Personal finance is an important life skill that every person needs to manage their money effectively. From earning and budgeting to saving, spending, and protecting assets, the decisions we make regarding our finances have huge implications for both our current well-being and long-term security. However, personal finance does not need to be overly complex – there are some basic principles that anyone can follow to get their financial house in order.
This article will outline the basics of personal finance that form the foundation for financial success. We’ll explain concepts like budgeting, spending less than you earn, saving for emergencies, eliminating debt, planning for goals like retirement and education, obtaining insurance, paying taxes, and focusing on building wealth rather than credit scores. Real-world examples and advice from experts will bring these principles to life.
By the end, readers will have a solid understanding of the fundamental techniques, strategies, and mindsets required to take control of their money. Armed with these basics, anyone can develop healthy financial habits for both current stability and future financial freedom.
What is Personal Finance?
Before delving into the specifics, it’s important to define what personal finance entails. Personal finance refers to all the financial decisions an individual or family makes regarding earning, budgeting, saving, spending, borrowing, and protecting assets. It encompasses how you acquire money through work, distribute it among various expenses and priorities through a budget, save for both short and long-term goals, and utilize financial products and services.
Proper personal finance management is crucial because it determines your ability to afford basic needs as well as luxury items. More importantly, your approach to personal finance is directly correlated with stress levels, independence, retirement preparation, wealth accumulation, and overall quality of life. How you handle money matters greatly.
The good news is that being skilled in personal finance isn’t as difficult as some believe. While certain advanced strategies require education, the basics can be practiced by anyone with discipline and determination. Experts agree that personal finance knowledge is about 20% theory but 80% behavior – you simply need to consistently apply sound money habits in your daily life.
With that introduction in mind, let’s explore the fundamental principles that should form the backbone of everyone’s approach to personal finance. Mastering these tenets sets the stage for financial success regardless of background or income level.
1. Create and Follow a Monthly Budget
The very first basic of personal finance is budgeting. A budget acts as a financial roadmap that outlines your income, expenditures, and plans for savings each month. The gold standard is a zero-based budget where income minus expenses equals zero, allowing you to control exactly where every dollar is allocated.
Creating an effective monthly budget requires listing all sources of pre-tax income followed by categories for essential, discretionary, and future-focused expenses. Popular budgeting methods include using free tools like the EveryDollar app, manual spreadsheet tracking, or the 50/30/20 model where half your take-home is dedicated to needs, 30% to wants, and 20% to savings and debt repayment.
Regardless of technique, following the same basic process each month is important for visibility into spending habits and accountable money management. By consistently tracking actual spending versus the plan, a budget builds financial discipline over time.
2. Live on Less Than You Earn
One of the best ways to achieve goals like establishing an emergency fund, paying down debt, or saving for retirement is to “live on less.” This crucial basic involves limiting current expenses to less than your after-tax income each month. While covering essential costs like housing, food, and transportation comes first, finding areas to cut discretionary spending allows these future financial priorities to become reality.
Optimal money management involves keeping close tabs on where income is going each month through budgeting. If regular overspending occurs despite having a plan in place, it’s time to tighten up by eliminating unnecessary or infrequent purchases, downgrading services, and getting serious about savings instead of lifestyle inflation. The rewards of living debt-free and goal-oriented are compelling motivating factors.
3. Save an Emergency Fund
Personal finance experts universally agree that building a fully-funded emergency fund should be a top priority. This cash cushion protects you from financial trouble in the event of unexpected car repairs, medical bills, home issues, or even temporary job loss. The baseline is accumulating $1,000 in easily accessible savings, while ultimately growing the fund to cover 3-6 months of essential expenses.
Contributing even small amounts each month consistently is key – automatically putting aside as little as $20 weekly adds up over time. Remember that emergencies won’t wait, so delaying building this safety net exposes you to major stress and potential debt when unplanned costs arise. Consider an emergency fund insurance policy that allows other financial goals and plans to remain on track despite life’s uncertainties.
4. Stay Out of Debt
Debt has become a normalized part of everyday life for many thanks to marketing from credit card companies. However, proper personal finance emphasizes eliminating and avoiding excessive or long-term consumer debt as much as possible. Credit likely has a role in building credit histories and possibly obtaining lower interest rates – but should only be engaged strategically, not as a substitute for cash.
If debt currently exists, the time-tested debt snowball method is highly effective for repayment. This involves listing and focusing on paying off the account with the smallest balance first while making minimums on others. The freed-up payments are then applied to the next smallest debt, sparking motivational wins that maintain enthusiastic momentum through the process. Staying debt-free or minimizing it maximizes funds available for important goals and stability.
5. Plan for the Future
Thinking long-term requires intentionally setting aside portions of each paycheck for goals like retirement, children’s education, vacations, or other large anticipated expenses. The sooner these future-focused savings habits begin, the more time the money has to potentially grow through the power of compound interest.
For retirement, experts recommend trying to save 15% of pre-tax income using retirement vehicles like 401ks for their growth potential and shelter from current taxes. If an employer offers a 401k match, make sure to contribute at least that amount to get free money. Roth IRAs also provide tax-free qualified withdrawals down the road. Budgeting for these extra expenses brings certainty and fulfillment.
6. Secure Essential Insurance
Another key basic of personal finance is using insurance products to protect your assets and earnings potential against unforeseen events. This includes different policies that safeguard your biggest investments like your home, vehicle, health, and future earning ability. Without proper coverage, a single accident or illness could financially devastate an individual or family for years.
Minimally, everyone should carry auto, renter’s/homeowner’s, health, life, and disability insurance tailored to individual needs and risk tolerance. These necessary policies transfer financial risk and hardship to insurers so you avoid catastrophic out-of-pocket costs if life throws you a curveball. Budgeting for insurance premiums each month increases peace of mind regarding essential protection goals.
7. Manage Your Tax Situation
Unless you’re familiar with tax loopholes or breaks, you likely can’t avoid paying some form of tax each year as required by law. However, smart tax planning enables legally maximizing how much you keep from your hard-earned income. Proper withholding ensures owing or being owed a large tax bill at filing time is avoided. Working with a financial professional can help determine your situation’s optimal options as well.
Key tax fundamentals include understanding marginal tax brackets, appropriate withholding, utilizing employer benefits, tracking deductions and exemptions, sourcing reliable tax software or professional guidance, and filing accurately and on time each year. Learning about income tax basics provides clarity and control in meeting obligations while keeping take-home pay optimized.
8. Focus on Wealth Building, Not Credit Scores
Marketers have convinced many that credit reports and scores dictate financial success. However, proper personal finance prioritizes wealth accumulation over the goal of high credit scores. While debt can help build profiles, access, and qualify for the lowest rates, it also enables overspending and high-interest obligations. The wealthiest shun debt as much as possible.
Building wealth involves budgeting to live below your means, becoming and staying debt-free through repayment plans, maximizing retirement contributions, growing investments, and utilizing cash instead of plastic whenever feasible. A disciplined, debt-avoidant approach eventually yields substantial net worth that supports lifetime financial security – far surpassing any benefits of high credit ratings.
Conclusion | Personal Finance
Mastering the basics of personal finance through consistent budgeting, savings habits, debt elimination tactics, insurance protections, tax planning, retirement preparation, and wealth-focused mindsets sets the stage for lifetime financial achievement. Starting with small changes in line with core principles allows lifelong habits to emerge naturally over time through effort and patience. Those who prioritize these fundamentals get stability today and comfort tomorrow regardless of income or circumstances. Understanding how to “win with money” empowers taking control of personal finances for good.
