A Guide to Personal Finance Basics

Daughter playing a block stacking game with parents after discussing personal finance basics

Key Takeaways

  • Better understand your current financial situation by tracking income, expenses, debts, etc. This provides a baseline to set goals.
  • Set financial goals, both long-term like retirement and short-term like saving for a house. Goals help guide budgeting and saving.
  • Create a detailed budget that maps income and expenses. It helps control spending and save for goals.
  • Build an emergency fund with 3-6 months of expenses to handle unexpected costs. It reduces financial risk.
  • Contribute to retirement accounts like 401(k)s and IRAs. Time and compounding boost retirement savings.

Learning how to better manage money is an important part of building a sound financial future. The concept of personal finance can feel a bit intimidating since there is a lot to understand. Understanding how finances work is important, it can help you to better manage money and be successful in the long run.

Good news: it's never too late to start learning. Here's a guide on personal finance 101 to help you understand some of the essential concepts.

Understand Your Baseline

You'll likely want to start by taking stock of where you are right now. Look at your current income and expenses, plus your debts, and see where you stand. Are you spending less than you earn? To get a good idea of how much you're spending, consider doing a challenge where you track everything you spend for 30 days.

Once you have a full financial picture, it will likely be easier for you to determine if you are where you want to be or if you need to make significant changes to your spending habits.

It can be a lot easier to move forward with simple tasks such as creating a budget, paying down debt and setting financial goals once you have a realistic idea of your current situation.

Work Out Your Goals

You'll also want to plan out your financial goals, both long- and short-term. Maybe you're saving for your child's college fund, planning a wedding or thinking about buying a new home, each of these goals could benefit from having a plan in place. Understanding not only what your goals are, but how to make a plan to help accomplish them, can go a long way when it comes to budgeting and saving for your future.

Create a Budget

Having a detailed budget is one of the most common pieces of advice out there for people who are trying to better manage money.

If you're unsure about what a budget looks like, that's OK. The key here is to think about your budget as the road map to your financial future. You can make your budget as straightforward or as complex as you'd like, but at the very least, knowing how much money you have coming in and going out, and where it's being spent, is likely where you'll want to start.

From there, you can use your budget to help determine places where you can cut costs or devote more savings to retirement. A budget can help you make smarter decisions about both savings and purchases, and can help you slow down runaway spending, which may help reduce potential debts over time.

Build an Emergency Fund

Work on reducing your financial risk as much as possible. One way to do that is through savings, namely building up an emergency fund. An emergency fund is essentially savings that can help you with unexpected big-ticket expenses.

A general rule of thumb is to build up an emergency fund that can cover three to six months of expenses in the event you lose your job or get hit with unexpected medical or other bills. When preparing for the unpredictable, no amount of savings can be definitively called enough to cover any possible emergency — the idea is to have as substantial a cushion as you can.

A similar concept is a rainy day fund. It's essentially a smaller version of an emergency fund, and is meant to cover more minor financial bumps in the road. You can use this fund to pay for emergency car expenses, home repairs or vet bills. Building an emergency or rainy day fund is one financial goal that can be worked on over time, tucking a bit away each month.

Pay Down Debts

Having large amounts of debt may be a cause of stress and concern, and it can have an impact on your financial health. Another focus is to work out a plan to start paying down some of those debts.

This is one area where a budget can be helpful. As you go through your budget, pay close attention to the debt you already have. The list might include student loans, medical bills or credit card debt. See where you can save money on other expenses and consider paying down some of these debts systematically.

While managing your debt can feel daunting, it's an essential first step in building a sound financial foundation and keeping up with your long-term goals.

Save for Retirement

It's never too early (or too late) to start planning for your retirement. It can be easy to underestimate the amount of savings you'll need, especially now that, for many, retirement is lasting longer than ever.

  1. Look at any plans offered by your employer. Many will sponsor a 401(k) or other retirement plan that will allow you to start saving for retirement by contributing through your paycheck. Some employers also offer matching, where they will also contribute to your 401(k) plan.
  2. Explore options that are not sponsored by your employer. Individual retirement accounts (IRAs) allow you to contribute to a retirement savings account wherever you work, and they could have some tax advantages, as well, depending on your alternatives and overall financial situation. Consider consulting with a tax advisor for more information.

Once again, with your budget set, you'll be able to determine exactly how much you can afford to add to your retirement savings each month.

Help Protect Yourself

Insurance is another important part of taking care of your financial future. In the event of the unexpected, you'll likely want to help protect yourself and your family. For many, part of that is also investing in that protection.

Accidents and illnesses happen, and the last thing you want is to have to burn through your hard-earned savings. You probably already have car or home insurance, but it's never a bad idea to consider some additional options for other types of insurance, too.

As you age, you might want to consider life insurance, as well as disability insurance. It's also important to consider your long-term health, as health care can make up a larger slice of your expenses as you age; long-term care insurance is another option to consider.

Review Consistently

Once you have your budget set with a plan to save for retirement and pay down debts, don't forget to check in with it. Over time, your situation can change: Maybe you received an inheritance, got a raise at work or paid off one of your biggest credit card bills. In these cases, you might want to take a new look at how you are managing your finances and retirement accounts and switch things around a bit.

It's easy to add a reminder to your calendar once a year, or if you're really feeling motivated, every quarter, to give your financial plan a quick once-over and see if you need to make any adjustments.

This can also be a great way to keep track of how your goals and plan are progressing. If you've started to make some real strides, pat yourself on the back and continue to focus on your goals.

Keep Learning

Now that you have a better understanding of some of the basics of personal finance, continue to educate yourself. Digging into your finances, and seeing how you can work on improving your savings, budget and goals, can help you be more confident with money. That confidence can help you over the long term, as you continue to build a solid foundation for your financial future.

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Save, Invest, Grow Your Wealth!

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