You’ll often hear people talk about being “good” or “bad” with money. If you’ve ever wondered what that really means, keep reading. In this article, I’ll discuss how to be good with money.
How to be good with money: What does that even mean?
Before we jump into my list of tips, let’s clear up a seemingly common misconception.
You see, many people insist being good with money is all about ticking off boxes on a universal checklist. Those boxes typically include things like:
- buying a home
- earning a six-figure salary
- owning rental properties
- never buying new vehicles
To be clear, there’s nothing inherently wrong with any of these goals. Issues arise, however, when you follow standards created by others without thinking critically about them.
My point? Exactly what it means to be good with money varies depending on your goals. From a high level, though, it all revolves around one question:
Are you on track to achieve your financial goals by the expected date?
I’ve chosen the tips in the next section to help you answer this question, which will reveal whether you’re good with money (and, if the answer is no, what you need to do about it).
How to be good with money: 10 important tips
1. Set SMART financial goals
As I mentioned a moment ago, your goals are a key piece of the puzzle when it comes to determining whether you’re currently good with money. It all starts with having SMART financial goals. SMART, in case you’re unfamiliar, stands for:
If you set generic goals, you’ll never be certain whether you’re good with money because the desired result is poorly defined. With a goal like “becoming rich,” for example, the goalposts will just keep moving – even if you’re aggressively accumulating wealth.
A much better approach would be to figure out how much money you actually need (and when you need it by). Then, you can gauge whether you’re good with money based on whether you’re moving towards that specific, measurable, achievable, relevant, and time-bound goal.
2. Know your financial independence number
To build on my previous point, your financial independence number arguably represents the most important SMART financial goal of all. If you’re unfamiliar with the concept, your financial independence number is a sum of money large enough to make work optional for you.
Most people have no idea what their financial independence number is. They know being “rich” would make life easier. They just don’t know what “rich” ultimately means.
Thankfully, it’s not hard to figure this out. In this article, I walk you through the process. Once you’ve identified your financial independence number, you’ll become better with money overnight. That’s because you’ll be purpose-driven. You’ll be able to measure every money management decision against whether it will move you towards your financial independence number or not.
3. Set a budget that instills financial confidence
There are many different opinions on budgeting. Some people say it’s unnecessary while others swear by it. In my opinion, this comes down to an overall misunderstanding of what budgeting actually is.
Budgeting isn’t necessarily about setting a limit on what you can spend in every category possible. It’s simply about telling your money where to go.
Indeed, my budget is very simple. I split every paycheck into three categories:
- necessities (i.e. bill payments)
- everything else
The first two categories are automated. I almost never think about them. I only make decisions when it comes to my “everything else” category, which is where I get to have fun (that category includes things like dining out and vacationing).
The benefit of budgeting this way? I feel very confident about money on a day-to-day basis. And confidence is a key part of gauging whether you’re good with money.
4. Plan for the unexpected
Withstanding life’s unpredictability is another key component of being good with money. It’s not that people who are good with money always know what’s about to go wrong. It’s that they account for the fact things will go wrong. Meanwhile, people who are bad with money fail to plan and consequently get caught off guard all the time.
Check out this article I wrote for some tips on planning for unexpected expenses. It’s a lot less complicated than you might think. Once you have a solid contingency plan in place, you’ll notice surprises that push other people into debt become merely water under the bridge to you.
5. Create sinking funds for irregular expenses
There are unexpected expenses and then there are costs people know are coming up yet still fail to plan for. Common examples include:
- holidays (i.e. Christmas)
- property taxes
- insurance premiums
Many people don’t think about where they’ll find the money to pay for these things until the credit card bill arrives. This is the exact opposite of being good with money.
Instead, be proactive and set up sinking funds for irregular expenses like these. A sinking fund, if you’re unfamiliar, is a savings account you deposit money in regularly so that by the time some irregular expense comes along, you’ve got enough to pay for it.
If you typically spend $2,000 every Christmas, for example, you could set up a sinking fund and deposit roughly $167 in it every month throughout the year. When December rolls around, you won’t have to put those purchases on your credit card.
Check out this article I wrote on the topic of sinking funds for more tips.
6. Avoid carrying high-interest consumer debt like the plague
I’d venture to say it’s impossible to really be good with money if you’re constantly carrying high-interest consumer debt. While people leverage low-interest debt (i.e. mortgages and even car loans) to build wealth, there’s virtually no way to do this with high-interest consumer debt. The rates are simply too high to leave you with any reasonable expectation of earning more via your investments.
I’m not saying financially savvy people don’t have credit cards, mind you. They absolutely do. However, they use them not because they can’t pay for things in cash but rather to receive rewards (i.e. points and air miles) for those purchases. They pay their credit cards off every month before interest starts accruing.
That’s the way to do it! If you find yourself constantly putting things on credit because you don’t have the cash to pay for them, on the other hand, you’re bad with money, plain and simple.
7. Don’t follow others unquestioningly
If you spend even five minutes scrolling through personal finance forums, you’ll find dozens of contradicting opinions on everything from whether to rent or buy to which investments are “good.”
The bottom line is that there are very few universal answers in personal finance. The correct approach to managing your money will always depend on your financial situation and goals. Anyone who says otherwise likely doesn’t have your best interest at heart. Rather, they’re often trying to either sell you something or convince themselves they’re making the right decisions.
Recognizing this is part of being good with money. Take charge of your own financial destiny.
8. You don’t need to be a penny pincher – but you do need to spend money intentionally
Contrary to popular belief, being good with money is not about pinching pennies. In fact, you could be the cheapest person on earth yet still fall short financially if you don’t put all the money you save to good use (more on this shortly).
The flip side to this is that if you put your savings to good use, you can actually save much less yet still be considered “good with money.”
This often really throws people for a loop. We tend to equate “financial savviness” with “never spending money, ever,” which just isn’t an accurate view. The key is to spend money intentionally. Every dollar you spend should be accounted for in your budget (even if it just falls into your “everything else” category).
When I mentioned “putting your money to good use” in my previous point, investing is precisely what I was referring to.
Now, many people are intimidated by investing. They think they’ll lose all of their money overnight, which is incredibly unlikely to happen if one invests wisely.
People who are good with money understand this. They know failing to invest is actually the far greater risk since money’s purchasing power is always declining. In fact, people who do everything else right yet don’t invest often struggle to get ahead.
While investing, in and of itself, isn’t actually all that difficult, taking the time to understand why it’s so important often is. You have to really care about mastering money, which is why I think investing is such a key indicator of financial savviness.
If the concept of investing seems foreign to you, check out this article. In it, I break the details down into manageable chunks.
10. Avoid lifestyle creep
Lifestyle creep is the practice of buying nicer things (including essentials like houses and cars) every time you get a raise. This is a terrible idea since it means you never actually get ahead financially after a raise but rather stay stuck while other people (i.e. salesmen) reap the rewards.
People who are good with money don’t fall into this trap. Sure, they reward themselves for leveling up. But it doesn’t come at the cost of their long-term financial progress.
How to be good with money: Conclusion
I hope this article has helped you think creatively about what it actually means to be good with money.
To summarize, it’s not about achieving a certain net worth or ticking off any other universal boxes. Becoming good with money involves an evaluation of your financial goals. As long as you’re making meaningful progress (again, whatever that means to you), you’re on the right path.
To read more of my articles about financial planning, click here.