Whether you’re a young adult just fresh out of college or a
senior getting ready for retirement, personal finance plays a big role in your
present and future security. Learning how to budget, managing debt, saving, and
procuring income-generating assets can help you be financially secure in the
long term.
However, many people would be intimidated by the very word
itself–“personal finance”. It has the impression of being
complicated, technical, and can only be understood by finance experts. This is
truly not the case. Even the simplest of the average Joes and Janes can become
experts in their own finances once they understand the basics and continue to
educate themselves with other related topics.
Trout
Associates, a well-known debt consolidation company, compiled the most
relevant information that beginners should understand about personal finance.
In here, you will find a cohesive, easy-to-understand reference guide on
personal finance and how you can succeed in this area of your life.
What is Personal Finance?
Personal finance is defined as the process of being able to meet personal financial goals. There are various goals people may want to work toward, but the most common are the following:
Paying off debt
Trout Associates believes that the first step to financial freedom is paying off debt. When you are able to pay off your debt consistently, your credit score will increase, allowing you to accumulate more assets and have more savings.
Building savings
Many of us have lofty goals. Whether it’s finally buying a house, a car, or simply being able to pay for a child’s college, a lot of people save for different reasons. Usually, the second level of meeting personal financial goals is being able to save money as a short- or long-term goal.
Financial freedom
At this level, the most basic financial needs are met through a consistent amount of money through income-generating assets. Most people who have this financial goal have already retired and just want to grow their assets to secure their own or their loved one’s future.
Why is Personal Finance Important?
Personal finance is essential for various reasons. A lot of people don’t know how to manage their money well enough to be able to meet daily needs. This leads to a vicious cycle of unpaid debts, removal of assets, and other financial problems that could have been avoided with proper planning. Others want to get out of the so-called “rat race” and would like to be called “Financially Independent and Retired Early” (FIRE).
Personal finance is also tied to overall life satisfaction. According to an article published in Psychology Today, being able to meet personal financial goals is tied to a sense of control, security, and the freedom to enjoy life. When people are always working for money, they may feel trapped with jobs they hate. They may also be in a constant state of stress due to accumulating debts or being unable to afford basic needs.
Now that we have discussed what personal finance is and its important in our lives, what are the core principles you should apply in order to meet your financial goals? Trout Associates provides us with these strategies that can help us succeed in our personal finance.
The Complete Guide to Personal Finance: Core Principles
Learn how to budget accordingly.
There are many ways to budget, but one of the most effective ways is the 50/30/20 method.
What is the 50/30/20 method?
This is a system of budgeting where you calculate the amount of income you have and divide it into three parts:
Daily expenses: 50% of your income should be allocated to daily expenses such as food, rent, utilities, living essentials, and transportation.
Lifestyle expenses: 30% of your income should be allocated for lifestyle expenses such as shopping, travel, and other leisurely activities that you may need to have in order to enjoy life.
Savings: 20% of your finances should be allocated for savings. Trout Associates recommends that you at least have 6 months’ worth of your income in your emergency savings fund.
Being consistent with this budgeting method can help you achieve your personal finance goals faster.
Reduce or pay off your debt completely when possible.
Another personal finance goal is learning how to manage debt. In many cases, it is not possible to remove debt for the long term. Expenses such as buying a house, a car, or paying off student loans can lead someone into a cycle of debt for a span of 10 or more years.
Trout Associates recommends various strategies such as consolidating debt. There are various strategies that financial advisors can provide in order to help you have lower costs on your monthly payments. Other strategies include being able to pay off your debt no a manageable timeline.
Preventative measures are also recommended. Do not take out loans that you know you cannot manage whether short-term or long-term. In essence, personal finance is being able to earn more than you spend. Being able to manage or pay off your debt completely provides you with the upper hand in your financial goals.
Use credit cards to your advantage.
Some people are happy to have their credit cards. It’s definitely a sign that you have an average-to-good credit score, which will allow you to make larger purchases while paying them in increments over time. However, a few abuse this privilege, ending up with enormous amounts of debt and a poor credit score as a result.
It is best to avoid maxing out credit limits and keeping your balances at around 30% of your overall limit. This gives you the chance to pay off your bill in time in case an emergency happens. Delayed payments can also affect your credit score while increasing the number of fees and interest of your balance.
Keep your credit score in check.
Speaking of credit, it is also important to constantly check your credit score. Your credit score provides you with more purchasing power–it can help you take out important loans, have access to better insurance plans, and it can provide you with the ability to pay necessary major purchases through credit.
There are three tiers when it comes to credit scores:
- A score of 720 and above is considered good.
- A score of 650 to 719 is considered average.
- A score of 649 and below is considered poor.
There are free tools to help check your credit score for free. Apps such as Credit Karma can help you monitor your credit score. Regularly check your credit score and make sure to pay off your bills promptly to help achieve and maintain better scores.
Save up for retirement.
Nobody has the capacity to work forever. At some point, you won’t have the energy nor the capacity to work in order to have an income. Thus, it is crucial to save for retirement while you’re still at your working age.
In order to maintain relatively the same degree of lifestyle, you have to save up a total of 80% of your monthly salary prior to retirement every month. Starting early can give you the benefit of compounded interest, which is interest achieving a ‘snowball effect’ over time. Your retirement savings can be done through an Individual Retirement Account (IRA), 401(k) or a 403(k). Knowing the difference between the various retirement plans can help you maximize your retirement savings for future expenses.
Educate yourself about tax breaks.
Filing taxes can be quite complicated. As a result, many people do not know that they have thousands of dollars available in the form of tax savings. When you file your taxes properly, you can receive the rightful number of claims which can be added to your savings.
To help you get started, keep track of receipts and purchases as soon as you can. By the end of the fiscal year, you will have to file these in order to get the tax deductions. Some apps help in filing taxes such as Turbo Tax can help you get these organized digitally. You may be surprised with how much you can save through tax returns.
Prioritize your spending.
Although this can be misconstrued as a part of budgeting, prioritizing your spending is quite different. This means that you understand your priorities for spending such as daily expenses, health, and your loved ones. Knowing this can help you set a wise budget and allow you to really think about where you allocate your expenses.
To do this, think about the top five things you would need to spend your money on. Take note this is not a “want” but rather a “need”. By doing this, you will achieve a sense of clarity that will help you better set your financial goals.
Personal finance shouldn’t be complicated. By taking these core principles to heart, you can get a head start in making yourself financially secure.