5 Financial Topics You Need To Understand Right Now To Change Your Money Life!

One of the biggest hurdles we need to overcome as an adult is Money!

• How do we make it?
• How do we manage it? and
• How do we grow it?

Your journey to financial freedom starts by you taking out the time to learn a few basic rules that matter the most when it comes to your money. These rules serve as “habit-building guides” and will help you take the necessary steps to transform your financial future.

In this guide, we will be breaking down what these rules are and how understanding these 5 Financial Topics can change your money life forever.

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1. Savings Vs Investing: Understanding The Difference and The Unique Importance Of Both

The first financial topic we will be diving into is your Savings and Investing culture. As you grow in your financial literacy, It is important for you to be able to differentiate between what “Savings” and “Investments” are and how they fit into your financial goals.

Key Differences: Savings Vs Investing

• They both make use of different instruments to carry out their tasks
• They offer different risks and rewards in return.
• Both have different rules governing them.

One of the most important rules governing how you should create and operate your savings/investment account is the general rule of “it is a step by step process and you need to have sufficient savings before you can move up to investing any penny”.

For your savings account, the basic rule is you should save between three to six month’s worth of expenses as your savings cushion. Once achieved, the rest of your income can then go into building an investment account.

The reason for this savings rule is because savings accounts offer little to no interest rate payments/gains, having a lot of money packed up in it is counterintuitive and might only lead to inflation eating away at the value of your money.

But by saving only three to six months’ worth of expenses and investing the rest, you are opening yourself up to possibly grow your money while still protecting yourself in case of an emergency.

A Step by Step Lazy Mans Approach To Turning Your Savings into an Investment Accounts

The first and most important aspect of personal money management is “Budgeting”. With the right budgeting mindset, you can easily save, invest in your future, and still enjoy each day.

Some of the popular Pay Yourself First Through Budgeting style includes the 50/30/20 rule. This rule helps you break down how you allocate your income.

• 50% of your budget to needs such as housing, insurance, and transportation.
• 30% of your income goes toward wants, which can be eating out, shopping, travel, and more.
• And Finally, 20% of your income goes toward savings and debt.

This budgeting system is very popular but is not set in stone, you can change up the numbers or even add a new one to best suit your basic needs. But in simple terms, you need to find a way to start budgeting your income if you really want to take charge of your money.

Once you are able to save up to three to six months’ worth of expenses, you can then begin using the 20% allocation from your income that goes into your savings account for investing instead.

Checkout this article: Beginner Guide: What Is Budgeting and How Can You Set Up Your HouseHold Budget?

2. Understanding Debt: Living a Debt Free Life

According to the economic data, it shows that consumer debt has grown to more than $14.9 trillion in recent times, with the average consumer having about $92,727 in debt.

Learning how to manage debt and properly make use of credit is critical to your long-term financial growth and stability.

Key Takeaways:

• Good Debt vs. Bad Debt: Good debt (like a mortgage or student loans) can increase your wealth, while bad debt (like high-interest credit card debt) drains it.

• Snowball vs. Avalanche Methods: The Snowball Method focuses on paying off small debts first for psychological wins, while the Avalanche Method targets high-interest debts to save on costs. Choose one that works best for you.

• Pay More Than the Minimum: Paying only the minimum can result in paying far more in interest over time. Even small additional payments can accelerate your debt repayment.

A Step-by-Step Guide on How To Live A Debt-Free Life

Debt can be an important financial tool for you to leverage on. Still, if you want to steer clear for good, these tips, tricks, and mindful personal finance choices can help you move toward your financial freedom of a debt-free life.

1. Track Your Spending To Improve Your Finances:

The first step is to know “what” and “where” you are spending your money each month. Better money management starts with spending awareness.

There are various free Money management apps you can make use of to track your spending across categories. This would help you see for yourself how much you’re spending on non-essentials such as eating out, entertainment, and daily costs that just keep creeping in.

Once you’ve found wasteful habits in your spending, you can make a plan to improve.

2. Pay With Cash, Not Credit:

Exercise patience and self-control with your finances. Instead of buying that luxury product, or taking that vacation with your credit card, wait and save up the cash for it instead.

If you wait and save money for what you need, you will find out your money management skills will improve and you would be able to cut down on impulse purchase a lot.

A credit card is a loan that accumulates interest unless you can afford to pay off the balance in full every month. They are best used for emergencies alone.

3. Cut Back on Recurring Charges:

Do you subscribe to services you never use? It’s easy to forget about monthly subscriptions to streaming services and mobile apps that charge your bank account even when you don’t regularly use these services.

This rule also apply to recurring charges like high interest loans, high house rent, car payments etc… The goal is to eliminate or bring our recurring charges to its lowest.

Review your spending for charges like these, and consider canceling unnecessary subscriptions to hold onto more money each month.

3. Building Your Credit Score: Your Key to Financial Freedom

A strong credit score is more than just a number; it’s a crucial tool that can open doors to lower interest rates, better loan terms, and even rental and employment opportunities. Good credit demonstrates reliability to lenders and can save you thousands over a lifetime.

Understand Credit Components: The Five Key Factors That Shape Your Credit Score

1. Payment History (35%)

Impact on Score:

Payment history is the most significant factor in your credit score, making up 35% of the calculation. Lenders prioritize this because it shows whether you reliably pay your bills on time. A record of consistent, on-time payments suggests that you’re likely to repay future debts as well.

Tips to Improve Payment History:

• Pay Bills on Time, Every Time: Even a single late payment can negatively impact your score for months. Set up reminders or automatic payments to avoid missing due dates.

• Prioritize High-Impact Bills: Late payments on loans, credit cards, and mortgages can hurt more than minor missed payments (e.g., utilities). Prioritize those with the biggest impact on your credit score.

• Recovering from Late Payments: If you have late payments on your record, focus on maintaining a positive payment history moving forward. Over time, recent payments will weigh more heavily than older late ones.

2. Amounts Owed (30%) – Credit Utilization Ratio

Impact on Score:

The amount you owe accounts for 30% of your credit score. This isn’t about your total debt; rather, it’s about your credit utilization ratio—how much of your available credit you’re using. A lower utilization ratio is better because it shows you’re not maxing out your credit.

Tips to Manage Credit Utilization:

• Keep Utilization Below 30%: Aim to use less than 30% of your available credit to show lenders you’re not dependent on credit. For example, if you have a $10,000 limit, keep balances below $3,000.

• Pay Down Balances Regularly: Even if you pay off your card every month, your credit report may show a high balance if you’re using a lot of credit between payments. Pay off balances in multiple smaller payments to lower reported balances.

• Request a Credit Limit Increase: If you’re consistently using more than 30% of your credit limit, consider requesting a limit increase. Just be cautious not to increase spending along with it.

3. Length of Credit History (15%)

Impact on Score:

The length of your credit history is 15% of your score, considering the age of your oldest and newest accounts, the average age of all accounts, and the length of time since recent activity. A longer credit history shows more experience managing credit.

Tips for Building Length of Credit History:

• Keep Old Accounts Open: Closing old accounts shortens your credit history and can reduce your score. If possible, keep accounts open, even if you don’t actively use them.

• Start Early, and Be Patient: The earlier you start building credit, the better. For those starting later, focus on consistency and be patient, as time will improve this factor.

• Avoid Opening Too Many Accounts at Once: Opening several accounts in a short period can lower the average age of your accounts, which could negatively impact your score.

4. New Credit (10%) – Hard Inquiries and Recent Accounts

Impact on Score:

New credit accounts for 10% of your score, focusing on recent credit inquiries and accounts. Every time you apply for credit, a “hard inquiry” is recorded on your report, which can lower your score temporarily. Multiple inquiries in a short period can signal to lenders that you may be in financial distress.

Tips for Managing New Credit:

• Limit Hard Inquiries: Only apply for credit when necessary. If you’re rate-shopping for a big loan (like a mortgage), try to complete inquiries within a short timeframe. Most scoring models treat these inquiries as a single one if they’re done within a specific window, usually 14-45 days.

• Avoid Opening Many Accounts at Once: Each new account impacts your credit score. Opening several new accounts can make you appear as a higher risk.

• Monitor Your Credit Report for Unwanted Inquiries: Unauthorized inquiries could indicate identity theft. Review your credit report regularly to ensure all inquiries are legitimate.

5. Credit Mix (10%) – Types of Credit in Use

Impact on Score:

Credit mix accounts for 10% of your credit score and considers your ability to manage various types of credit, like credit cards, installment loans, mortgages, and retail accounts. Having a healthy mix of credit types shows lenders you can responsibly handle different kinds of credit products.

Tips for Optimizing Credit Mix:

• Diversify Types of Credit: If you only have credit cards, consider adding a different type of account, like a small personal loan or auto loan. However, only add credit types as needed, not solely to improve credit mix.

• Avoid Opening Unnecessary Accounts: It’s better to open accounts as needed than to open an account purely to improve your credit mix. Instead, focus on maintaining your current accounts and paying them off regularly.

4. Emergency Fund and Insurance: Your Safety Net

The next financial topic to go in-depth into is Insurance. Although this topic might be the least interesting in this list, it is still very important to you as an individual to have some form of safety net.

If there’s ever a slight chance that there might be an emergency, you will be glad you took your time to learn about creating an emergency fund and getting insured.

Steps to Build Your Emergency Fund:

• Set a Monthly Savings Target: Aim to contribute a set amount from each paycheck, no matter how small, to keep building your fund.

• Automate Your Savings: Set up an automatic transfer to your savings account every payday. This consistency will help the fund grow with minimal effort.

• Treat It as Untouchable: Your emergency fund is not a vacation or shopping fund. Only use it for true emergencies, like car repairs or unexpected medical costs.

Insurance: The Essential Shield Against Financial Loss

While an emergency fund helps with immediate cash needs, insurance protects against potentially catastrophic expenses that could wipe out your savings.

Having the right insurance coverage prevents your finances from being devastated by unexpected, high-cost events.

Types of Essential Insurance:

1. Health Insurance: Medical bills can add up quickly. Health insurance covers hospital stays, medications, and other treatments, providing vital financial protection and access to healthcare.

2. Auto and Home Insurance: If you own a car or home, these insurances are essential. They protect against accidents, theft, natural disasters, and liability if someone else is injured on your property.

3. Life Insurance: If you have dependents, life insurance provides financial security for them in case of your death. Term life insurance is often the most affordable and straightforward option, providing coverage for a set period.

4. Disability Insurance: This is often overlooked but crucial. Disability insurance provides income if you’re unable to work due to injury or illness, protecting against a complete loss of income.

5. Long-Term Care Insurance: If you have a family history of long-term health issues or anticipate needing support in your older years, long-term care insurance can help cover expenses for assisted living or nursing homes.

Tips for Choosing Insurance Wisely:

• Shop Around and Compare Policies: Rates and coverage options can vary widely, so compare policies from multiple providers to get the best deal for your needs.

• Understand Your Deductibles and Limits: Higher deductibles usually mean lower premiums but ensure you can afford the deductible if an emergency arises.

• Regularly Review Your Coverage: Life changes (like marriage, having kids, or a new job) can alter your insurance needs. Review your policies annually to ensure they’re still adequate.

5. Taxes:

The final topic you need to dive into is Taxes! How much do you pay in tax, how can you cut it down, and the best ways to legally write off some of your expenses are topics you should endeavor to read about.

Everyone pays taxes, so it is important you Understand how your taxes are deducted is one of the most important/necessary financial topics to be aware of.

Check out this article by Investopedia as it breaks down What Taxes are, who pays them, and why?

Conclusion

By focusing on these five financial topics, you’ll be laying a solid foundation for a better financial future. Budgeting and debt management will help you control your present; investing and financial literacy will secure your future, while an emergency fund keeps you safe in case of life’s surprises.

Empower yourself to take charge of your finances, one topic at a time, and watch your money life change.

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