Building your foundations in personal finance can seem like a daunting task. After all, the thought of building your financial home can be a lot to process. With that, it is a good idea to start with the basics and work your way up. In our personal finance 101 guide, we will walk you through the building blocks of personal finance to help you create a bright financial future.
Let’s take a closer look at what we will cover.
Foundations in personal finance
Before you can move into a property, you have to make sure that the foundation, structure, and finishing touches are up to your standards. In personal finance, taking the time to improve the basics is critical to long-term success. Whether you want to start house hacking or simply break the paycheck to paycheck cycle, taking action to improve your personal finance situation is critical.
We’ve broken down our personal finance 101 guide into three stages: laying your foundation, building your structure, and adding the finishing touches. Taking action in each stage will help you get your financial house in order.
Start with laying a solid foundation
You wouldn’t start building your home without a solid foundation underfoot. The same goes for your finances, you can’t build a stable financial future without a solid foundation.
If your financial footing is less than solid, don’t worry! You can take action to create a solid financial foundation today! Although it may take some time to see the fruits of your labor, the end result will be worth it.
Here’s where you should get started:
Set goals for your money
Without a clear goal for your money, it can be difficult to make long-term progress. You need to take some time to think about why you want to improve your current financial position. A clear direction for your money will help you make decisions that will take you to your goals.
You might have the goal of saving up a down payment for a house hack. Or have the ultimate goal of reaching financial independence in the future. If your goals involve financial independence, then you can make choices that align with that goal.
Whatever your money goals are, take a few minutes to write them down. You can refer back to your goals when you need to make big money decisions.
How to build a budget
Without a budget, it can be almost impossible to reach your financial goals. Instead of looking at a budget as a constraint, view it as a tool to help you reach your money goals. A consistent budgeting strategy can help you make progress towards your long-term goals.
Check out my article for Tips on How to Budget.
You can build a budget by starting with your monthly income and savings goals, then add in your expenses. You might need to get creative in order to make everything fit in your budget. Don’t be afraid to make some changes to your expenses as you set up your budget.
As you build a budget, take advantage of tools such as Mint and Personal Capital that make your life easier. The apps are designed to track your budget for you and make it easier to stay on budget. You can check into these apps whenever to get a sense of where you stand in your budget at any point. With that information, you can make your decisions accordingly.
How to pay off debt
If you are in debt, then it is time to get rid of those burdens. Although some debt can be a part of life, tackling your consumer and student loan debt is an important part of your journey.
Take a look at your debts by listing them all out. Once you have an idea of how much debt you are in, consider your options for paying it off quickly. You have two options – the snowball or avalanche methods.
With the snowball method, you can throw all of your extra funds at your smallest outstanding debt. Once you pay off that debt, you add the monthly payment that you eliminated to your next largest debt. If you are motivated by small but steady wins, then this is a great option.
With the avalanche method, you focus on paying down your debt with the largest interest rate attached. Since a higher interest rate can cost you thousands of dollars over the lifetime of your loan, this method is more efficient. But if you have loans with high balances, you may not feel the emotional win of making extra payments for a long time. If you are motivated by the numbers of your personal finances, then the avalanche method could be your best option.
How to build an emergency fund
An emergency fund is a critical part of a stable financial picture. With an emergency fund in place, you can breathe easy knowing there is a safety net in place. If you lost an income source or had an unexpected bill pop up, you would be able to stay afloat without any major financial stress.
Most financial experts recommend building an emergency fund to cover between 3 to 6 months worth of expenses. Although the exact number will look different for everyone, most of us feel better with the funds to carry us through turbulent times. If you are building a hefty emergency fund, then consider placing these funds in a high yield savings account.
Set up automated bill pay
Life is busy for all of us. Staying on top of bills is just another thing on our to-do list that occasionally falls through the cracks. Unfortunately, a missed bill can have a big impact on your credit score. Luckily, automated bill pay can save the day.
Go through your accounts and set up automatic billing to avoid any surprises. Although you should still check over your bills to ensure you aren’t being overcharged, automating this part of your to-do list makes sure that nothing slips by you. With a few minutes of effort to set up these automatic payments, you’ll never miss a bill again.
Start saving for retirement
A happy and healthy retirement usually requires a large amount of assets to support yourself during your golden years. Although retirement may feel like eons away, it is important to start saving for retirement as soon as possible. Even if you aren’t hoping to retire early, you should start stashing away funds now.
If you have access to a 401(k) at your company, then look into the company match options. If your company is willing to match any part of your contributions, then make sure to contribute at least enough to score the match.
Beyond your employer-sponsored plans, you can consider opening an IRA. An individual retirement account – or IRA – will allow you to save for your retirement in a tax-advantaged way. A Roth IRA is funded with post-tax dollars while a traditional IRA is funded with pre-tax dollars. You can choose between a Roth IRA or Traditional IRA to suit your tax needs.
Determine your needs vs. wants
As you map out the basics of your budget and other foundations, it is important to determine the difference between needs and wants. The distinction will look slightly different for everyone. But you can use this to make sure that you are making the right choices on a regular basis.
A few basic needs include food and shelter. Depending on your situation, you might expand your needs to include transportation to get to work or family expenses. Beyond your needs, you will encounter wants such as travel to exotic places or new clothes. When you can see which purchases are essential and which aren’t, you can stick to your budget more easily.
Build your structure
Once you have laid solid foundations for your personal finances, it is time to take things to the next level – building a structure. Every home needs to have major systems in place such as framing the walls, putting on the roof, and ensuring that the plumbing is in working order.
Just like a solid home, a long-term strategy for financial success lies in building the structure well. Everyone should have a solid understanding of useful finance 101 topics. With that knowledge, you can be comfortable with your financial situation.
Without thoughtfully building a structure, a house is more likely to have structural problems in the future. Luckily, many future financial issues can be avoided with a careful framing process.
Take the time to address each of these issues in your personal finances.
How to build your credit score
A good credit score is a gateway to important financing opportunities. Whether you want to purchase a property to house hack or build a real estate portfolio, a good credit score will make your life much easier.
A few good practices to build your credit score include making on-time payments in full to any debts and keeping your debt to income ratio relatively low. You should also review your credit reports on an annual basis to ensure that there aren’t any errors that are causing a dip in your score. For more tips, check out our full article on how to build your credit score.
If you aren’t sure where you stand with your credit score, take a minute to check it for free. Credit Sesame and Credit Karma are both good options to monitor your credit score easily.
How to save money
Saving money is not always an easy task. With life constantly finding ways to pull at your wallet, you’ll need to focus on changing your mindset when it comes to saving money. The key is to realize why you are saving money and what the end goal is. Once you have some clarity about your money goals, putting money aside to reach those goals is easier.
How much should you be saving? The mindset shift is important, but you may need to make some other changes to make saving money practical. If you simply don’t have enough money left over at the end of the month, then you need to find a way to earn more, spend less or both. Finding a good balance between earning more and spending less is usually the best solution.
How to build a side hustle
A side hustle can be a way to reach your savings goals faster. Luckily, anyone can build a successful side hustle with enough hard work, determination, and a willingness to pivot.
Some options for a flexible and successful side hustle include freelance writing or becoming a virtual assistant. There is an endless number of side hustle opportunities. Get creative with your approach to building a side hustle. Not only can it help you reach your money goals, but also build new skills in a fun outlet.
Properly insure yourself
Insurance is a way to prevent an unfortunate accident from becoming a financial drain. It is important that you insulate yourself from potential liabilities whenever possible. At the very least, you should seek out insurance policies that cover health, life, rental space, your home, and liabilities such as your car. Don’t allow yourself to stay at risk of significant financial consequences, just find a combination of policies to cover you.
When in doubt, consult legal advice on what types of insurance you should carry.
Cut your expenses through bill negotiation
Saving money on your expenses might be as simple as calling your bill provider and asking for a discount. You might be surprised how often they will be able to cut you a deal. With a few phone calls each year, you could potentially save hundreds.
If you don’t have the time to call around, then consider using a service like Trim or Truebill. Their agents can tackle the tedious parts of negotiation and you can enjoy the monthly savings!
Why you should cut your expenses
According to the Bureau of Labor Statistics, average American households spend the most money on five expenses. The Big 5 includes housing, transportation, food, healthcare, and taxes. With each of these expenses, you have the opportunity to slash these costs. Although it might require some creative thinking, you can significantly reduce the amount you spend on these basics.
Take a minute to read our Big 5 series which outlines specific strategies that could help you cut costs.
Read some of the best personal finance blogs
Personal finance blogs are a great place to catch up on finance 101 topics. No matter what you have questions about, the answer is likely out there.
Beyond blogs, there are several thought-provoking books including Your Money Or Your Life, The Simple Path to Wealth, and The Millionaire Next Door. Each of these books offers a different perspective on money that might help change your money mindset for the better.
Understanding interest rates and how they impact your finance
Interest rates will come attached to any loan that you take out. The higher the interest rate, the more the loan will cost you in the long-term. It is important to note that even a seemingly small interest rate can significantly impact your bottom line.
Anytime you are considering a loan, look at the total cost of the loan not just the loan amount. You might be shocked how quickly an interest rate can have your finances struggling to make progress.
What is compound interest and how can it change your life?
Compounding interest is an amazingly powerful tool in personal finance. Essentially, compound interest is the consistent adding of interest to the principal of a loan. Once the interest is earned, the next interest payment is calculated on your principal plus accumulated interest.
With time, compound interest can help you grow your funds with little effort on your part. The key is to contribute to accounts that offer compound growth early and often. You can harness the power of compound interest
What is your net worth and how to track it
Net worth is one of the most important numbers in your financial journey. Although some of us start off with a negative net worth as we enter the workforce, the goal is to build our net worth over time. In the end, we all want a net worth with enough assets to support our retirement.
To calculate your net worth, simply subtract your liabilities from your assets. As your assets grow, this process can become more complicated over time. Personal Capital can automate this process for you and update your net worth on a daily basis.
How to start investing in the stock market
Investing in the stock market is one way to build wealth over time. Although this is by no means a get rich quick strategy, consistent investing over the course of decades can lead to a valuable portfolio.
In order to get started, head to the brokerage platform of your choice. A few good options to investigate include Vanguard, M1, Robinhood, and Fidelity. You can set up an account and start funneling funds into the market whenever you have the opportunity.
Before you start investing in the market, please take the time to create an investment strategy and an investment policy statement. The strategy should reflect your long-term goals and the policy statement should act as a guide for when the market gets turbulent. It is likely that your stock market portfolio will be a bumpy ride, make sure that you are prepared for the bumps in the road. Don’t panic sell when the market is volatile, that can lead to some disastrous consequences. Instead, stick to your investment plan and only sell when your policy statement will allow it.
Add the finishing touches to your home
The final touches of building a stable home are the personal touches that you can add-in. A few might include choosing a flooring option, picking out your cabinet’s hardware, and painting the walls to suit your personality. These more nuanced details vary from house to house, but they can make you feel more at home in your space.
With that, these last few personal finance topics that you need to work on are the finishing touches that can help you take your finances to the next level. The best part about this is that you have choices. You can choose to take advantage of credit card rewards that suit your lifestyle and create retirement savings plans that align with your goals. The finishes will vary, but you’ll have the opportunity to create a financial picture that makes you happy!
Take action on these steps when you are ready!
Supercharge your retirement savings
Once you have a handle on your short-term finances, it is time to think bigger. A long-term investment strategy for your retirement is an important part of any personal finance journey. After all, most of us would prefer to have the option to retire at some point.
When you are ready to supercharge your retirement savings strategy, the first step is to max out your retirement accounts. Take a look at the retirement accounts that you have access to. Look at the limits set up by the IRS on your tax-advantaged retirement accounts such as a 401(k), IRA, and HSA. Once you’ve hit those limits, you can go even further by opening a taxable account. Beyond investing in the stock market through those accounts, you can also build a real estate portfolio.
No retirement strategy will be identical. Instead, it can – and should – align with your individual goals and comfort levels.
Take advantage of credit card rewards points
If you can responsibly manage a credit card, then rewards points are a next-level move. Why not take advantage of the rewards that credit card companies are willing to offer you for putting your normal expenses on your credit card?
Rewards credit cards often offer attractive sign-up bonuses and long-term rewards. The best place to start is with the Chase strategy which you can learn more about in our full article.
Try house hacking
House hacking is an amazing way to supercharge your path to financial independence. Since the average American household spends 30% of their income on housing, it is easy to see why this is such a powerful tool.
Imagine if you could completely eliminate or reduce your housing expenses! That could dramatically transform your financial trajectory.
We have a multitude of resources to help you start your house hacking journey. You can get started with our ultimate guide to house hacking or check out our house hacking case studies for inspiration.
Next level investing topics
After you have a handle on your basic financial situation, you might want to take your knowledge to the next level. If you are considering pursuing FIRE (Financial Independence Retire Early), then you may need to consider these investment topics more seriously. A carefully planned investment portfolio could support your dream to reach financial independence at an early age and retire before 65.
A few strategies to investigate and include in your own plans include choosing the right index fund, exploring Monte Carlo simulation, and uncovering a safe withdrawal rate that you feel comfortable with.
In the coming weeks, we will dive into these high-level topics in more detail.
The bottom line
The financial house you build for yourself can lead to years of financial security. Although it can take time to get the foundations of personal finance set up and the framing established, the end result is worth the effort.
Don’t overwhelm yourself by jumping into the finishing touches without setting up the foundation. Instead, take the time to work through each of the steps and create a stable financial situation.