Half of all Americans have no money set aside for retirement, and 35 percent of American adults have no more than a few hundred dollars in savings. Less than 20 percent have more than $10,000 saved up to fall back on in an emergency. Mastering the essentials of personal finance can help adults of all ages avoid (or dig themselves out of) such situations and get their feet on solid financial ground.
At its core, personal finance is about your money and the ways in which you manage it. Personal finance includes all forms of personal money such as:
- Bank accounts (checking and savings).
- Credit cards.
- Insurance (home, vehicle, health care, life).
- Debt (mortgages, loans, credit card balances).
- Taxes (filing, deductions, credits).
- Investments (stocks, bonds, mutual funds).
Personal finance also encompasses the habits, behaviors, strategies and planning you perform around your money and your short- or long-term financial goals.
Solid personal finance decisions and practices must be grounded in a clear idea of where an individual stands and what he or she wishes to accomplish. Setting financial goals is an essential part of making smart and consistent financial decisions.
Experts encourage individuals who have not yet set financial goals to ask themselves a few key questions.
- Do you have an emergency fund?
- Do you have credit card, student loan or other debt?
- Do you have a retirement plan?
- Do you want to make any big purchases, such as a house, in the future?
While this list is far from comprehensive, it can help personal finance beginners get started identifying their priorities and where they might benefit from initial or long-term financial investments. Specifically, it can highlight ongoing problem areas or key opportunities that may strongly shape an individual or family’s financial decisions. Common examples of key opportunities families might find include early investing opportunities that support the dream of buying a house or building a solid retirement income. Examples of ongoing problem areas include repeated failure to pay a credit card balance or loan payment on time, or frequent, unexpected and problematic vehicle maintenance costs.
Despite constant encouragement from financial advisors and experts, less than one-third of American households write or follow a monthly or yearly budget of any kind. Regardless of the reason for this low participation rate, budgets serve as one of the most powerful tools households have in their personal finance arsenals. A well-designed budget allows individuals and households to:
- Clearly see what money is coming in and where it is going.
- Identify errors or misconceptions they might have had about their finances or habits.
- Ensure that their money is consistently being funneled into the things that matter to them and not unnecessarily lost or wasted.
- Recognize opportunities to make positive changes to their financial habits, investments or tools.
- Track and celebrate their progress toward large or long-term goals.
Fortunately, modern tools make budgeting faster and easier than ever before. Mobile applications of all styles, many of them free to download and use, allow individuals to integrate their banking and credit card records with their primary budget spreadsheet. Some even offer instant updates so that users can see exactly where they stand at any time. Most offer a variety of reports and other tracking and reporting tools to assist users in analyzing, understanding and adjusting their habits and progress.
Adopting Good Habits
Beyond budgeting, there are some universally applicable best practices people can engage in that promote strong, low-stress personal finances. While some adults are fortunate enough to be taught these practices when they are young or, even better, to have had these habits effectively modeled for them growing up, many adults must put in the hard work and patience to learn personal finance best practices for themselves and then implement those new behaviors in their lives over time. Among the most valuable best practices to start with are the following.
- Keep a Rainy Day Fund. Emergencies happen. Whether they are medical emergencies, financial crises like the unexpected loss of a job or “acts of nature” like a tree falling on a shiny new car in a storm, eventually everyone has the unexpected costs thrown at them without warning. Having a healthy emergency fund can insulate a family’s primary budget from enduring the most of those sudden, one-off expenses. How much a household needs to set aside is open to debate, but three months’ worth of expenses is generally considered the absolute minimum.
- Plan for the future and adapt along the way. Life insurance, retirement funds, wills and trusts are easy to forget about or put off when an investor is young, struggling to pay off suffocating debt or pinching pennies to save for an important, big-ticket item. However, addressing these complex legal essentials can make a tremendous difference in an individual or household’s long-term personal financial health. It is equally important for families to update these invaluable tools as their family compositions, financial standings or priorities change over time.
- Leverage tax opportunities. As they are planning and tracking of their finances, households benefit from taking into account tax laws and opportunities to leverage any tax breaks and credits for which they qualify. Although these opportunities may seem small by themselves, when they are consistently maximized over time the positive effects can be powerful.
- Minimize debt. Nearly all financial experts agree that paying down and paying off debt should be a priority for individuals and households trying to get a handle on their personal finances. Extremely high interest rates can drain a household’s budget and cripple its ability to live within its means or invest in long-term goals and plans.
- Use debt wisely. Some forms of debt, used carefully, can help households achieve long-term goals and align with individuals’ top priorities. Mortgages, for example, can be a safe and functional part of households’ personal financial plans so long as they are well matched to the households’ income and priorities and do not tip the household into unmanageable levels of total debt.
- Stay aware of credit scores. Making on-time payments and carrying a low or reasonable amount of debt relative to income and other assets should ensure that an individual’s credit score remains high and stable. All the same, individuals should periodically review their credit scores and take action when necessary to correct errors or otherwise bolster their scores.
By Melanie Henson –