Making smart financial decisions is important whether you’re a high school student, a recent college graduate, a first-time homeowner or a midlife worker. But learning how to spend, save and invest wisely doesn’t have to be intimidating. Being financially literate is a matter of understanding some basic principles that you apply to different decisions in your life, whether it’s trimming your spending, stashing savings to buy a home, or building funds for your child’s education or your own retirement.

This guide will:

Show what you can expect to spend money on based on your age

Provide you with strategies for managing your money

Teach you the basics of navigating life’s major expenses

The Ground Rules: Basic Money Principles

Save by Paying Yourself First

When expenses pile up, it might feel next to impossible to save. That’s why financial experts recommend that you pay yourself first. Whenever you make some money, take a designated amount or percentage and transfer it to a savings account. Better yet, if you have a regular paycheck, automate that transfer with your bank so you don’t even have to think about it. Then pay your monthly bills and other living expenses with the remaining funds.

Many experts advocate saving a sum that’s equal to six months of your living expenses in the case of an emergency or job loss. After you’ve built an emergency fund, save for longer-term goals such as your child’s college tuition and your retirement.

Make a Budget

Creating a budget is extremely important in helping you spend your money with intention. With a budget, you can see where your money is going on a daily, weekly and monthly basis — and then adjust as necessary.

Track Your Spending

A spending diary can help you see the small or every day expenses that surreptitiously drain your bank account. It can also help you anticipate when your bills are coming, both fixed expenses such as rent, and variable bills that fluctuate month to month such as your utility bills.

Get Rid of Debt

Whether you have student loans, credit card bills, or other debt like a car loan, know how much you owe and at what interest rate. Pay off high-interest debt first, but make sure you’re paying at least the minimum payment your lender requires on each of your bills to avoid damaging your credit history.

Taking on debt is not inherently unwise. In fact, you may have heard of the concept of “good debt,” which is debt you take on to improve your financial position later – such as a student loan that gets you an education that can increase your income. However, if you’re focused on learning the fundamentals of money management, treat all debt as obligations that you should pay off as soon as you can.

More Resources:
CalcXML’s Emergency Fund Calculator

Use this calculator to help you determine how much money to set aside for an emergency based on your monthly expenses, income, and other factors.

Easy Guide to Budgeting

This comprehensive guide shows you what a budget looks like, includes expert advice from a financial planner and a free downloadable budget worksheet.

Spending Diary app.

This free online tool helps you track and analyze your spending. Input everything you spend each day, track where your money went, and create reports by week, month, or custom dates to understand your spending patterns.

Saving for Retirement Expense Calculator

Our free calculator provides an estimate of what your annual retirement expenses will be, in tomorrow’s dollars.

Managing Your Money at Any Age

Financial Literacy in Your Teens

Impulse Buying

Credit and Debit Cards

Part-Time Jobs and Paychecks

Setting good financial habits early in life can help you manage debt responsibly and lay the groundwork for financial security later on. For young adults, learn to distinguish between wants versus needs. Do you need those designer jeans or you just want them because you saw a celebrity wearing them? You can still buy things that you want but you must understand that an impulse buy now means you may not have money for gas or textbooks later.

While teens generally can’t qualify for a credit card until age 21, you can be added as an authorized user to your parents’ account, which would help to build your credit history. Your goal is to ultimately achieve an excellent credit score (anything above 720 is considered excellent). Lenders, credit card issuers, insurance companies and others use your credit score to judge how responsibly you handle money. If your parents add you as an authorized user, you should discuss when it’s appropriate to use the credit card and whether you’ll be responsible for repaying your portion of the bill. Credit cards also come with spending limits. If you exceed that limit, your card could be declined or you could get hit with a fee.

Even if you can’t qualify for your own credit card, you may be able to get a debit card instead. A debit card pulls money directly from your checking account, while a credit card creates a separate bill that you have to pay each month. Consumer protections that are offered to credit card purchases aren’t always provided for debit card purchases, so remember to ask about returns and warranties.

A part-time job can be a smart way to earn extra money and gain job skills. Depending on how much you earn, you may need to file an income tax return with the Internal Revenue Service and your state.

The Breakdown: Understanding Your Paycheck

Here’s a look at common sections on a paycheck so you can understand where your money is going.

Form
  • Employee Earnings:

    This will indicate the number of hours worked, the pay per hour, and the total wages for that pay period. Gross income refers to the full amount you earn before taxes, while net income refers to your take-home pay after taxes. Your paycheck may also indicate your year-to-date (YTD) pay, which is a running tally of all your earnings from that employer in the current calendar year.

  • Deductions:

    Your employer will typically withhold money from each paycheck for state and federal income taxes, as well as FICA contributions. FICA covers Social Security tax and Medicare. Your employer pays half of what you owe for FICA and withholds the other half from your paycheck.  

    Although there are none on this sample paycheck, if you had any reimbursement expenses for your job (for travel, uniform, or something else) these will be included on your paycheck, too.

More Resources: Financial Literacy in Your 20s

Budgeting

Student Loans

Health Insurance

If you’re not yet financially independent, you’re probably getting close. Making money management decisions on your own can be exhilarating and scary at the same time.

Start by crafting a budget. To make sure you’re not overspending, create a weekly or monthly budget and track your spending. You could do this using an app, a spreadsheet or pen and paper. Once you see where your money goes, you may be inspired to be resourceful—bringing your lunch to work, for instance.

In addition to necessities like rent, car payments and food, and discretionary expenses like weekend travel or entertainment, your budget should also include saving for short-term goals such as a car, mid-term goals like a down payment for a home, and long-term goals such as retirement.

As soon as you get your first job, make sure you participate in your employer’s retirement savings plan, even if retirement feels light years away. Some employers offer matching funds if you contribute to a 401(k), which is free money and compound interest [earning interest on interest you’ve earned previously]. The incredible power of time and compound interest helps your money grow more quickly but you have to start early. For younger investors, it’s the quickest way to build a nest egg for retirement.

Now that you’re a responsible adult, it’s time to think about health insurance. If you’re under age 26, you may qualify for coverage under your parent’s health care plan. Otherwise, consider coverage through your employer or your state’s health insurance exchange. Going without health insurance could mean penalties come tax time, not to mention big bills if you become sick or injured.

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The Breakdown: Buying a Car on Credit

So you need a car but can’t afford to pay for one outright. A car loan allows you to finance the purchase over time. The longer the term of the loan, the lower the payment each month. But in some cases, that could mean your loan will be underwater (you owe more than the vehicle is actually worth) for a good chunk of the term. In the end, though, you’ll own the car free and clear.

If you’re planning to finance a vehicle, get pre-approved for a car loan from a bank or credit union before you walk into a dealership. Having your own financing might help you negotiate dealer financing at a lower interest rate. Alternatively, dealers often offer incentives on a car purchase like steep discounts on the price or free upgrades, but to get the incentives, you must take advantage of dealer financing. If this is the case, and the incentives are worth it, go ahead and finance the purchase through the dealer. Then in the next month, use your credit union or bank to refinance that loan at a lower interest rate.

Leasing a car is an alternative to buying. Leasing is like renting, where you pay a set amount each month for the car, typically subject to mileage surcharges if you exceed 12,000 miles per year (about 1,000 miles a month) and damage fees for excessive wear on the car. This can be a good option if you don’t have enough money up front for purchasing or don’t want to drum up a loan, but, on the downside, at the end of the lease you won’t have a vehicle to trade in for a newer set of wheels.

Financial Literacy in Your 30s

Joint Finances

Home Ownership

You may meet more responsibilities in your 30’s—whether you’re earning more, taking on a mortgage, combining finances with a partner, or all of the above.

If you choose to live with a partner, it’s especially important to reflect on your financial goals and how you prefer to spend your money because your partner’s goals and preferences may not be the same. Communicating about financial priorities can help address any discrepancies. Start by making a joint list of your shared financial responsibilities (rent or mortgage, car insurance, pet care, etc.). Next, create separate lists of what each of you like to spend money on, in order of priority. Here are some suggestions for priority categories:

Experiences (travel, concerts, cooking classes, dinners out)

Material Things (for home, cars, clothing, etc)

Family (higher education fund for kids, family get-togethers)

Savings (emergency, retirement, and other goals)

Everyday Luxuries (beauty/barber, vintage wine, brand-new electronics, etc)

Talk about joining accounts

Couples who open a joint checking account have equal access to bank funds. This enables you both to see how much money is being withdrawn from the account and for what kinds of expenses. Communication and trust are key for maintaining a joint account. So make sure you both discuss financial priorities before setting up a joint account.

…But know it’s not the only option

Some couples opt for the best of both worlds: they use a joint account for shared expenses, yet each partner keeps some money in a separate account so they can maintain some financial autonomy. This may be particularly important to people who had become accustomed to managing their own money. However, having three bank accounts can make it difficult to track spending and identify where a household budget could be improved.

Before joining finances, be sure to discuss if you’ll contribute to shared expenses 50/50 or in proportion to your incomes. That way, both partners feel like they’re pulling their weight financially even if they have disparate incomes.

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The Breakdown: Understanding Home Loans

All mortgages are home loans, but not all home loans are mortgages.

A first mortgage (a loan that can finance your purchase of a home) may be among the biggest debts you ever take on, so it’s important to consider all its facets—everything from the deposit to total loan amount to the loan features, fees and fine print.

Because homeowners rarely keep a first mortgage until it’s paid off, many refinance their home loans—meaning they get a new mortgage to replace the original mortgage. If you sell your home, you’ll use the sale proceeds to pay off your mortgage.

But there are other types of home loans, too, including loans taken out for home improvement or loans taken out to create a line of credit (home equity loans).

More Resources: Financial Literacy for New Families

Family Budgeting

Childcare Costs

Budgeting for yourself and a partner can be plenty challenging: adding children to the mix is a whole different ballgame. Let’s look at strategies for stretching your dollars when you have kids.

Especially if your child doesn’t have older siblings or cousins to inherit from, buying used can be a huge asset. Kids outgrow clothing so quickly there’s no need to buy new. The same goes for books and toys. Shop yard sales, thrift shops, and online retailers to find gently used kids’ items at a deep discount off the retail price. Another strategy is swapping with other parents when your kids outgrow their clothes and belongings. If you are buying new, learn to become a comparison shopper. Use online shopping tools and coupon sites to find the best price on everything you buy.

Some families choose to have one parent stay home while the children are young because of the skyrocketing costs for child care. Child care costs are higher than college tuition and rent in some regions.

Among families with two children (a 4-year-old and an 8-year-old), child care costs exceed rent in 500 out of 618 communities.

According to a recent study by the Economic Policy Institute, monthly child care costs for a household with one child (a 4-year-old) range from $344 in rural South Carolina to $1,472 in Washington, D.C. Among families with two children (a 4-year-old and an 8-year-old), child care costs exceed rent in 500 out of 618 communities.

Every situation is different, and not all families have the choice to keep one parent out of the workforce instead of earning an income. But for those families that do have this choice, here are some pros and cons of returning to the workforce rather than staying home with kids.

care

Many families decide to have one parent stay home if that parent’s income would have been awash with childcare costs. However, they may be overlooking the hidden cost of lower future earnings. In a study published by the Women’s Institute for Policy Research, research showed that after two to three years out of the workforce, women’s earnings can take a 30 percent hit. A 2015 Harvard Business School study showed that mothers working outside the home were more likely to have higher wages and supervisory roles. Having both parents working and paying into Social Security also means a higher payout in retirement.

While there are obvious financial benefits, there are equally drawbacks. Less paid child support is needed when one parent stays home. The stress of juggling work and family obligations may be diminished with one parent able to hold down the fort while the other works.

The decision for a stay-home parent to return to a traditional workplace is immensely personal, not to be taken lightly. Discussing possible outcomes with your partner and making a sample budget for each alternative can provide inroads towards making a positive decision for your family.

More Resources: Financial Literacy for Middle Age

College Funds

Saving for Retirement

Home Care and Equity

As you get older and progress in your career, you will likely have more money than you did in your youth but also more financial obligations.

Your Kids and College

If you’re planning to support your child’s higher education, even in part, the costs can become extraordinary. Maybe you’ve been putting away money since the day your child was born and maybe you haven’t—either way, you have options.

Including your child in the financial process can be a healthy first step, so they’re not confusing “FAFSA” with an international trade agreement. Fill out the grant or loan application together. Creating a monthly budget together is also a productive exercise, especially if your child plans on working a part-time job. By filling out the FAFSA, parents of dependent children can choose to apply for Federal PLUS Loans on their children’s behalf.

Setting limits is important, too. If you have budgeted or agreed to assist with four years of tuition, your child should know that, so any time in school beyond four years is their own financial responsibility.

Catch-Up on your Retirement Savings

It’s never too late to build your nest egg, however modest it may be to start. One way to start is upping your retirement contributions. When your children leave the nest, bolster your own nest egg, whether this means maxing out your contributions to an Employer-Sponsored Retirement Plan or IRA or putting more into a CD, Money Market or regular Savings Account. If you do invest as part of your catch-up strategy, beware advisory fees. To paraphrase John Bogle, Founder of the Vanguard Group, one certainty of the stock market is that the middle man wins, a.k.a. the investment banker. Look out for financial advisors who will capitalize on your fear and try to charge you for their “assistance.”

Taking Care of Your Home

The last thing you want to do in retirement is make mortgage payments. Sacrifice your yearly family vacation or the vintage car purchase you’ve been contemplating to get paying off your mortgage out of the way: you’ll thank yourself for it.

Another way to take care of your home without breaking the bank—reduce your energy bills by asking your energy provider for an audit. Recommendations might include adding insulation or a programmable thermostat or upgrading your windows. Some energy-efficient updates to your home may have tax credits available.

Performing regular home maintenance might seem trivial in the moment, but the benefit adds up. Tasks like replacing the filters in your heating and cooling system, vacuuming electric baseboard heaters, and checking faucets for signs of dripping can keep your home running efficiently and help you avoid costly repairs.

More Resources: Financial Literacy for Seniors

Downsizing

Saving for Retirement

Many seniors choose to downsize (move from a large home into a smaller one) once the kids move out and they retire. This can reduce or do away with housing costs altogether. But to make sure that downsizing is the right move, consider other factors. For example, if you’re moving to a condo, you may be able to pay for the unit outright, or need just a small mortgage, but pricey condo fees may offset some of those savings. Some seniors choose to rent so they’ll have more flexibility and liquidity in their budget.

Once you reach your 60s, you’ll need to decide when to claim your Social Security retirement benefit. You can take your benefit as early as age 62. But if you wait until your full retirement age (66 or 67, depending on the year you were born), or until you reach age 70, your benefit will be larger. When you are within three months of age 65, even if you haven’t claimed your Social Security benefit, you should sign up for Medicare to avoid a late sign-up penalty charge. 

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Women and Financial Literacy

In today’s American households, women are often heads of the household, primary breadwinners or primary spending decision makers. And because women live longer than men on average, they’ll likely have more years in retirement to fund.

Sadly, women often lag behind men in financial literacy. American women from all age groups consistently scored lower than men on a financial literacy test, reports a 2014 study from the Munich Center for the Economics of Aging. Poor financial literacy can take a toll especially when women without a developed knowledge around their finances grow dependent on male partners or family members who then pass away. The toll is significant too, for women without a male partner or guardian, who may choose to pay huge fees to financial managers.

Learning about money management from an early age can make a difference. Because basic financial literacy is not always incorporated in school curriculums and tutelage often occurs ad hoc in the home, parents can make progress by encouraging all their children to learn about money non-discriminately. The more mothers know and are willing to learn themselves, the better an example they can serve for their daughters—and for their sons, who may have daughters of their own.

Financial literacy is empowering and it’s something that everyone should have. We all are impacted by money. We spend little time in this country around educating our kids on this topic and I think it has to be viewed as equally important as any other part of your education.

Shannon McLay
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Q&A

expert Shannon McLay Author

Shannon McLay is a financial planner who left a traditional financial services firm to start her own company, The Financial Gym. She said that the key to long-term success is a commitment to financial fitness and making smart financial choices. She writes a blog, Financially Blonde, and puts together a podcast, Martinis and Your Money. She is the author of Train Your Way To Financial Fitness.

What’s the best way to make a budget plan? Should we think daily, weekly, monthly or annually?

People need to remember that budgets are like diets. Nobody wants to be on one, but just like diets, there’s all different ways to budget. You need to find the one that works for you. Some people like the spreadsheet budget and breaking their spending down monthly, quarterly, or doing goals-based budgeting, where they set a savings goal or a debt repayment goal. Some people do a zero-based budget where you allocate every dollar to a specific purpose. It’s important to keep in mind that there are all different ways to budget. It’s not a one size fits all.

What financial concepts are most important for young adults to know?

From a basic level, people need to understand earning, saving, spending and in that order. There needs to be an understanding of how you make your money, whether it’s an allowance or some kind of system of earning at home to jobs when you’re of age. Then you need to understand the importance of saving it and putting that away and learning how to spend responsibly after the savings.

When are credit cards a good idea? What is the value of giving a college student a first credit card?

It depends on the level of maturity of the person, but start using credit as soon as possible. Whether or not you believe that credit cards are a good solution, it’s a large driver of our credit score which you’re going to need for other areas of your life. Learning how to use them responsibly is an important part of financial literacy. The sooner you start the better, because that gives you a long credit history.

What kinds of skills can parents teach their kids from a young age?

I think that parents should start teaching their children at a young age and never be afraid that there’s such a thing as too young. I started talking to my son about financial literacy at 5. Now he’s 10, and he’s investing his money and saving and spending. The sooner you start and the more you bring up these ideas, the more they become a language.

The best teacher for kids at any age is with cash. I would avoid giving kids cards until they’ve mastered the concept of cash. They can count it, learn more about it, they can actually see when they spend it. It’s hard to understand what money is if you’re not seeing it and feeling it. Once they’ve mastered their cash, once they have the ideas around managing money responsibly, then you take it to the next level and explain debit cards, credit cards, mobile pay. I work with 25-35 years old now who have no idea where their money goes because they’ve been on debit and credit cards since high school and their parents paid it. They have no concept.

Updated: July 27, 2017