4 Common Sense Money Concepts

By Cameron Huddleston GOBankingRates.com

WWR Article Summary (tl;dr) Understanding a few money management basics can help you avoid costly money mistakes and start getting ahead financially.


Whether you aspire to be rich or just want to stop living paycheck to paycheck, you need to understand basic money concepts.

Unfortunately, essential financial terms and concepts often aren't taught in school. So it's up to you to learn them on your own.

To help, here are four money concepts you should know. Understanding these basics can help you avoid costly money mistakes and start getting ahead financially.

KNOW HOW MUCH YOU MAKE AND SPEND EACH MONTH Knowing how much money you have coming in and going out each month is the foundation to managing your money well.

"If you don't know this by heart, then virtually every decision you make about your finances will be pretty much a guess," said Charles Scott, president of Pelleton Capital Management, a wealth management firm in Scottsdale, Ariz.

Figuring out how much you make is straightforward: Check your pay stub or bank account to see how much is being deposited directly. To figure out where your money is going, you'll need to review your bank and credit card statements.

Scott recommended identifying these three categories of spending, fixed expenses such as rent, mortgages or car loans; variable expenses such as credit card payments and discretionary expenses such as entertainment, vacations and restaurant meals.

"Take the time to look back at what you're currently spending, write it down, create at least the three main categories listed above and add it up," he said. Then you'll know whether you have more going out than coming in and what changes you need to make to your spending.

CREATE A SPENDING PLAN You've likely been told time and again that you need a budget. But budgets often don't work because the focus is on cutting things out. A more constructive approach is to create a spending plan to plot where you want your money to go each month, Scott said.

You have to go through the exercise of tracking your spending. But the goal isn't to pinpoint which expenses to eliminate. Instead, you should figure out what's most important to you, saving for a vacation, early retirement, paying for your kids' college, and then align your spending with what you value rather than blowing your money on things that don't matter.

"As you do this, over time you will begin to see where funds are actually going and be much more capable of aiming those funds where you want them to go," Scott said.

DON'T CHARGE MORE THAN YOU CAN PAY OFF MONTHLY If you charge more on your credit card than you can pay off each month, you're not alone. Nearly 40 percent of Americans have credit card debt and possess a median balance of $2,000, a GOBankingRates survey found.

"While it's fairly common for people to have credit card debt and lots of it, common sense dictates that you should only charge what you can afford to repay," said Holly Johnson, author of "Zero Down Your Debt."

If you carry a balance, you'll end up paying more than the amount you originally charged to your card because you accrue interest on your balance. For example, if you have a $2,000 balance on a credit card with a 15 percent interest rate and pay just $50 per month, you'll spend $790 in interest over the four and a half years it will take you to pay if off.

"Charge only what you can afford to repay if you choose to use credit," Johnson said. "That way, you won't wake up one day with a growing credit card bill you cannot tame."

KNOW WHY YOUR CREDIT SCORE MATTERS Nearly 60 percent of Americans don't know their credit scores, according to a survey by LendingTree. However, this three-digit number plays a big role in your financial life.

Your credit score matters because lenders use it when deciding whether to give you credit and the terms of that credit, such as the interest rate.

A good credit score can help you get a better interest rate, which means you'll pay less to borrow money.

Insurers, utility companies, cellphone companies and landlords also look at your credit score to determine whether you're a credit risk.

You can get your credit score for a fee from myFICO or from the three credit bureaus, Equifax, Experian and TransUnion. Or you can get a version of your score for free from a site such as Go Free Credit.

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