10 Personal Finance Basics Everyone Should Know
- Lack of financial knowledge has resulted in many young adults making bad decisions with their money.
- The secret to achieving your goals and accumulating wealth over time is to educate yourself on the fundamentals of personal finance.
- Most money problems can be solved by learning how money works and using it as a tool to help you succeed.
What is Personal Finance?
Personal finance refers to managing your money, including budgeting, saving, and investing, while also planning for your future. Other areas of personal finance include insurance, mortgages, banking, taxes, and retirement planning.
Another aspect of personal finance is planning for short and long-term financial goals. One example of a short-term goal is saving enough money to pay for a family vacation. One example of a long-term goal is saving money in your retirement account until you are ready to retire.
10 Personal Finance Basics Everyone Should Know
Financial literacy skills are important because they can help you stay organized with your money and plan for a healthy financial future. Here are ten personal finance basics you should master.
1. A Budget is Your Financial Foundation
Budgets are spending plans that help achieve financial stability and progress toward short-term or long-term goals. But many people associate the term budgeting with having a restriction on your money. Instead, budgets are tools that assist you in acquiring and completing the most important financial goals on your to-do list.
Before creating a budget, you should list your expenses. Common expenses include:
- Housing (rent or mortgage)
- Utilities (lights, water, trash, or sewer)
- Transportation (car payment or gas)
- Cell Phone
- Payments (credit cards or loans)
- Savings or emergency fund
Before creating your budget, identify the financial goals you want to accomplish, like establishing an emergency fund or paying off student loan debt. Next, list your monthly expenses and all current income. Then deduct your income from expenses. You should reduce spending or increase your income if you have a negative number. A positive number indicates that you have an operating budget. Finally, adjust your budget as necessary.
A budget helps to highlight areas where you are overspending and can help dig your way out of debt or invest for your future. It is a skill you should develop before receiving your first paycheck.
Recommended Read: How to Create a Basic Budget in Three Simple Steps
2. The Value of an Emergency Fund
Having money set aside for unexpected expenses can prevent you from incurring high-interest credit card debt or falling behind on payments. To avoid this, you should set aside money each month to build an emergency fund.
Emergency funds are used for unexpected car repairs, job loss, or medical expenses. A good rule of thumb is to save three to six months' worth of basic living expenses in a separate savings account.
Automate a small amount to a savings account each pay period. Automatic transfers make saving for an emergency fund easier, and it reduces the amount of self-discipline required.
Choose an account that earns high interest while simultaneously being easily accessible should you need it. For example, a high-yield savings account, an online savings account, or a no-fee bank account are all excellent options.
CapWay Pro Tip: CapWay has no fees associated with a Money Account. See more details here about the benefits of banking with CapWay.
Recommended Read: Five Signs of Financial Instability
3. Pay Bills on Time
An essential part of taking charge of your finances is making on-time payments on your bills. Knowing when your bills are due and making it a habit of paying them on time can help you feel less stressed, save money, improve your credit score, and qualify for future credit with lower interest rates.
Late payments can harm your credit score, which lenders use to determine whether or not to approve you for loans and credit.
Your payment history accounts for 35% of your credit score. A history of late and missed bill payments can have a significant negative impact on your score. A low credit score can make it difficult to obtain loans, and the loans you receive will most likely have higher interest rates.
Make a list of your bills and their due dates, set up automatic payments when you can, and sign up for reminders to ensure you never miss a payment.
Recommended Read: States Mandating Financial Literacy by 2023
4. Check Your Credit Reports Annually
The three major credit bureaus offer free weekly credit report checks. In addition, you can obtain a free copy of your credit report at annualcreditreport.com.
Keeping track of your credit is crucial to your financial health and success. Checking your credit report annually will help you know if you are in good standing. If you notice any errors on your credit report, contact the credit reporting agency or the account provider. If necessary, submit a formal dispute via certified mail.
Regularly checking your credit report can help you to identify wrong addresses, misspelled names, identity theft, and other errors that could negatively impact your credit score. Clear up any mistake on your credit report to ensure you can increase your credit score.
Good credit is important when you want a low-interest rate on loans like a car loan or a mortgage loan.
Recommended Read: Why Your Credit Score Matters When Purchasing a Home
5. Manage Your Debt
Debt management is controlling your debt through financial planning and budgeting. A debt management plan aims to help you reduce and eventually eliminate your current debt through practical strategies.
A good debt management strategy involves tracking your net worth. Your net worth is the equivalent of what you own versus what you owe.
Some people divide up their debt into two categories: bad debt and good debt. Good debt is considered financing a home with the hopes that it will accumulate in value over the years, investing in your education by taking out student loans or taking out a small business loan to start a business. Bad debt is paying for clothes on a credit card or other items that will depreciate over time, like a phone, a vehicle, and office equipment.
Whatever debt you have, it’s important to keep track of it and create a plan to pay it off.
6. Avoid Credit Card Balances
Paying your credit card balance monthly is the best way to avoid credit card debt. To achieve this goal, make sure you only spend what you can afford to pay off in full each month.
A recent study by LendingTree showed the average interest rate for credit cards carrying a balance was 18.43% in the third quarter of 2022. It’s easy to swipe your credit card and pay the minimum balance every month, but over time, it will cost you more than the original price due to high-interest rates. This high-interest rate concept applies to loans as well.
If you are overwhelmed with debt, try one of these two methods to pay it off.
Debt Snowball Method
The debt snowball method lists your credit cards in order from smallest to largest balance. You pay off the credit card with the smallest balance and then pay the minimum on the credit card with the largest balance. Once the card with the smallest balance has been paid in full, you will take the amount you were putting on the smallest credit card, pay it on the next card on your list, and continue until all debt has been paid in full.
Recommended Read: Pay Off Debt Using the Snowball Method
Debt Avalanche Method
The debt avalanche method lists cards in order from largest balance to smallest. You pay the minimum balance on all other cards and put excess towards the credit card with the highest balance. Once that card with the highest balance has been satisfied, you will move down the list until all debt is paid off.
It will take time in either case, but the important thing to remember is to set a goal and stick to it. Your debts will gradually melt if you stay focused on your end goal and avoid incurring unnecessary new debts.
7. Save for Retirement Early
Retirement can seem far away when you're young. However, the earlier you start saving for retirement, the more financially comfortable you will be during your retirement years. Also, depending on how you save for retirement, you can earn compound interest on the money you save.
Consider contributing to a 401(k) or employer-sponsored retirement plan if you have one, especially if your employer matches your contributions. Then, depending on your financial goals, you can open a traditional IRA, a Roth IRA, or a SEP IRA.
Recommended Read: 401(k) vs. IRA | Which One Should I Choose?
8. Investing 101
Investing is the key to making your money work for you and building wealth. Investing can increase your chances of outpacing inflation. Also, through investing, you can potentially earn additional income. There are many ways to invest, and some common ways that people invest their money include the stock market, real estate, bonds, and a retirement account.
Before you start your investing journey, write down some of your goals and analyze your budget. Once you know how much money you have to put toward investments, talk to a financial advisor to help guide you through the process that best fits your goals.
Remember that risk is involved with all investments and that the market goes up and down over time.
Recommended Read: Investing 101: Real Estate, Stocks, and Bonds
9. Insurance Matters
Insurance prepares you for moments when your back is against the wall. Various insurances like health, life, car, and renter's or homeowner’s insurance provide an added layer of protection.
Insurance can protect you against unforeseeable circumstances. Generally, with all insurance, you pay a monthly fee to keep your insurance coverage active. So, if something were to happen, like a car accident, you would be protected through your insurance provider. In addition, your insurance provider could pay for a percentage of your new car, depending on your coverage type and driving history.
Many people can purchase insurance like dental, health, and life through their employers. Typically, a percentage is deducted from an employee's paycheck to pay for the insurance's monthly, quarterly, or yearly cost. Talking with an insurance agent or company will help you decide what type of insurance you need and different insurance plans to fit your budget.
Recommended Read: How Life Insurance Provides Financial Security for Your Family After You're Gone
10. Storing Your Money in a Bank
Many financial institutions are available for you to store your money safely in a bank account. It’s important to find a bank that meets your financial needs. Whether you choose a traditional bank, a credit union, or an online bank, you should feel comfortable storing your money with them.
Online banks have become popular due to banking convenience. CapWay has many benefits for its Money Account holders, such as:
- A debit card (and virtual card)
- Bank account protection
- FDIC-insured bank
- Access to customer service 24/7
- A user-friendly website and mobile app
- No overdraft, monthly fees, or minimum balance fees.
- Access account 24/7
- Use the mobile app (available for both iPhone and Android)
- Send and receive money
- Create Money Goals
As an added benefit, CapWay’s Phunds program provides users with a free financial education curriculum for free for the first six months of opening a CapWay Money Account. You can learn more by visiting the CapWay website or downloading the mobile app.
Recommended Read: How to Make Money Moves with a CapWay Debit Card
The Money Wrap-Up
It’s essential to learn the basics of personal finance to have true success with your money. When you understand financial literacy, you can easily manage and track your finances. Your knowledge of money is one of the key components to life and being successful. In addition, as you are working toward learning about money, you can pass down your knowledge and skills to your family and friends.