Photo by Tima Miroshnichenko
So far in this series, Let’s Get Critical, we’ve discussed what critical thinking is, how to use it at work, and how to demonstrate it to further your career. Let’s wrap up this series by applying critical thinking to managing your money.
Save
Now – Whether it’s a broken tooth or a broken car, you should have immediate access to $1500 to pay for unexpected expenses. You can apply critical thinking to save up an emergency fund. For example, most banks offer multiple accounts so you can segment your money for specific purposes. In addition to a debit account, open an adjacent account and label it Emergency Fund. Set up an automatic transfer of $25 a week from your debit account to your Emergency Fund. In one month you will have saved $100. In 14 months you will have saved $1500. Yes, it’s a long time. If you can save more aggressively, plus earn interest on the Emergency Fund, then you can do it faster.
Soon – If you’re dreaming about an extended vacation, planning to purchase a vehicle, or want to own your own home, critical thinking helps you break down your goal into manageable chunks, establish a timeline, and calculate how much you need to save each month to achieve it. For example, if you’re saving for a $20,000 down payment on a house within two years, you’ll need to set aside approximately $833 each month.
Later – For eventualities like retirement, critical thinking makes you consider factors like inflation, investment options, and your desired lifestyle in retirement. While you can’t predict the future, you can estimate how much your expenses will be and work backward to determine how much you need to save each month to reach those goals. Then you can research investments like IRAs, or 401(k)s and weigh their benefits against your risk tolerance and at what age you want to retire.
Spend
Budget – Pay attention to where your money goes by tracking your spending. This can be as simple as a weekly check of the transactions in your debit account on your bank’s app. Occasionally, maybe quarterly, pull data to see where your money goes over time. For example, do you spend more in the winter? Is it because of heating costs or holiday gifts? What expenses are non-negotiable? What extras can you cut back on without resentment? Armed with this analysis, critically think about where to adjust spending so you can strategically allocate funds to cover both essential expenses and discretionary spending.
Insurance – Just like you have to save for emergencies, you also have to spend for them. An emergency fund helps you pay for minor emergencies. Insurance protects you against major emergencies that could financially ruin you. Critical thinking means you stop and think about what you need to protect. Usually this includes your health, vehicle, and home. Now, how much protection do you really need? How much risk can you afford? Compare plans and premiums to balance cost with comprehensive protection.
How do you apply critical thinking to your money management? Please share in the comments.