is why it is better to keep it somewhere else, such as a savings account, which I have already mentioned. Accessing the money in your savings account involves another step, in that you’d have to transfer it out before you can actually spend it. If your savings account is for a certain goal, like a vacation or home down payment, you can mentally consider that money “already spent”.
7. Reduce Your Debt
Some people have difficulty paying off old debts. Meanwhile new debts continue to accumulate. It all has to be paid with a monthly salary that is yet to come in. One option is to refinance and consolidate your debts. You can find out how much you could save, both in terms of your monthly payment and overall interest (which is arguably more important) using our Loan Refinance Calculator.
8. Look for Additional Sources of Income
If you want more financial freedom, you can have an additional source of income, no matter what you do from 9-5. You can do jobs like translation, transcription, academic writing. You can do these and many other jobs from the comfort of your own home. For more ideas see my posts 17 ways to make extra money from home and 8 profitable hobbies.
9. Sell Things You No Longer Need
Most people keep things in their house or apartment that they really don’t need or don’t get a lot of utility out of. In order to maximize your financial well being it can make sense to sell off the stuff you don’t use. In that way you can use the money to pay off debts, advance your savings goals, or invest in a side hustle.
10. Live Below Your Means
If you spend everything you earn, it is impossible to save and this makes certain life goals such as buying a home or having an early retirement impossible. To be able to save you need to live below your means - no matter what you earn. Ideally your budget has “free cash” every month, meaning you spend less than you earn. Some people have savings rates as high as 50-60% of their income. In other words, for every dollar they spend, they also save a dollar. Financially savvy individuals put those dollars to work by investing them so they grow over time.
11. Save Up for Big Purchases
If you want to buy a car, a house or furniture, you need to save a little every month. This is the best option, because it is impossible to pay for large purchases out of a single paycheck. Big purchases require planning, and people with a high financial IQ do a lot of research and price comparing. Now you could put that $4,000 couch on your credit card, but do you really want to pay 18% interest for the next 3 years? The interest alone would cost ~$720 per year. The credit card company would sure love that.
12. Let Go of Impulse Buying
Many people have a habit of buying things impulsively, even though they do not need those things at the moment. They think that if they buy something, they will be in a better mood, even though they don't really need what they bought at the moment. You should stick to a budget and not buy unnecessary things and thus spend money that can be used for more useful things. If you think you might be addicted to shopping here are 5 tips to help you kick that habit.
13. Perform a Monthly Financial Self Audit
You are obliged to do a financial self-audit every month in which you determine how much you have spent, how much you have saved, whether you have new debts and thus determine the progress of your financial goals.
14. Set Clear Financial Goals
Financial goals can be: short-term (up to one year), medium-term (3-5 years) and long-term (5 years and more). For a start, it is best to set a short-term goal. When you achieve more short-term financial goals, then it will be easier for you to achieve medium-term and long-term goals.
To improve your financial intelligence you should follow the advice given in this article. By using these tips you can only be at a profit.