Before we get into my Personal Finance 101 steps, I think a big gatekeeper to managing your money successfully is your mentality and mindset.
Firstly, many times the media or financial experts make this stuff seem like complicated rocket science. Surely some aspects to finance can be, but the majority is really not. This can mess with your financial literacy, mindset, and feelings towards money from day one.
Other times, it’s easier to be in-denial about our financial situations. If you don’t pay attention to the problem, it doesn’t exist, right? But as you know, that temporary “solution” will inevitably snowball in the future where it becomes a much more challenging problem.
Another way your mindset might be hindered is maybe you are relatively on the younger side, say 20’s to early 30’s and your financial education is just not a priority to you. The “I’ll worry about it later” mentality creeps in because you have time on your side.
Whatever it is, your understanding of personal finances and dedication to managing money has to start with the right mentality. Otherwise, it won’t be a priority to you nor will you dedicate time to learning.
I unfortunately can’t give you the magic “aha!” moment or steps to get on the right mental path. We are all unique in what works.
Building financial security is an ongoing juggling act. Some of the money balls you have in the air are going to be goals you want to reach ASAP.
Other goals might have an end date that is a decade, or decades, off but require starting sooner than later.
It’s up to you whether your list of short- and long-term goals is on a spreadsheet or pencil to paper. Just be sure to give yourself some quiet time to think it through. Here’s a simple prompt: Money-wise, what would make you feel great? At its heart, that’s what a financial plan delivers: the means to help you feel safe and secure, so you can focus on living, not worrying.
Some possibilities to consider:
No matter how much you earn or how costly or seemingly affordable your living expenses are, you still need a budget to keep tabs on your finances. If you don't have a budget already, now's the time to create one. Once you do have that budget in place, commit to following and reviewing it periodically to see if changes need to be made. Also -- and this is crucial -- your budget should always leave you with some room for savings. If it doesn't, it means you're spending too much and should start cutting back.
Aim to Live Below Your Means
When you spend every penny you bring in, you leave yourself zero wiggle room for unplanned expenses and lose the opportunity to save. And the latter can be a major problem, especially as far as retirement goes. Living below your means can actually remove some of the financial pressures you might otherwise be facing, and once you learn to be happier with less, you'll appreciate the flexibility of having extra money on hand. But more so than that, living below your means will allow you to save money for the future. No matter where you are in life, you should always aim to save at least 10% of each paycheck, and the more you surpass that mark, the better.
After you've successfully created a basic budget, you'll have a much better understanding of where your money goes and where you can trim expenses. For many people, this is as simple as cutting back on some of the little things that can add up. For others, it may mean taking a closer look at spending to make deeper cuts to create a wider gap between monthly inflows and outflows.
For example, some of the smaller variable expenses you may consider eliminating include unnecessary subscription services or recurring memberships you don't use. Bigger cuts could result from refinancing your mortgage or wiping out an entire spending category, such as dining out.
Why is reducing expenses important? Three reasons. First, it can free up more money in your budget, so you're less inclined to rely on credit cards or loans to cover spending gaps. Second, if you have debt, adding extra money back into your budget can help you pay it off faster. And third, having extra money can help you boost your emergency fund or grow retirement savings.
You never know when you might lose your job, fall ill, or encounter a situation where you're unable to work. If you don't have savings, you run the risk of taking on debt or getting into major financial trouble when the unexpected hits. That's why you should always have an emergency fund with anywhere from three to six months' worth of living expenses.
Furthermore, you should keep that money in a safe place like a savings account so that it's available to you on a moment's notice. If you don't have an emergency fund already, building one should take priority over all other financial goals, including retirement or a down payment on a home. You should also review your emergency fund periodically to make sure it meets your ever-changing needs.
These days, checking and savings accounts at a bank are FREE! If you don’t already, go to a local bank and open both accounts. A savings account earns higher interest, while a checking account earns less but is accessible at anytime with a check or debit card. DO NOT cash checks with a check cashing service, they take large fees that really add up over time.
Online Savings Banks
These typically pay the highest interest yields. You can open a high-yield online savings account and set up an automatic transfer from your checking account into it. For even less temptation to spend, decline the debit card the online bank might offer you.
The unofficial term for the interest rate charged on unpaid credit card balances is “insane.” While it’s common for banks to pay savers less than 1% interest these days on savings accounts, the average interest rate they charge credit card users with an unpaid balance is pushing 17%.
Paying off high-rate debt is one of the best investment moves, and the average 17% interest rate charged on unpaid credit card balances is a big roadblock to building financial security.
If you have a solid credit score, you might consider checking if you can qualify for a balance transfer deal to a new card that will waive interest payments for an initial period. Not having to pay any interest for a year, or more, gives you a chunk of time to make a big dent in repayment without interest continuing to pile up. If a balance transfer isn’t in the cards for you, there are two popular get-out-of-debt strategies you might consider.
From a financial standpoint, the “avalanche” strategy makes the most sense. You pay the minimum due each month on all your credit cards, and then add more money to the card charging the highest interest rate. When the balance on your highest-rate card is paid off, you start shoveling the extra payments to the card with the next-highest interest rate. Rinse and repeat.
Stymied as to where you can find the extra money to add to the highest-rate card? Time to scour that budget you’ve got running in the background. Maybe an expense gets totally chopped, or maybe you do some strategic nipping and tucking to reduce monthly outlays for some of your expenses.
Getting Out of Debt
Even after creating a sound budget and cutting unnecessary expenses, you may still find yourself with lingering debt. Using credit and taking on some debt itself isn’t necessarily a bad thing, but when you can't keep up with the payments or borrow more than you can afford to pay back, you could be in trouble.
Getting out of debt becomes even more difficult when you're facing a high-interest rate on credit cards or loans. One of the most important steps in getting out of debt is to pay more than the minimum amount due each month.
Even a modest credit card balance can take over a decade to pay off if you pay the minimum amount due because of interest and finance charges. That could end up costing you thousands of dollars that could be better used towards savings.
It Costs More to Borrow Than it Does to Save
Any time you borrow money, you're going to pay interest on the amount you borrow. Just like investing your money can help it grow over time, so, too, can carrying debt cost you more money over time. Let's say you need $2,000 to buy new furniture. If you save that money over the course of six months, you'll spend $2,000 to get what you need. But if you charge that $2,000 on a credit card with 12% interest and take six months to pay it off, you'll spend $2,070 instead. With the exception of your home and automobile, don't buy anything you can't pay for in full.
Money you have today is worth more than the same amount of money in the future because of its earning potential. That's why it's always smart to invest money you're not currently using or don't see yourself using for a number of years.
Imagine you have $5,000 sitting in a non-emergency savings account that you don't expect to need for the foreseeable future. If you take that money, invest it in stocks, and manage to score an average annual return of 8%, in 30 years, you'll have turned that $5,000 into $50,000.
Open an Investing Account (Brokerage or IRA)
Wait, you’re telling me to open an investing account when I don’t know jack about that yet!? Don’t worry, hear me out here.
Whatever your financial institution of choice (I recommend Vanguard), you can open an account for free and not fund it right away. But, you can contribute a small amount to start learning too.
If you are like me, I tend to be a better learner when I practice what I read at the same time. So opening an account got me familiar with investing terms, understanding investment types, how the account works, and more.
Never put all your money in or risk investing in individual stocks to start. The goal here is to take steps to do something and begin learning how things work.
Many people underestimate the amount of money they'll need in retirement and hold off on saving for the future because it seems so far away. In reality, there's no such thing as having too much money in retirement, and the sooner you begin saving, the better your chances of amassing a sizable nest egg. If you start contributing $200 a month to a retirement account starting at age 45, by the time you reach 65, you'll have $110,000 if your investments generate an average annual 8% return. But if you start saving that same amount 10 years earlier, you'll have $272,000 for retirement -- more than double.
A big part of managing your finances is getting your priorities straight. Follow these simple rules and commit to a financially responsible lifestyle, and you'll reap the benefits both now and in the future.
You've created a budget, cut expenses, eliminated your credit card debt and have started saving for retirement, so you're all set, right? While you've come a long way, there is one more important aspect of your finances that you need to consider: insurance.
You've worked hard to build a solid financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen, and if you aren’t adequately insured, it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. Life insurance, disability insurance, and homeowners' insurance can help with those scenarios.
One question you may have is, what kind of life insurance do I need? Term life covers you for a set period; permanent insurance covers you for life, with some policies offering the benefit of cash value accumulation. Permanent life insurance, however, can be more expensive than term life. When choosing between the two, it's important to consider which one is the best fit for your needs and goals.
Hopefully, you weren’t looking for any secret recipes when it comes to teaching yourself about money. Will you know everything about money? Probably not. But the goal is, you’ll become a Personal Finance 101 master, which is plenty to make huge strides in your life.
You should never stop learning, but you have to take steps and be consistent if you want real results. Good luck on your financial journey!