How to be smart with money and improve business and personal finances
Did you know that money is the leading source of stress1 for Americans? Despite being something so integral across our lives, many of us have a taut relationship with money.
But it doesn’t have to be that way. There are certain habits or traps that can position us to be vulnerable to overspending or accumulating debt. Once you become aware of these triggers, you can start to incorporate lifelong tools and techniques to be smarter with money.
We will explore exactly that: how to be smart with money and how you can change your relationship money to live in a way that allows you more confidence, contentment and happiness. Once money and finance are no longer armored in intimidation or mystery, you can get in the habit of tracking your spending and avoid common financial mistakes.
Don't worry, this post is not about how to be more frugal, it aims to encourage you to develop a financial mindset and improve financial literacy and awareness. Find sources and other recommendations at the end of this tutorial. Feel free also to ask questions.
Be Smart With Money – Overview
When thinking about how to be smart with money, there are several financial areas to consider. These2 include budgeting, banking, investments, insurances, managing credit and debt, retirement planning and taxes. Sound overwhelming? It doesn’t have to be.
Whether taking care of personal finances, business finances, or both, there are a few basic concepts that apply. To be smarter with money, let's start with how you view money, including embracing mindfulness and gratitude. Why that?
Well, with a more confident foundation, you’ll be able to get ahead of the curve and take up smarter practices. You don’t need to be a financial expert, but learning the basics is helpful – and totally doable.
Reading tips: Developing financial literacy includes more than just learning about money. Combine these skills to learn to grow your online business or how to stop procrastination if you have goals but often hesitate to take appropriate actions.
How To Be Smart With Money – 4 Concepts & Strategies
1. Mindfulness and Gratitude
What is your association with having money? Or not having it? Does money mean success? Freedom? Stability? Happiness? The answer to these questions might not be straightforward, but they are worth considering. Understanding your associations with money is the first step towards building a healthy relationship with money.
Consider your own story
Much of how we relate to money is influenced by what we have observed and internalized3. As described in an article by Forbes4, start by asking yourself questions in evaluation of your relationship with money. Forbes suggests questions including:
- Where do my money values originate? (This might be supported with questioning the attitude around money during your childhood and continuing to the present day.)
- How do money and money decisions make me feel? Self-assured or unsure?
- Reflecting on my personal financial history, is there a trend of making secure financial decisions? If not, why is that?
- Do I resist taking action concerning money?
- Is my behavior with money impulsive? Or am I able to easily say no?
Money isn’t everything
In the words of the prolific Notorious B.I.G5: “more money, more problems.” Hence, It can be easy to fall for the illusion that financial issues are caused by lack of sufficient money, and that having more money is a simple solution or cure-all. But, that just isn’t the case6.
Your financial situations and issues may evolve or even alleviate with more money in the bank, but if you do not address harmful financial habits and anxieties, then those will follow you across income levels.
I personally made that experience too. “If I just had more money, then…” is a classic phrase here. However, the lesson here is that if I cannot get on with the money I have because I overspend or make the wrong decisions, simply having more money won't help. I will keep overspending, and thinking ‘If I just had more money, then… .'
The solution is to manage the resources (money, time, food) available and use them smartly to fulfill needs or achieve set goals. If you happen to improve your financial flexibility, you will be able to scale wisely. It's a process. And, no worries, it does not mean skipping fun spending. It means figuring out when spending is spending wasted.
One of the most powerful tools to feeling more content across your life, including with your financial wellbeing, is practicing gratitude. Research7 demonstrates the positive impact of gratitude, including improving productivity, regulating emotions or making better decisions.
And gratitude can be good for financial habits and wellbeing. Studies suggest8 that gratitude can improve happiness and that gratitude and patience can lead us to better monetary decision making. Practicing these values can better prepare you to recognize what you do have and focus on longer-term financial goals.
You can be thankful for many things, and a salary increase is certainly one of them. You may also be grateful to be in a good relationship, have amazing friends, live in a great place, have found fulfilling hobbies and particularly have access to (online) education. The key lesson here is that you love what you do, find your purpose and consistently develop your strengths. The money will follow. It's the best investment you can make.
Further Reading: Best personal development courses.
2. Track and Understand Your Spending
To make better financial decisions, try to understand what’s going on with your own spending. This means committing to monitor how much money goes out. Yes, it can be a bit of a pain at first but there are several supports to help you commit and embrace this habit.
I do recommend monitoring your ins and outs for about 1 month before actually setting customized budgets. This way, you see where you might overspend and where you can easily cut without reducing the quality of your life. Yes, you can keep enjoying your coffee.
Imagine the first sip of a cold drink on a hot summer day or eating the first piece of chocolate when watching TV. Those first sips and bites are always the best and offer maximum satisfaction. After that, eating or drinking more only provides little more pleasure or value and at some point none at all. Thus, you can easily cut that third or fourth coffee.
This applies to money as well. In income-satisfaction surveys, people reported that the quality of life kept increasing until they reached income brackets of $70,000 to $90,000. Earning more money beyond that was not bad, but it did not contribute to more happiness or satisfaction in their lives.
Start with a budget
Setting a budget might be the least fun part of tracking your spending, but it is necessary. Start by taking note of how much money you have coming in and break it down into monthly or weekly chunks. Track every single spending.
Next, list categories of expenses. These might include food, rent, utilities, fitness, clothing, paying back debt, personal hygiene or social expenses. If you are budgeting for your business, follow the same pattern but take additional considerations.
Allocate a budget within each category, and make sure you leave some ‘wiggle room’ for unexpected costs. You will get better over the course of the months as you understand how, when, and where you spend your money. There are no limitations to how many categories you can set up. The main goal is to manage the unknown. Experiment a bit here.
Tip: I myself tend to micro-budget often which I think is a safety habit. This is not always ideal, to be honest, but I want to secure my personal share of my monthly salary. The share that just belongs to me is setting aside funds to build savings or budgets for bigger projects or goals. You should secure your share, too as it can vaporize too easily. I try to achieve 15-20% of my net earnings. It's also worth automating those savings (see below).
Monitor as you go
Every time you make a payment, make a note. This can be through your bank statements or, if you use cash, make sure you write down those expenses. There are also many tools to help you keep track of your spending, including apps9 and spreadsheets10. Both business and personal finances can benefit from these tools, allowing all financial transactions to be accessed and analyzed in one space.
However, whatever tool you end up using, make sure you track all your spending and most importantly, figure out for what and when you spend your money. Furthermore, don't track for the sake of tracking, draw the right conclusions, e.g., cutting down or increasing the budget to avoid overspending or unforeseen surprises.
Tip: Once you have tacked your spendings for 3-6 months and know what's going on you may try micro-budgeting. It's budgeting recurring costs based on needs, habits or fun. The benefit is not to track every single item anymore. I just know that I need a certain budget for food, household items, shopping, education or entertainment and allocate a set fund for each month here. No further tracking of individual purchases needed.
One option is to have a separate account for spending and one for saving. This is also comparable to using only a debit card rather than credit. This habit helps you stick to your budget without the temptation to overdraft or overspend.
Again, you can go wild here and set several accounts or sub-accounts for various spending categories, saving goals or projects. I have sub-accounts for food spending, savings, holidays, gadgets, education and just fun money. Latter is particularly cool, as I do not have to care about what I spend on it. It's for whatever I want, for fun.
Tip: Make sure to secure your personal share, your piece of the cake. You decide what you will invest in. THIS should not include budgets for food, bills or fun money. It's rather your life insurance. Remember I talked about the phrase “If I had more money, then…”? Well, if you spend it carelessly, you can earn a lot of money and still not feel rich. Or you can try to set aside 10-20% of your income and start to feel financially more secure the longer you do it.
Calculate the actual cost
Before you make a purchase, consider the cost regarding your own earning efforts. For example, how many hours would you need to work to buy a $100 item? Begin thinking in terms of your own labor rather than dollars. This helps to put purchases into perspective and avoid frivolous spending.
To this correctly, you will need to add costs such as taxes, time used for daily commuting or hours spent for preparation that cannot be billed. Your hourly rate may shrink shockingly if you take that into account. This way, a purchase made out of habit that offers hardly any additional value might be easier to avoid or better to understand how much it really costs.
3. Avoid Common Mistakes
There are plenty of easily made financial mistakes11 that you may be unaware of. The following are a few tips to get ahead of these common gaffes.
Identify Spending Triggers
As mentioned, emotions are connected with money. A spending trigger12 is a typically subconscious emotion that motivates spending money. Lists of emotional spending triggers13 include very human experiences such as getting a high or rush of excitement, wanting to present a particular image, craving immediate gratification or tying the purchase to self-worth.
Evaluate your recent purchases, particularly ones that don’t meet a basic need, and reflect on whether these might be tied to an emotional trigger.
Triggers could also include people or places. For example, if you have a friend that always convinces you to spend more than you’re comfortable with, suggest hanging out that doesn’t involve money at all. This might be touring a free museum or playing frisbee in the park. Or, if you find that online shopping late at night is your response to a stressful workday, replace this habit with something else such as exercise or reading a book.
Are you among the 60% of Americans14 who do not have the savings to cover a $1000 emergency expense? One way to help you accumulate a security buffer in the bank is to automate savings.
Designate a certain amount of your income every week or month to go directly into a savings account. Even if it’s not much, every bit contributes. And if your employer offers a retirement plan, such as a 403(b) or a 401(k), it’s a good idea15 to enroll.
Another great option to help you save is to take advantage of saving apps. The variety of apps16 available cater to personal and small business savings.
Tip: It's best to put aside 15-20% of your weekly or monthly earnings. If you cannot do that, no pressure. Simply start with 5%. Try paying off your debts or optimize spending habits and allocate that money to increase your monthly savings rate. Try to get that $1,000 emergency fund first. After that, it's worth having separate savings accounts that follow certain goals.
Data revealed that young Americans (aged 18-29) owe more than $1 trillion in debt. That is a number with a lot of zeroes, and that is a lot of debt. If you are working towards paying back your debt, there are many tips17 to help navigate those payments.
However, maybe it’s time to start rejecting debt as normal or necessary18. Recognize that accumulating debt is not a requisite pathway to success or happiness. You may decide that accumulating debt as an investment for business or education is worthwhile; but, debt is not just an avenue to buy things you cannot actually afford.
Focus on yourself, your budget, your priorities and this will help you understand what is and is not really within your financial reach. And consumer debt is bad debt. There is no value in it apart from that banks receive interest fees from you. Pay for things outright.
This tip relates to the previously mentioned task of setting a budget – it might not be the most fun or easy but setting financial goals can really help improve your financial wellbeing.
The benefits of setting goals include helping you to stay focused and motivated in the long term and helping you stay accountable along the way. Also, different financial goals require different financial strategies19.
Without the goal, it’s certainly harder to develop a strong roadmap to get there. However, you may be surprised to learn that you actually need less money than you think to be happy and live comfortably. Looking at the Forbes list of the richest celebrities and start dreaming can be fun but does not get you anywhere. As we learned above, more money does not necessarily mean more happiness or even financial stability.
What matters is that you try setting financial goals that refer to your own life, social environment, and abilities. You may want to save up money for a trip worldwide, educational training or that luxury item (enter product here) of your dreams. Get rid of debts, lock away an emergency expense, automate savings for your life insurance and then create budgets for the things you want to achieve financially.
4. Learn the Basics
What is one of the best ways to make something less scary? Understand how it works.
Financial literacy, the knowledge and education to understand and apply financial concepts related to money, investments and borrowing, is declining19. And this decline is evidenced strongly with young people aged 18- 34.
FINRA (the Financial Industry Regulatory Authority) periodically conducts a survey to assess financial literacy, posing 5 questions. Younger people demonstrated the starkest decline20 in the ability to answer questions correctly, dropping from 30% to 17% in the previous survey.
With so many resources available to learn about finance, there is the opportunity to flip this trend on its head. Strengthening your understanding of personal finance can help you to be successful in other ventures, including building up a side hustle or business. The following are examples of a few basic concepts: interest (simple and compound), stocks and bonds.
Interest often applies to both investing and borrowing money. If you borrow money, you’re probably going to have to pay interest. This charge is most often a percentage of the original amount. Simple interest21 is a set rate on the amount of money borrowed. So, if you borrow $100 with 5% interest, you would owe $105.
Compound interest22 is the interest on interest. This sounds weird, but it’s really an easy concept. Let’s consider an investment. If you have $100 that is earning 5% interest annually, the first year this would be $105. Then, it would earn 5% of the new value; so, 5% of $105 is $5.25. At the end of the second year, you have $110.25.
It might not sound like a large amount of growth, but compound interest can really snowball quickly.23 Check out this graph24, which really illustrates this point. And you can use formulas25 to calculate compound interest.
Stocks and bonds are often mentioned together, but they’re not interchangeable terms. When you buy stocks, you are purchasing a piece of ownership of a company. Stocks can earn money in different ways. One is referred to as dividends26 when a company pays each stockholder a portion of the earnings.
Another way is when stocks appreciate27 in value, meaning their value increases. If you choose to sell that stock, it will go for a higher amount than you paid, and these are your earnings. Remember that stocks can also depreciate, or go down, in value.
A bond28 is a debt instrument that provides is a fixed income for the investor who loans money to the company or government that issues the bond. If, as an investor, you choose to buy a bond you are essentially loaning money to the issuer of the bond. In exchange, you get interest at a fixed rate29.
The purpose of this article is not to dive into financial concepts, but to encourage you to take the time to read some articles or check out some YouTube channels30 to help you feel prepared. Empower yourself by learning and take advantage of free online resources.
6 Additional Tips to Further Improve Finances
From Credit to Debit – Even with an understanding of how credit and interest work, it can sometimes be simpler or more secure to use debit or cash rather than swiping a credit card. This is especially true for smaller purchases.
Diversify – Diversifying your income, such as launching a side hustle or investing in the stock market, can help you prepare for an unexpected financial event. Even if you are building your savings, if your primary source of income is disrupted, having some secondary streams of money can be very helpful.
Wait it out – Set and stick to a rule that when you are tempted to buy something, online or in-person, wait a full two days. At the end of two days, if your desire to make the purchase is still as strong as it was before, then go ahead. But you might find that the interest has faded. If this is the case, then pass on the purchase and move along.
Get thrifty – Saving money doesn’t have to be a drag. You can get creative with reuse and saving, align saving money with other values such as sustainability, or have fun with the hunt for a great deal.
Cut back where you can – Little purchases add up to large costs. Conversely, every avoided unnecessary expense will add up to big savings. Don’t deny yourself every pleasure, but rather save things as treats. For example, if you love the oat milk latte from your local coffee shop, resist purchasing one every morning. Instead, make it a special Friday ritual.
Go beyond the basics – When you’re prepared with the basic knowledge and the right attitude around money, there are so many exciting advances happening in the world of finance. Opening yourself to cryptocurrency or the breakthroughs of fintech may energize the way you view and relate to money.
How To Be Smart With Money – Conclusion
Learning how to be smart with money is possible. Once you reflect on your relationship with money and your habits (including the bad ones), you will be equipped to understand further finance and how to avoid falling into common traps. Normalize talking and learning about finance. This can take some of the associations of the unnerving or stressful elements away.
In conclusion, remember that money really does not buy happiness. However, shifting the way you relate to and use money can be one part of building a happier life today. What will be your first step?
If you have tips and trick on how to be smart with money, please share them in the comments below.