Earning, saving, borrowing, and spending: A guide for Financial Literacy Month

Daphné Leblanc • April 28, 2022

April is #FinancialLiteracyMonth and to wrap up the month we’ve created a guide to improving your financial knowledge, from better understanding your income and savings, to being wiser about borrowing and spending. 

Let’s get started.

Your income (understanding your earnings)

Income is the money you make, typically as your payment through work, but also money that comes in from investments or other assets. There are two basic types of income: gross income and net income. 

  • Gross income is what you make before any taxes or other deductions are made and net income is your take-home pay. 
  • Net income is the money you actually get from your paycheck each month, after payroll and tax deductions. Net income will always be smaller than your gross income, which can seem frustrating at first. 

A few things to remember when comparing gross and net income, is where the deductions go. The most common deductions you’ll see are federal, state, and local taxes, especially if you are a salaried or hourly employee. If you are a freelancer or work independently, you’ll be responsible for paying these taxes when you file each year. Taxes are predetermined based on where you live, how you have filled out your tax forms based on your income, and other circumstances. Remember, regardless of whether you’re salaried, hourly, or a freelancer, it is your obligation to pay your taxes on that income.

It is also likely that you’ll see other deductions from your gross income. These may come in the form of investment account contributions (like a 401K contribution) or employer-provided health insurance that you pay for partially. 

Understanding the difference between your gross and net incomes is the first step in setting a budget and managing your savings.


How to start saving

Now that you understand how to calculate your income and the money you’re taking home with each paycheck, so now let’s talk about saving it.

Understanding how much in savings to set aside can be tricky, especially if you don’t know what you are going to do with that savings in the future. The first step is establishing a budget. From there, you can establish what you want to save for and tie a dollar amount to those goals.

What steps do you go about making a budget? 

  1. Subtract your debts and expenses: Start by figuring out how much you can save by subtracting your monthly debts and expenses from your monthly net income. Expenses can be large scale (like rent or car payments) or smaller, but essential (like groceries and transportation). 
  2. Develop savings goals: It’s hard to know where to start when saving, so start by thinking about some common savings categories:
    • Emergency fund: Experts recommend having three to six months’ worth of expenses in your emergency fund.
    • Retirement: Whether that’s a 401K, Roth or Traditional IRA, or something else entirely, make sure to think about retirement. 
    • Education: Whether this is for you or your future children, developing some savings goals around education and tuition is always recommended. 
    • Big purchases such as cars, vacations, or a home: These purchases require extensive savings, and possibly an investment strategy to grow those savings.
    • Investments: Investing is a great way to maximize your savings, so starting to think about how much you want to put toward investments is a great option for growing your wealth.
  3. Understand what is left for non-essential expenses (spending): It can be tempting to bypass savings and go straight toward non-essential expenses like shopping or dining out, but it’s not advised when making your budget. Once you’ve developed and found success in sticking to your savings goals, you can plan out the rest of your budget for non-essential expenses.

Whatever you plan to do, the bottom line is never to forget the importance of saving. In times of uncertainty, your future self will thank you.


Borrowing and spending

Borrowing money isn’t a bad thing, nearly every American uses our credit system, which allows individuals to borrow money from banks and lenders. It’s a way to gain access to things like car loans, education loans, and home loans or to cover unexpected expenses like medical bills. The key is to make sure that you don’t borrow more money than you can afford to pay back.

To handle your borrowing and spending responsibly,  start by looking at your credit report. This document shows your credit history, including but not limited to rental payments, credit inquiries, and utilization rate on credit cards. Your credit score is a calculation of all of this information. The higher your score, the better your borrowing habits look to potential lenders.

If you have poor credit, there are still steps you can take to improve your score. One of the best things you can do is to make all of your payments on time. This includes credit card payments, utilities, rent, and any other bills you may have. You should also try to keep your balances low. This means that you shouldn’t max out your credit cards.

In addition to paying your bills on time and keeping your balances low, you can also try to get a mix of different types of credit. This could include a car loan, a student loan, and a credit card. Having a mix of different types of credit shows lenders that you can handle different types of debt.

If you’re having trouble keeping up with your borrowing and spending, there are a few things you can do to get back on track. Here are a few tips to help you understand and manage your borrowing and spending:

Better behaviors for borrowing
  1. Learn how your credit score impacts interest rates and borrowing costs. Your credit score is one of the most important factors in determining your borrowing and spending habits. The higher your score, the lower your interest rates, and borrowing costs will be. If you have poor credit, you may still be able to get a loan, but it will likely come with a higher interest rate.
  2. Make all of your payments on time. One of the best things you can do to improve your credit score is to make all of your payments on time. This includes credit card payments, utilities, rent, and any other bills you may have. You should also try to keep your balances low. This means that you shouldn’t max out your credit cards or take out loans that you can’t afford to pay back.
  3. Get to know what to look for when borrowing money. Be sure to read the terms and conditions of any loan or credit card agreement before you sign up. This way, you’ll know exactly what you’re getting into and won’t be surprised by hidden fees or other charges. Pay attention to the interest rate and the length of the repayment period, as these can affect how much you’ll ultimately payback.
  4. Understand what your payment schedule and interest payments look like. If you’re not sure how much interest you’ll be paying on a loan or credit card, use an online calculator to get an estimate. Make sure you know when your payments are due and how much they’ll be. Consider setting up automatic payments so you don’t have to worry about forgetting to make a payment.

Now, when it comes to spending, start by referring back to your budget. As a refresher, this will include three main categories: debts and essential expenses, savings contributions, and finally non-essential expenses. 

We’ve compiled a few tips for smart spending when it comes to putting down money on all of these items:

Successful steps of spending
  1. Remember that your necessities (debts and essentials) should come first. This means that you should prioritize things like loans, groceries, and bills over any other expenses. Additionally, be mindful of the things you can’t afford and be willing to say no to them. This will help you stay within your budget and avoid any unnecessary debt. Figure out if you need to adjust your spending to meet your goals for paying back debts (borrowed funds) and savings.
  2. Use credit wisely. When you borrow money, be smart about it. Only take out what you can afford to pay back, and make sure to make your payments on time. Additionally, try to keep your balances low so you don’t end up paying a lot in interest. This will help you use credit wisely and avoid any unnecessary financial stress.
  3. Use financial tools to track your spending. There are a number of financial tools available that can help you track your spending. This can be helpful in creating a budget or identifying areas where you may be able to cut back. They can help you keep tabs on your progress if you’re working to pay down debt or save for a specific goal. Some examples of these financial tools are budgeting apps, mint.com, or personal finance software like Quicken. You can easily find these by doing a quick search online.

There are a few different ways to track your spending and borrowing, including budgeting and using money management software or apps. And if you find yourself struggling to manage your spending and borrowing, there are a number of professionals who can help you, like financial planners and credit counselors.


Things to remember

Managing your earnings, savings, borrowing, and spending are equally important parts of your financial health.

  • Remember that your “take-home” income is your net income. It’s going to be lower than what your salary or hourly rate is. 
  • The key to building a savings is calculating your personal budget. This is made up of essential expenses (like debts and rent), savings goals, and non-essential expenses (what you want to spend). 
  • Stay mindful of the amount you borrow, only borrowing what your budget tells you that you can pay back, and be sure to pay off those debts as quickly as possible. 
  • When it comes to spending, refer back to the budget you set when determining how much you should save. 

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