Our Family of Companies
western & southern financial group logo
western & southern life
columbus life logo
eagle realty group logo
fort washington logo
gerber life logo
integrity life logo
lafayette life logo
national integrity life logo
touchstone investments logo
w&s financial group distributors logo

Your Guide to Personal Finance

Personal Finance
Share:
Young couple sitting at a desk looking at personal finances

Personal finance impacts every part of your life. Yet, as important as it is, it's rarely taught. You're often left to pick up bits and pieces of basic financial planning along the way and hope for the best.

However, a significant part of building a solid financial future revolves around understanding key aspects of personal finance and financial planning. When you start to learn some of these skills, it can become easier to manage your finances, which can benefit you down the road.

Use this guide to personal finance as a jumping-off point. You'll learn some of the essential concepts of personal finance and gain some resources to help you dig deeper.

What Is Personal Finance?

"Personal finance" is really a catch-all term that covers how you manage your money. That includes your income, savings, debts, investments and retirement accounts.

There are a lot of facets to personal finance, which is one of the reasons why so many people find it a bit intimidating. Understanding personal finance means diving into areas such as banking, retirement, savings, debt, real estate, taxes and estate planning.

Here's the good news. You can learn about personal finance. And once you start, it can become easier to set goals, help pay down debts and help boost your retirement savings.

Your finances can impact so many areas of your life, such as your savings, interest rates on loans and when you can retire. So, learning about it and understanding as much as you can now will help pay off for the long term.

Why Is Personal Finance Important?

Do you plan on buying a home? Getting a new car? Retiring after a long and successful career?

If the answer to any of these is yes, your finances will play a role. How you manage your money can often help determine if you can afford a home, what interest rates you get on loans and when you can retire. We're faced with financial decisions every single day — from simple problems, such as if you should buy lunch every week at work, to more complicated decisions, such as estate planning for future generations.

The better you manage your finances, maintain a good credit score and limit your debt, you may have an easier time accomplishing your goals. That's why becoming financially literate and making the most of your money matters.

Understand Your Baseline

Now that you're ready to learn some basic financial planning, there's one very important first step to take: looking at where you are right now.

When you start with a baseline, you'll have a full picture of your finances. You'll know if you need to cut back on your spending or if you have some extra funds to contribute to investments or retirement. It's a lot easier to set realistic goals when you know where you stand.

A great way to start is with a month-long challenge. Track your income and everything you spend for 30 days. Use this time to go about your regular spending routine. Then you'll have a picture of what a typical month looks like for you.

You can use a spreadsheet or online tool to keep track of everything. At the end of the month, look at your numbers. After this, you'll be in a great position to start setting goals.

Set Financial Goals

Once you have a clear picture of your current financial situation, it's easier to create financial goals. However, remember that when it comes to goal setting, it's not just about the long term, such as retirement. It's very helpful to have some short- and medium-term financial goals, too.

Here are some common financial goals to consider:

  • Paying off credit card debt
  • Paying off a student loan or medical debt
  • Creating an emergency fund
  • Saving a down payment for a home
  • Saving for a wedding
  • Saving for your kid's college tuition
  • Saving for retirement
  • Saving for a vacation

These are just a few examples. Your goals may look different. Regardless of what your goals are, it's helpful to write them down, so you can start planning.

Once you have a few financial goals set, create a timeline. Saving for retirement, for example, could last decades, so that's a long-term goal. On the other hand, saving for a vacation with your friends and family next year is a great example of a short-term goal.

Knowing when you want to hit your goals can help when you start creating a budget.

Explore More About Financial Goals:

Financial Life Stages

Stick to a Budget

When you get started with personal finance, the most popular advice you'll hear is to set a budget. A budget is one of the most critical tools you have to manage your finances. For many, creating a budget — and sticking to it — is a great way to practice basic financial planning.

With your budget in place, managing your money and tracking your goals becomes easier. You don't have to guess about what you might have or if you can afford to buy something — your budget will help give you the answers.

A budget is also great for helping you reach your financial goals. Once you have your budget set, you may find you've been overspending in other areas or have extra income, which you can apply to items such as your emergency fund or use to pay down debts.

Getting started can be easy. Use your baseline spreadsheet as a guide. Or use one of the many budgeting tools and apps available online. These do most of the hard work for you and alert you if you're in danger of overspending. As you create your budget, don't forget to include your financial goals. For example, budgeting $25 a week into your vacation fund now can end up going a long way toward covering your flights and hotel costs next year.

By making small, positive changes over time, you can help yourself get closer to reaching your financial goals.

Explore More on Saving & Setting a Budget:

What Does a Budget Look Like?
Master Your Personal Budget
Budgeting for Couples

Build an Emergency Fund

You might have seen this statistic on the news. According to a Federal Reserve survey, nearly 40% of Americans would have to borrow the funds or could not pay if they were hit with a $400 unexpected expense. Another study by Bankrate found that 28% of Americans don't have any emergency savings at all.

Those numbers go to show the importance of having an emergency fund. It's something else you'll want to consider building into your budget, especially if you don't currently have one. Putting even a small dollar amount every week or month into an emergency fund can help give you some peace of mind that you can cover unexpected bills when they arise.

If you're starting with your emergency fund, a good rule of thumb many experts suggest is to save about three to six months' worth of expenses. Your expenses may include your mortgage or rent payment, monthly bills, food and so on. The goal here is that if, for example, you were to lose your job unexpectedly, you could financially survive an emergency for a period of time. Keep your emergency fund liquid, in a savings or money market account, for easy access.

A similar concept to an emergency fund is a rainy day fund. A rainy day fund could help you cover minor emergency bills, such as new tires on your car or a vet bill.

Explore How to Create an Emergency Fund:

Emergency Fund Calculator

Pay Down Debts

For some, a significant barrier to reaching financial goals and saving for retirement is debt. Having a lot of debt not only puts a financial strain on your plans and goals, but it can also be a big source of mental and emotional stress. Unfortunately, that stress can spill over into the rest of your life in negative ways.

Learning how to manage your debt is an essential part of your overall financial health. Generally, you want to avoid having a lot of debt. Your financial snapshot can be a big help there. It's hard to know what to work on paying down until you have a complete picture of your total debt. That can feel scary at first. But, once you know the numbers you're dealing with, you can use your budget to create a plan.

There are varying types of debt, including credit cards, student loans, car loans and mortgages. Depending on what kind of debt you currently have, a good approach to paying it off is to start by looking at your short-term debt with high-interest rates — for example, credit card bills.

Here are a few approaches for other types of debt:

Credit Card Debt

According to Experian, the average American has approximately $5,300 in credit card debt, spread across multiple cards, and an average credit utilization ratio of 25%. Most people get into trouble with credit cards by charging a lot and then not paying down the balance each month. Since some cards can have high interest rates, paying only the minimum each month could cost you thousands in extra annual interest paid. Keeping your credit utilization ratio below 30% is essential, too, because a high ratio may harm your credit score. Paying off high-interest, short-term debt first can help to prevent it from turning into long-term debt.

Student Loan Debt

Today, many millennials are struggling with the burden of student loan debt. A Federal Reserve study found that 40% of those who attended college have at least some form of student loan debt, and the median amount of debt for those who still owe is between $20,000 and $24,999. Having a significant amount of student loan debt can impact various financial decisions, from buying a home to retirement savings. That's why it's important to include your student loan payments in your budget plan, so you can help avoid falling behind, and accruing late fees.

Car Loan Debt

Depending on where you live, a car might be necessary for you to get around. Data from Experian found that the average American has just under $20,000 in outstanding car debt. Another report from Kelly Blue Book found that the average transaction price for a new car in 2021 hit over $42,000, with a record number in loans. A car loan is typically considered a short- to medium-term debt, so it's something you want to track in your budget. If you have extra funds each month, putting some extra cash toward your car loan to help pay it off sooner might be an option, too. The Consumer Financial Protect Bureau has some good advice on approaching borrowing and negotiating a car loan.

Mortgage Debt

For many, the most significant long-term debt they'll have is a mortgage. It's a serious financial responsibility and not one to take lightly, since you'll be paying it off for decades to come. According to Experian, in 2020, the average mortgage debt was approximately $208,000, and about 44% of American consumers have a mortgage. Budgeting for your mortgage is an essential part of any basic financial planning. Your mortgage is most likely your largest expense each month. And, as you create an emergency fund, you'll want to have enough in there to cover your mortgage payment for a few months if you lose your job or can't work.

Another option to explore is a mortgage refinance, which could help you reduce your monthly payment. Managing your debt may feel overwhelming, but you can do it. The key is to create a plan and prepare for the long term. Steadily chipping away at it each month can add up over time, and reducing your debt can open up many new possibilities — and help to reduce stress.

Explore How to Manage Your Debt:

How Much Debt Is Too Much?
Good Debt vs. Bad Debt

Plan for Retirement

It is never too early or too late to start planning for retirement. By the time you reach retirement age, you'll have spent decades working. Retirement is a time to enjoy a well-deserved break and a chance to explore new adventures and opportunities.

A key goal in younger years is to build up your retirement savings. However, as you get older and closer to retirement, you'll also want to create a retirement budget to see how it aligns with your goals and expectations. For example, if you plan to spend the first few years of retirement traveling the world, you'll probably need more than someone who intends to stay at home with their grandkids.

As with a standard budget, this can help you see how much money you'll need each month to cover your expenses, and you can compare that with the income your savings may provide. Working with a financial professional before you retire can help you effectively plan out your retirement income and savings goals.

As you age, your retirement savings strategy will, too. So, it's not something you want to set and forget.

Explore Ways to Plan for Retirement:

How to Save for Retirement
Retirement Calculator
5 Reasons to Start Preparing for Retirement Now
How Much Does a Couple Need to Retire?
When Can You Collect Social Security?

Save Your Money

The key to making the most out of your retirement is building up as much savings as possible. You can do that in various ways, such as building up your savings, investing in the stock market or focusing on retirement savings accounts.

As you create your budget, make sure you see where you can find ways to add to your savings every month. Even a few dollars at a time can add up over the years. Compound interest could potentially make a big difference for those who start investing their money when they're 25 compared with those who start at 45.

Here are a few ways to save:

  • Add to your Social Security benefits: Qualified retirees can claim Social Security benefits. These benefits are paid out every month and make up a portion of many Americans' retirement income. The amount you'll get is based on the highest-earning 35 years of income. Adding even a year or two of higher income to your numbers can help to boost your Social Security payout when you retire. However, depending on your financial situation and needs, your Social Security might not be enough. According to the National Institute on Retirement Security, 56% of Americans are worried they won't have enough saved for retirement. The Social Security Administration has resources to help you learn more.
  • Maximize your 401(k): Many workplaces offer employer-sponsored retirement plans, such as a 401(k). One benefit of a traditional 401(k) is that these accounts are tax-advantaged, meaning any contributions you make come from your pretax income. However, these funds will be taxed upon distribution. If you're contributing to your 401(k), the money will come out of your salary before you get your paycheck. Some employers also offer contribution matching, where they'll match contributions you make up to a certain percent or dollar amount — essentially free money. Keep in mind that any tax-deferred funds will be taxed upon distribution.
  • Open an IRA: Whether or not you have an employer-sponsored retirement plan, you can consider opening your own individual retirement plan (IRA). Many people with 401(k)s also open them to have more opportunities for retirement savings. If you want to open an IRA, the process is relatively easy and can be done online now. Once you have your account ready to go, make sure to allocate funds from your budget for your IRA. Set aside time every year to review your full savings plan and determine if any adjustments need to be made to maximize savings opportunities and reduce risk.

Explore More on Investing:

Investing 101
Long-Term Investments vs. Short-Term Investments
Pay Off Debt or Invest?
5 Investment Myths
What's the Difference Between a 401k & IRA?

Consider Your Insurance Needs

You might wonder what insurance has to do with planning for your future. The reality is insurance — from life insurance to long-term care insurance — is tied to your finances. So, you'll want to factor these costs throughout your life, especially as you get older.

Many Americans receive employer-provided health insurance through work. However, as different working options become available, more people are beginning to strike out on their own or work for small businesses. In this case, you may need to provide your own health insurance. And if so, you'll need to budget for those costs.

Health insurance also changes once in retirement. At 65, people can opt into Medicare, but it's important to know that it covers only about 80% of your healthcare costs. The remaining 20% will need to come out-of-pocket, or you can purchase additional insurance for a higher monthly premium.

Another type of insurance to consider is life insurance. Life insurance is there to help provide a financial cushion for your beneficiaries in the event of your death. The death benefit from your life insurance can be used to help pay costs such as a mortgage, student loans, tuition and childcare. Not having life insurance could leave your family without any sort of income replacement or with the burden of having to pay your debts. That could put them in financial difficulty.

If you're worried that life insurance is prohibitively expensive, it's generally more affordable than you think. Research from LIMRA shows that over half of Americans overestimate the cost of life insurance by three times its actual price.

As you set your budget, don't forget to add insurance costs. Beyond health and life insurance, factor in your car, homeowners, or renters insurance if you have it, too. To save some money, contact your insurer to see if you can bundle your car and home insurance into one monthly payment.

Explore More on Insurance:

Life Insurance 101
Types of Life Insurance
How Does Life Insurance Work?
Understanding the Cost of Life Insurance
Life Insurance Calculator

Stay on Top of Taxes & Estate Planning

It's not always easy to think about what you want to happen to your financial resources when you're gone, but estate planning is an essential part of long-term basic financial planning.

Estate planning lets you transfer your assets and wealth, including your home, life insurance and savings accounts, to your loved ones. The most common way to go about this is by setting up a will. This document can help you lay out your wishes for your assets. If you don't have a will when you pass, it's possible your assets could get caught up in the probate process, which may take months or even years to sort out.

Working with a financial professional and reaching out to an attorney can help you start the estate planning process. You can learn the various options for protecting and transferring your assets. They can also help you learn some of the best ways to maximize taxes on your wealth and assets for now and after you're gone.

Taxes are another key part of your finances. Every year, you have to prepare for tax season. So, make it a part of your regular financial checkup to review where you stand. Check your W-2 withholding if you have a typical 9-to-5 job, and make sure you're claiming the right amount. You can also work on maximizing your deductions by increasing the amount you put into your 401(k) and other tax-advantaged savings vehicles, such as a Health Savings Account.

Explore How to Manage Taxes & Estate Planning:

How to Prepare for Tax Season
Understanding the Role of Tax Deductions
Estate Planning 101
What Is a Will?

Budget for Buying Real Estate

Another part of personal finance includes any real estate holdings you might own. Buying a home is one of the biggest financial decisions you'll ever make, and it will stay with you for a long time, so it's no something to take lightly.

As you prepare to buy a home, your budget is going to become a very important tool. Use it to look at your debts and income, see how much money you can afford, and find ways to add to your savings goals for a down payment. Also, remember to consider all the costs of owning a home and factor that into your budget. During the buying process, you may have to pay closing costs, taxes and bank fees. And once you own the home, you're responsible for upkeep. So, keep an eye on those costs and plan accordingly.

Working with a qualified real estate agent and mortgage broker will help you get the necessary answers to key questions. You may also want to consider getting prequalified before you start looking, so you'll know what kind of budget you can afford. It's an easy way to stay on track.

Review Finances Consistently

Remember your budget is a living and breathing document. As your finances change, so should your budget. Set aside time every quarter or six months to review it and make changes as necessary. Create a calendar reminder, so you'll always stay on track. If you have any significant life changes, such as a getting new job, getting engaged or receiving an inheritance, revisit your budget at that time rather than wait for your annual review. You'll likely be able to make some small tweaks right away.

Getting into the habit of regularly reviewing your finances can help you stay on track. In addition, it can help you get into the mode of planning for your future — thinking about big purchases before you spend and carefully considering if you want to add more debt.

While you're reviewing your finances, don't forget to celebrate your wins. Getting your finances on track can take a lot of work, so when you pay off a credit card or hit a savings goal, pat yourself on the back. Your hard work paid off.

Explore Ways to Check Your Finances:

Personal Finances Review
Single Parent Finances
Financial Planning Checklist

Keep Learning Personal Finance Basics

Understanding your finances is a life-long process. But starting sooner rather than later can pay off down the road. As you learn more about your finances and get more comfortable, you can adjust your approach and dig deeper into some complexities without feeling overwhelmed.

Explore More on Personal Finance:

How to Teach Kids About Money
Personal Finance in Your 20s
Financial Calculators

Right now, you're working on building your confidence and a solid foundation that will serve you well in the future. If you want to get more help, consider working with a financial professional. They can serve as a partner and a guide to personal finance, helping you build a better financial future.

Next Steps