Mastering Personal Finance: Your Ultimate Guide to Financial Freedom
Did you know that almost 60% of Americans don't budget? That stunning statistic alone explains why we need personal finance at all–let alone today. Personal finance is just about everything in life that you operate skillfully to set yourself up for more money. It's how you make money, it's how you manage that money, it's focusing more so on the future than only making short-term plans, and it's a bit on statistics and other invested-based mechanisms you need to learn that you don't, however, have to be an expert in. In this article, I want to explore what financial planning and wealth building represent and how that impacts your life. That will come by discussing techniques to budget at a much higher level than you might realize, why you need to think about having a rainy day resource, and throwing out a few concepts to make you think of how you'd like to approach long-term growth with a more in-depth mindset. My job is to provide you with a rough turpitude about developing long-term wealth that could sustain several generations of your family.
Understanding Personal Finance
"Personal finance" is what we do with our money. It’s budgeting, saving, and investing. It’s paying off debt. All the myriad things we do with money fall under the broad term "personal finance." It means how we handle money and is especially important when there is no money. Knowing about personal finance means that we can plot the next point in our plan. If we have a series of financial points that we need to hit—buy a house, send a child to school, retire at sixty-five—once we know how to earn, we can figure out how to get to the next point.
In personal finance, the "Big Four" are:
Budgeting – Looking at income vs. expenses
Cash Savings – Good financial practices suggest the need to have cash saved for the future.
Investing – Placing saved money in an area that will offer a greater total return over time.
Debt – How to prolong paying for something rather than actually saving to buy something.
Practicing good personal finance means we’ve mastered these items. It also implies that we’ve taken steps to avoid the traps. Further, we’ll be secure. The four practices pile into one another. If we know how (and why) to do on, we know how (and why) to do the other.
The Importance of Budgeting
Budgeting is exactly what it sounds like: creating a plan for how you'll spend the money you bring in. This basic personal finance skill is often one of the first things people learn as they start to "get good" with their money.
Budgeting, in its simplest form, is the process of figuring out "how much money do I make, and how can I divide this between my bills, spending, and saving goals?" Knowing the answers to these questions empowers you to make informed decisions over your own money.
Knowing your starting point is key. If you've never kept a strict budget before, congrats: you get to play detective. Spend a month "as you are," and be brutally honest about how you're handling your money. Track every dollar you spend, no matter how "small" a purchase it might seem.
There are two basic challenges in budgeting (other than the emotional tension): first, defining your goals to orient what you're shooting for, and second, getting to know yourself from an objective standpoint. The first challenge involves defining your vision, and the second involves leveling off your assumptions of "what you're like" to be congruent with what your behavior suggests.
Strategies for Saving Money
Everyone needs to save money. It helps you build a strong financial foundation. Because of the money you save, you can cover any unexpected but important expenses (your car’s new timing belt). It enables you to take advantage of an opportunity that comes your way later in life (like a good stock deal, a downpayment on a house, or an advanced education). Above all, setting aside a small part of your income helps you develop and grow a lifelong plan of action.
Automating your savings: Tell your bank to make the transfer for you.
Automatic checking to savings = you didn’t need it in the first place.
Cutting frivolous, often overlooked spending is a surefire way to save BIG money.
"How much can you save?" The stuff I’m talking about is the regular $8.99/month Hulu subscription you never use, the random meal at Mcdonald's (instead of eating the lunch you brought to work, Timmy!), or the impulse $9.99/month Xbox subscription—all the small charges your brain conveniently sweeps under the rug. Do you know what I’m talking about?
Emergency funds: You need an emergency fund. Think of it as your "I-fucked-up" fund. Shit, you never know what could happen. Maybe you gotta replace the transmission on your car. Or, Gramps has a sudden medical expense pop up. Aim for 3–6 months’ worth!
Investing for the Future
"Investing is another key part of building wealth. It’s how you get your money to grow over time. There are several types of investments you can make, including stocks, bonds, and mutual funds. Stocks are essentially ownership in a company. They have the potential for a high return but can also be highly volatile. Bonds are what you get when you loan money to a company or the government. They’re typically much more stable, with a lower return on investment. Mutual funds use "strength in numbers" — You pool your money with a bunch of other investors, and together you buy a portfolio of both stocks and bonds. You get to balance reward with risk.
Starting to invest is scary, especially if you’ve never done it before. But you've got to start somewhere. That’s where the end goal of diversification comes in. You want to spread your investments out across a few "classes." That way, if something tanks, you don’t lose out in a big way. If you're just starting out, though, that’s a long-term goal. You should focus on figuring out an investment or an investment strategy, to begin with. Do some research. Figure out what you want to do. Make some goals. Seek some professional help, at first, until you get the hang of it. Then, see what happens."
Effective Debt Management
Debt has far-reaching effects on personal finance. It influences how much you spend each month and how long it takes to meet your financial goals. Becoming adept at managing debt changes the look and feels of your financial plan. It can mean the difference between just getting by and feeling as though you're building toward more financial comfort.
In terms of debt management, two popular strategies are known as the snowball and avalanche methods. The former encourages you to aim any extra cash at your smallest debts first, allowing for the psychological boost you feel when knocking obligations out of the park, making you feel more accomplished. The avalanche method, meanwhile, targets the most expensive debts—those with the highest interest rates—which can save you money in interest payments.
Don't overlook the power of maintaining good credit. A strong credit score will reward you with better terms on loans and credit cards. Indeed, even a slight reduction in the interest rate on a home loan, given the amount of the loan, might result in significant savings.
Below are the steps you must take if you really want to get out of debt.
Planning for Retirement
Retirement planning is important. It's never too early to start because the earlier you do, the more you can save. If you start in your twenties or thirties, your money will grow exponentially due to compound interest. As you progress in your career, contribute to a 401(k) and open up an Individual Retirement Account (IRA). The 401(k) is beneficial since your employer may match your contributions. An IRA allows you to save more of your income because of tax advantages.
To understand the amount of money you should save, do your own research. Of course, your lifestyle, cost of living, and how long you’re going to live all affect this number. A typical baseline you should aim for is about 70-80% of your pre-retirement income. A good way to build savings is to have a plan. The easiest way to do this is to start with the end in mind. Have a goal. Determine a specified amount of money you want to save and figure out how much you have to save each month. Keep checking your investments to make sure they line up with what you want. The more time you think about it, the earlier you can start, and the better off you could be down the line.
Mastering personal finance is a must if you want to be financially stable and independent. Below are some of the most important things you need to know about.
The key takeaways from the article are, firstly, you have to understand where it is your money is going. Once you understand that, you can then make plans about how you want to use your money. It always pays to be wise about these things.
How do you know if your finances are healthy? Solutions to your financial problems should be actionable. Start by tracking how much money you spend on a day-to-day basis. Make a budget and try to stick to it as much as possible. Save consistently and decide upon a good percentage of your income to actually save. Save more! Make an educated guess on how rich you might be in the future, given your current savings. Look for your best investing options, with a fail-safe on what you're comfortable with. If you've lost a lot of money gambling—
I'd love to hear your tips for personal finance in the comments below. If you got this far, consider subscribing to email updates below! That way, you'll be alerted the next time I post. I read a book some weeks, distill the best parts of it, and then send it out for all of my subscribers to read. Thinking of this blog as 'light reading', only about once every few weeks, also it has value, whether you read my book summaries or are interested in some financial advice, personal finance, or self-improvement. Let's change the world, together!
