Personal finance involves the control, management, and maintenance of an individual’s finances. This includes income, debts, bills, investments, and even savings goals. Personal finance can also include handling financial responsibilities on an individual or group/family level.
Why Are Personal Finances Important?
Handling your personal finances responsibly is the pinnacle of importance when it comes to establishing a healthy credit history, being approved for a wide variety of financial products, receiving low interest rates and high loan amounts, and more. Practicing responsible personal financial habits can also relieve a great deal of money-related stress. For example, creating a budget and knowing exactly what your financial obligations are can take out quite a bit of ambiguity in paying your due bills and expenses.
Personal Finance Basics
Below are some basics of personal finance that all consumers should know.
Keep Your Passwords and Sensitive Information Private
Keeping your financial data safe is essential. In order to do this, make sure you do not share your private information, such as bank account login passwords, your social security number, PINS, and other login information, with anybody, not even trusted friends or family members.
Pay Your Bills on Time
Having a steady and consistent payment history will not only help you avoid late fees and digging yourself deeper into debt, but it will also help you establish a healthy credit score. Making your due payments on time is the most impactful factor that contributes to your credit score.
Furthermore, paying your bills and other payments on time will actively help you reduce the amount of debt you owe. When you lower the amount of debt associated with your name, you are also working towards raising your credit score and improving your debt-to-income ratio.
Create a Budget
Having an established budget is one of the core elements of maintaining financial stability and responsibility. When you track your spending habits, bills, and other payment obligations with a budget, you can see how much money you are required to pay, along with how much money you should have left over each month. From there, you can tailor your spending habits to make more room in your budget if needed.
If you are a beginner with budgeting, it may be a good idea to first calculate your net worth. Your net worth is the value of all of your assets minus any liabilities you may have. Assets include income, property, savings accounts, etc. For most consumers, liabilities would be the debt an individual owes. Common debts that can deplete your overall net worth include:
- Past due bills, taxes, etc.
- Balances owed on loans.
- Credit card debt.
Beware of Developing Harmful Credit Card Habits
Credit cards can be helpful when you need to make purchases, and don’t have sufficient funds in your checking account, but they can quickly get out of hand. Unfortunately, it’s extremely common for consumers to rely on their credit cards for regular purchases, which causes them to rack up a high balance. Unless the consumer pays off their balances in full each month, they run the risk of accumulating increasing debt each month.
It’s important to remember that it’s completely possible to survive without a credit card, so it may be in your best interest to stay away from them while you are working on establishing personal financial security.
Know That Investing Involves Risk
With investing and cryptocurrency becoming increasingly popular, it is important that consumers understand the potential risks. Below are a few core tips to follow if you are thinking about investing.
- Research before you invest.
- Don’t invest unless you are prepared to lose money.
- Be wary of new cryptocurrency systems.
Ways To Handle Your Finances
There is no one correct way to handle your finances. In fact, there are many different ways consumers can responsibly and successfully manage their financial situation.
One of the most popular ways to handle your finances nowadays is to do so electronically. Consumers can pay most, if not all of their bills and debts via an online account. You can even set up automatic payments, so you don’t have to manually pay your bills at all!
Along with online financial accounts, there are also mobile apps designed to help consumers pay and keep track of their bills, payments, and subscriptions. Apps like Mvelopes and You Need a Budget (YNAB) are great for tracking due payments, weeding out old subscriptions you may no longer need or use, and helping you stay on top of any financial or savings goals you may have.
Other services that help consumers organize their finances via their smartphones are:
- Simplifi (by Quicken)
- Personal Capital.
Another popular method of handling finance is to utilize the envelope method. The envelope method involves using a physical envelope to represent each of your financial responsibilities. For example, you may have a separate envelope for expenses like:
- Rent/mortgage payments
- Individual bills.
- Christmas/holiday presents.
After you have set up an envelope for each of your financial obligations, fill each envelope with the amount of cash you will need to cover that obligation for the month. Put any extra cash left over in its own separate envelope to avoid impulsive spending. From there, you will make your various monthly payments using the funds within your envelopes.
Many people find the envelope method extremely helpful when handling their finances because they like being able to physically divide up their money and see where their funds are going.
Pen and Paper Method
If you don’t feel comfortable handling your finances on your computer or smartphone, you can always keep your records updated the old-fashioned way with a pen and paper. However, there are many potential setbacks you may encounter if you choose not to handle your finances electronically. For example, if you lose the paper/folder where you are keeping your financial data, there may be no way to recover it.
Managing Your Money for Future Success
Some steps you can take to set yourself up for financial success in the future are:
- Set financial goals – setting financial goals can be great motivation if you want to save money or work on cutting out pointless impulsive spending.
- Think about retirement – it’s never too early to start planning and saving for your retirement. If you don’t have a 401k account, consider starting a separate savings account specifically for when you retire.
- Have an emergency fund – having a savings account, or emergency fund will help relieve the stress of unexpected expenses or financial emergencies. You can also rest easy knowing you have emergency funds set aside, so you won’t have to turn to unreliable forms of funding like car title loans or payday loans.