Personal finance covers a range of topics, including:
Income generationBudgetingBankingInsuranceLoans and mortgagesInvestmentsRetirement planningTax and estate planning
“Personal finance is simply the approach we take to using money,” said Todd Christensen, AFCPE at Debt Reduction Services and author of “Everyday Money for Everyday People.” According to Christensen, examples of personal finance might include:
Planning your monthly spendingBalancing your checkbook or debit accountTransferring money from your checking account to your savings accountSetting up direct deposit for an IRATaking only the cash you plan to use on groceries into the store so you don’t overspend
How Personal Finance Works
You may have heard your grandparents say, “Live below your means and save the rest.” This is the essence of personal finance—making smart decisions with your money now so you have freedom and options later on. “Personal finance is more than budgeting,” said Lauren Zangardi Haynes, a CFP, CIMA, and CEPA at Spark Financial Advisors. “It’s understanding credit cards, how compound interest works for you (or against you), understanding Roth vs. pre-tax savings, planning for a rainy day, making housing decisions, and saving for college and retirement. It’s interwoven in our daily lives at every corner.” Zangardi Haynes went on to say that understanding personal finance is key to reducing anxiety around money. You don’t have to be an expert. You just need to know the basics.
How Can You Be Good at Personal Finance?
Being good at personal finance is all about making your money work for you—regardless of how much you have. “Money touches every aspect of life, and if a person doesn’t know how to manage it, then it can lead to a lifetime of headaches and stress,” said Ksenia Yudina, CFA, founder, and CEO of UNest. “Once a person gets a handle on their finances, then they can spend time focusing on the things that matter most in life.” Here’s how to get good at personal finance.
Set Clear Financial Goals
Everyone has a vision of what financial success looks like to them. Maybe for you, it’s having a credit score over 800, retiring by age 50, or helping your kids avoid the student loan squeeze. For others, it may be driving a luxury car or owning a second home by the beach. Whatever your goals are, you must create a clear framework for achieving them if you want to be successful. Be SMART about your goals. Make them specific, measurable, achievable, realistic, and time-bound (SMART).
Start Budgeting
Learning to budget is one of the basics of personal finance. It involves tracking your income and expenses so you can see where your money is going each month. When done right, a budget puts you in control of your money. It gives you the freedom to spend more on things you love by spending less on things you don’t. There are a lot of budgeting apps to help you automate the process.
Build an Emergency Fund
If you always feel like you don’t have enough money to pay the bills, an emergency fund could provide some relief. It’s one of the basics of personal finance because it gives you a safety net to fall back on if something unexpected happens (such as your car breaks down or your cat needs an emergency vet visit). Many financial advisors suggest you keep three to six months of basic expenses in a savings account for your emergency fund. If that seems out of reach, start small with a $1,000 starter fund or one month’s worth of expenses. Anything is better than nothing.
Pay Off Debt
Getting out of debt can be challenging. But there are a lot of reasons why you should do it. Becoming debt-free increases your financial security, gives you more money to spend on things you enjoy, and improves your credit score. Making a plan to pay off your debt can be one of the best things you do for your personal finances—especially if you have high-interest debt. “Eliminating high-interest debt should be a top priority when it comes to personal finance,” said Yudina. “This type of debt can quickly spiral out of control and derail any financial plan you have in place.”
Start Saving for Retirement
Saving for retirement has all types of benefits—you can deduct contributions from your taxes, you build up a nest egg for the future, and you may get free money if your employer offers matching contributions. Many financial experts recommend saving 15% of your pre-tax income for retirement. If you’re not saving anything at the moment, contribute at least enough to get the full employer match, if one’s available. After that, consider maxing out a Roth IRA, then going back to your 401(k). (This is a popular retirement savings rule of thumb people follow.)
Stick With It
The goal of personal finance is to spend less so you have more money to save and invest. Although it’s a simple concept to grasp, it can be difficult to stick with it when you’re constantly bombarded with marketing messages telling you to buy more, more, more. Each time you go to make a purchase, ask yourself, “Does this item bring me one step closer to the life I want to live? Will I enjoy this purchase or am I just buying it to buy it?” By asking yourself questions like these, you align your spending with your values and minimize your chances of wasting money on something that puts you farther away from your goals.
Increase Your Personal Finance Literacy
When you have financial literacy, you understand all the facts, tools, and principles you need to be smart with money. Unfortunately, financial literacy isn’t taught in many U.S. school systems. It’s up to you to seek out this information if you want to be successful with your finances. Stuck on where to start? Here are three resources you can tap into to increase your personal finance literacy.
Personal Finance Podcasts
Some personal finance topics can be confusing, even dull—especially if you’re new to it. Podcasts that break topics down in clear, inviting ways can help you better visualize how they apply to your life. There’s no shortage of great personal finance podcasts to listen to and learn from.
Personal Finance Books
Reading personal finance books is also a great way to learn how to manage your money better. Books cover all the personal finance basics, including how to invest, pay off debt, change your money mindset, increase your income, and more.
Personal Finance Software
Personal finance software and apps are hands-on tools you can use to manage your money and reach your goals. Some help you budget and track expenses while others help you manage your investments.
