- The right approach to money could help you grow wealth and avoid debt.
- Here are a few key lessons to take to heart.
These lessons could set the stage for long-term success.
On Valentine's Day, it's common to make a concerted effort to shower your loved ones with gifts and affection. But rather than get caught up in chocolates and flowers, you may instead want to focus on these three key financial lessons.
1. The importance of budgeting
A budget can serve a lot of purposes. It can help you free up money for savings, avoid debt, and hold yourself accountable for spending. Without a budget, you might struggle to understand where your money goes month after month. You might also struggle to manage your bills well, thereby compromising your financial security.
If you don't yet have a budget, one misconception is that setting one up is complicated. In reality, it's not.
Just comb through recent bank account and credit card statements (six to 12 months' worth) and list every individual expense you're on the hook for. From there, figure out what those expenses cost on average. Some expenses, like your rent or car payment, may be predictable, whereas your healthcare and grocery costs may be variable.
Then, compare your spending to what your paychecks give you. If there's room every month to put at least a little money into savings, you're in good shape. If not, you may need to rethink your spending. But having your various expenses mapped out for you should make it easier to determine where you can cut back.
2. The power of investing
If you have money you don't expect to use within the next five years or so, then it pays to put that cash to work by opening a brokerage account and investing in it. If you load up on stocks and other investments and hold them for many years, there's a good chance that over time, you'll end up with a lot more money than you started with.
Now the idea of investing for the first time may be daunting. But a good rule of thumb is to build a diversified portfolio. That means buying stocks across different segments of the market -- for example, some tech stocks, bank stocks, car stocks, and energy stocks, as opposed to limiting yourself to one specific sector.
You can also look at owning assets outside of individual stocks. Many investors are enjoying success with cryptocurrency these days. And if you want diversification in your portfolio, you may decide to buy ETFs (exchange-traded funds), which let you own a bucket of stocks, bonds, or crypto with a single investment.
3. The need to have savings at all times
If you don't have an emergency fund, you might land in debt the moment an unplanned bill falls in your lap that your regular paycheck can't cover. You might also face other dire consequences. For example, if you lose your job and it takes months to find a new one, you could risk losing your home if you fall too far behind on your mortgage payments.
That's why it's crucial to build yourself a safety net. Ideally, your emergency fund should have enough cash to cover three to six months of essential bills. You might also choose to set separate funds aside for issues like car or home repairs if you're worried about those specific expenses.
The sooner you get a solid handle on your finances, the more secure and successful you're apt to be. Take these three important lessons to heart. Chances are, they'll serve you well for many years to come.
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