What is personal finance you may ask? That’s a real question that many people have. Basically, personal finance is the way a person goes about managing their money.
When it comes to managing money, there are different principles or ideas that people use and they can vary from person to person. Personal finance is, by its very meaning, personal. That means that people may have different ideas about managing their families money — and THAT’S OKAY!
There are a lot of things that fall under that definition so let’s break down a few popular topics that tend to come up. Here are some of the top things that are considered under the umbrella topic of “personal finance”:
How to make more money – how to earn more money, get a raise, or even start a small business
How to create a budget – how to properly track your money
How to save more money – how to reduce expenses, savings/checking accounts
How to invest money – how to choose the right retirement strategy, IRA’s, 401-k’s, etc
How to pay off loans – getting rid of student loans, credit card loans, and mortgages
How to choose insurance – health insurance, car insurance, and life insurance
Set Financial Goals
If you want to be better at your finances you need to know what your target is. When we were paying off our $50k of debt, we knew excatly what our goal was. Do you want to save $1,000? Do you want to pay off your debt? Do you want to retire a millionaire? Knowing what you want is the first step of financial planning. Use the SMART goal setting formula to help guide us in setting our financial goals.
Be Realistic About Your Money
If you make $20,000 per year, it’s not realistic to pay off $1000,000 of debt in one year. Understanding the limits to how much progress you can make is a major factor in your goal setting. We like using the S.M.A.R.T goal system when setting both life and financial goals. The big thing here is to simply physically write down your goals. If you do this you are 10x more likely to achieve them.
Write Down All Your Income & Expenses
One of the first things you do once you know your goals are to understand EXACTLY how much money comes into your bank account each month and how much goes out. Again, physically write down each bill you have. This may take awhile but it’s important. When you write down every dollar, you make and every dollar you spend, you will know how much disposable or net income you have to put towards reaching your goal each month.
Without a budget, your vision will perish 🙂 Seriously, you need a budget. Especially if you are just getting started. Without a weekly or monthly budget, how will you reach your goals? Hate to break it to you but you probably won’t.
Peter Drucker once said, “what gets measured gets managed.” So measure and manage your money well by creating a budget.
Your personal financial plan often requires discipline and perseverance and you will need it. Once you have a plan in place, trust it and stick to it long enough to see progress. It always gets hard before it’s easy.
Reevaluate Your Financial Plan
Once you start reaching some of your smaller financial goals, revisit your goals to be sure to update your plan on a monthly and quarterly basis.
You don’t have to have a degree in finance to be good at personal finance. I’ve found that money is more about behavior than math and spreadsheets. Master yourself and you will master your money.
Here are a few practical tips and steps to get you started if this is new to you:
Seriously. Having $1,000 saved up in an emergency account will save you some heartache someday. It’s a great place to start if you don’t already have some cash saved up for emergencies. Here are some tips on saving more money each month to reach your savings goal:
One of the best ways to improve your financial future is to start paying down your debt as early as possible. If you have student loans, refinance your loans. If you have credit card debt, start making larger than your minimum payments towards your debt to pay it off quicker.
Try to keep yourself from getting back into debt by not spending more than you earn. If you have to take out a loan, make sure to have a plan to pay it back as fast as possible before you take it out. If you need motivation, think about all the money you will be able to stash away once you pay off those loans? You’ll be socking away money like a madman (or madwoman)!
Credit cards get a bad rap by a lot of financial gurus, but they can be a useful tool if you use them correctly. The big thing with credit cards is to simply know and understand your financial behavior. If you know that you won’t be able to utilize your cards wisely, get rid of them.
If you think you can muster up the willpower to pay them off in full each month, then they can be an excellent tool to build your credit. Keep your account balances low. Don’t spend more than 30% of your credit card balance or your credit may be impacted negatively.
Always pay off your card in full. Try to use the rewards cards with caution, sometimes the rewards seem worth it but think critically about the annual payment and other fees associated with each card. Never, never, never pay your credit card late.
I love tracking my credit score. In fact, I increased my score by over 200 points over the last two years. Don’t ask, it used to be bad! Your credit score has a lot of factors that go into it. Here are a few big ones: how long your credit accounts have been open (the longer, the better), payment history (the less late payments, the better) and your credit-to-debt ratio (the amount of debt vs. credit limit).
Your credit score is calculated between 300 and 850. Here’s a good way to look at it:
You can also get one free credit report per year from the major three major credit bureaus: Equifax, Experian, and the TransUnion. Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport, a site sponsored by the Big Three.
You can also download free mobile phone apps so you can have constant access to your credit score. If you want to do that (we recommend this) If you want to track your credit score for free you can use a site called Credit Sesame.
Thinking not only about today but 10, 20, 30, 40 years down the road can be a powerful thing. Think about the impact you can have on your family tree if you decide to get your finances in order now. Your kids could go to college without loans. Your family could no longer worry about money. You could take vacations without the stress of coming up with money. You can finally do that remodel on your home. The list can go on but start thinking longer term.
Albert Einstien said that compound interest was the most valuable principle in all the world. Saving for retirement early can help you take advantage of compound interest. It may seem like long ways out, but it’s not. Experts suggest that you need 80% of your current income in your retirement account when you retire. That means, if you make $100k a year after taxes, you’ll need $80k a year for when you retire every year you live past the point that you still work.
The younger you start, the better. Start setting aside money each month once you have your debt paid down and have an emergency fund. Take advantage of any work-related savings and retirement funds. Starting an IRA or a 401(k) can help you get started right away.
If your employer doesn’t have a plan, don’t worry. You can use services like Betterment to set up your Roth IRA or regular IRA. You can also start saving with handy apps like Acorns and Robinhood.
Just don’t fail to start saving for retirement now. Time could be the difference between freedom and working until your 90.
Enjoy your hard work. Budgeting, saving and investing can be draining. Once you reach a few of your goals, celebrate so you can stay motivated. It’s important to enjoy some of the money you make.
Once you have created the core foundation of your personal financial plan, like setting up your budget and saving some money each month you can begin to think in broader terms about the principles you believe in. Sometimes the key to improving your personal finances is to change the way you see things rather than downloading the latest app.
These three principles below have helped us move to a bettter place financially.
Eliminate unnecessary expenses
Look at your budget once a month and see what you can eliminate. Try to eliminate something that you don’t need and then contribute that amount to your savings or investing goal.
Negotiate what you can
This skill could save you hundreds a year. Things can be negotiated you just don’t ask. Take the time to ask if you can get a better rate at your bank with your car loan. Ask your insurance if they could give you a better rate, if not look around to see what else is offered. Switch your phone plan to a go-phone to save some money. The big idea is to ask. If you don’t ask you don’t know.
Side Hustle to earn extra money
Side hustle or earning extra money on the side can be a lifelong practice and skill to develop. It will accelerate your personal financial situation tremendously. Learn How to Start a Blog or Website From Scratch in 10 Mins and earn money from it. Sign up on Elance, ODesk, or other sites where you can earn some money. Buy things from thrift stores and sell them on Ebay or Dclutter. Get a weekend job. Begin thinking of your extra time and skills as a way to side hustle.
Practice minimalism as a way of life
Frugal thinking and minimalism are concepts that have aided many in their pursuit of financial independence. Thinking in terms of how much you DON’T need can be a powerful exercise. Take some time to think about how you could simplify your life. Maybe it’s moving into a smaller home or apartment. Maybe it’s selling a vehicle and only using one. Whatever it is, it can likely help you on your personal finance journey as well.
Read about how we lived in a camper to simplify our life here.
The great tragedy is that we don’t learn about personal finance in high school or college. The great thing about the world we live in today is that you find a lot of great information online. The catch is that you have to decide for yourself if it is trustworthy or not. Get into the practice of reading personal finance blogs and other resources. Look at popular personal finance directories to find blogs. Rockstar Finance and Alltop Finance are two reputable directories for you to start with. The big thing is to surround yourself with knowledge so you’ll stay inspired when times get hard.
A great way to stay inspired is to read the greats. As I say all the time, if you want to master your money, master your mind first. That’s why the first few books listed below are not about money, they’re about how you think.
How to Have A Success Mindset
How to Build Wealth
How to Grow Investments
There are some awesome free resources when it comes to learning about personal finance if you like more of the online classroom format. Everything from budgeting, to saving for retirement, and investing can be found nearly free online. Here are a few resources we found and like:
Open2Study from Open Universities Australia offers a financial literacy course that covers savings, manage your money, how compound interest, and basic investing. There are four modules, ten video lessons, nine quizzes and one assessment. The complete course takes about 8 to 16 hours to complete.
Morningstar’s Investing Classroom offers a free course for new and seasoned investors to learn about stocks, funds, bonds, and portfolios. You’ll find topics that include “Stocks versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix” and “Introduction to Government Bonds.” The courses are short course takes about 10 minutes is followed up by a quiz.
Harvard University and MIT offer courses through Edx. These courses will teach you how credit works, which types of insurance you need, how you can maximize retirement strategy, your credit score and much more.
How to Save Money: Making Smart Financial Decisions from Berkeley
Finance for Everyone from the University of Michigan
Personal Finance from Purdue University
Online personal finance resources are a great way to get started with managing your money better. There are so many new tools online, and our job is to help curate a list of the best tools for you to use to manage your money better. Here is a list of our favorite tools. We use all of these to manage our money and love them
Personal Capital – manage all of your accounts in one place for free
Betterment – begin investing with an easy to use robo advisor
Credit Sesame – get your credit score for free on your phone
Dclutter – sell your old items and get paid
Robinhood – buy and sell stocks for free (get a free stock for signing up – click here)
LendEdu – get free rates interest rates to refinance your student loans in under 3 minutes by filling out a quick questionnaire
The most important thing is to find resources that work for you. If one blog, book, course or podcast is dull or difficult to understand, keep trying until you find something that clicks.
Not all personal finance skills can be boiled down to adding and subtracting numbers. In fact, the biggest skills can come by way of mindset and behavior change. Here are a few skills to work on if you want to master how you manage your money.
One of the most important tenets of personal finance is sticking to a plan that works. To retire, you will need to not only come up with the right plan but stick with it long enough for compound interest to work for you. Sticking with something when it gets hard is called perseverance. Don’t give up because it’s hard. Keep going.
Creating a vision for your finances is one of the most important things you can do. If you don’t have a clear vision for where you are going and how you will get there, you will be lost before you know it. A vision will carry you through hard times and keep you on the path you chose. Be intentional about your finances and the life you want to live. That’s vision.
There are a lot of things that you can do alone, but personal finance is better with two involved. If you are married, get your spouse involved in the big decisions you are inspired to make. It takes two to tango. If you are single, enlist your friends to keep you accountable to your goals. There is no better way that to have the support of those around you.
A lot of things in life boil down to this concept, and unfortunately, personal finance is one of them. This means that if you want something to happen in your life you need to make it happen by sticking to your goal. This not only means sticking to your plan but learning how to say “no” to the things that will not help you get to your goal. This means saying “no” to a new car, a high-priced purse or watch. This can be hard, but we all either suffer the pain of discipline or suffer from the pain of regret.
Video on How to Retire Early
The 50/30/20 Budget Rule
Buying vs. Renting
Challange: leave a comment below with the best personal finance advice you’ve ever received!
Also published on Medium.
Zack is one of the co-founders of FreeUp and is in charge of setting the strategy for the blog and managing the day-to-day operations. When he isn't plotting new ways to create awesome blog content, he likes to geek out about global affairs, ride motorcycles and can probably be found hiking somewhere during his days off.
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