Personal Finance 101: Here’s Where to Start
Point of Interest
Getting started with personal finances isn’t complicated — but you’ll need a solid plan and some key tools to get headed down the right path.
In today’s world, there are many uncertainties, but your personal finances don’t have to be among them. Personal finance includes all the decisions you make about your money – spending, saving, earning and budgeting. If you’re unsure of how to manage finances, now may be the best time to get started with your personal finance journey.
What is a personal finance journey?
A personal finance journey involves actively taking control of your personal finances and then taking steps to understand and improve them. This can include paying down debt, improving your income, shifting your money into more profitable accounts and learning to better manage risk. Taking these steps will reduce stress, improve your credit, instill profitable money management habits and leave you feeling more confident about your financial future.
How to begin your personal finance journey
Every journey begins with a single step, and your personal finance journey has five simple steps you can take to get started.
Make a budget
If you begin a journey without a plan, it’s anyone’s guess where you’ll end up. Think of your budget as your roadmap on your personal finance journey. Your budget will help you assign concrete numbers to your current expenses and income, and it will help you outline ways to reach your personal finance goals.
To get started on your budget, take the following steps:
- Identify your sources of income. Be sure to include all household income, including wages from your spouse or earning from a side hustle.
- Identify your expenses. This should include both fixed expenses, such as monthly utilities, and variable expenses, such as gas or food. For expenses that vary from month to month, list an estimate of how much you typically spend.
- Review your recent bank statements to make sure you haven’t missed any monthly expenses. You can also use your bank statement as a good benchmark for your variable expense categories.
- Add up your total income and expenses and then subtract your expense total from your income total. If the resulting number is positive, this is the amount you can start to put towards savings every month. If the resulting number is negative, this is the amount you are overspending in your budget.
Once your budget is outlined, you may find you have a shortage at the end of every month. One of the simplest ways to make up for a shortage is to cut back on expenses. Cutting back on luxury purchases, such as gourmet coffee or professional nail appointments, is a natural first step. But if your expenses are already limited to necessities only, there are still ways to cut your expenses.
Identify the four highest expense categories in your budget and then create a list of ways that you can reduce this expense. If your grocery bill is high, start utilizing coupons or frequent shopper discounts. If you spend a lot on credit card payments, contact your credit card company and negotiate a lower interest rate. If your highest expense category is childcare, see if you can trade services with a babysitter or arrange a cheaper alternative to reduce your out-of-pocket expenses.
Pay off as much debt as possible
Any debt you still owe adds money to your budget every month in the form of interest. For example, if you make a minimum credit card payment of $75 each month to a credit card, but the company charges $39 each month in interest on your accrued purchases, you are effectively only paying off $36 of your balance (assuming you don’t add any more charges to the card).
Pay off your debt by starting with the highest interest debt first. If you have high-interest credit cards, roll that debt into a balance transfer card with a temporary 0% interest rate to aid in your paydown plan. Take advantage of the temporary promotion to pay off as much of the debt as possible while no interest is accruing, and you’ll be able to eliminate that debt much faster.
Identify savings and investment opportunities
Sticking money under your mattress is better than wasting it on frivolous things, but smarter saving involves looking for opportunities to increase the value of your personal finances. If your employer offers a match on 401(k) contributions, be sure you are making the necessary deposits to take advantage of this free money. If you have liquid funds that won’t be needed for a while, invest them in a high-interest CD or money market account that will earn more than a traditional savings account. Don’t let your money just sit — look for investment opportunities that have your money working for you instead
Increase your insurance
Insurance is a financial vehicle to help mitigate risk, so it is an important part of any personal finance journey. You can add or increase your insurance in many different areas, but not all of them are necessary or helpful. To determine where you may need to increase your insurance, conduct a personal insurance audit.
Start by outlining your current insurance policies and coverage levels. Think about which areas would have the biggest negative impact on your personal finances if a disaster occurred. For example, if your house was hit by a tornado, would your current level of homeowner’s insurance allow you to recover without too much financial disruption? If not, consider increasing your homeowner’s coverage. Evaluate each category, your current coverage levels and the likelihood of that risk occurring to determine which policies should be the highest priority.
What not to do on your personal finance journey
There is no single financial pathway that is perfect for everyone, but there are some financial missteps to avoid. On your personal finance journey, follow these guidelines to avoid some common bad money management habits:
- Don’t overextend your credit. A common tactic for improving credit scores is to open a credit card, make a small purchase, then pay off the balance at the end of each month. Although this strategy can build credit history, it can also be a negative temptation for some borrowers. A good rule of thumb is to never charge more than 30% of your available balance.
- Don’t try to do it all. When starting your financial journey, you may feel obligated to pay down debt, start a college savings account, complete savings challenges, improve your credit score and build a 6-month emergency fund. While each of these is a great financial goal individually, it can set you up for burnout and failure when trying to accomplish all of them at once. Start with one or two small goals and work up from there.
- Don’t forget to document. You will likely be on your personal finance journey for several years, so start documenting immediately. Document your goals, keep detailed payment receipts and calculate your monthly budgets. Detailed documentation not only help you identify your progress, but can also help you see how far you’ve come.
Tips, tricks and tools for managing your personal finances
Personal financial management requires little more than a pencil, a calculator and some paper. While technology is not necessary for managing your finances, it has made budgeting a bit easier and more fun. Many banks now offer helpful budgeting software as part of their customer service offering, so check with your financial institution to determine what may be available.
There are also several free apps that can help you with your personal finance journey. Trim works to find savings opportunities and cut down on unnecessary monthly bills. Digit analyzes your spending habits and automates your savings. Truebill helps you create a fully customized budget each month.