Finance involves the management of money on both personal and corporate levels. Financing also refers to the act of funding or lending out money to qualified recipients. In order to live a debt-free life, it’s important for consumers to prioritize personal finance education and financial literacy.
Personal Finance vs. Financing
While personal finance and general financing can be closely related, they are not the same things. As mentioned, basic personal financial skills and financial planning involve consumers managing their own money. This money can be in the form of income, savings, investments, and more.
Financing, on the other hand, involves a sponsor or creditor contributing funds or loaning money to qualified borrowers. For example, when a lender approves a borrower for a loan, that lender is performing financing services for the borrower. Some common forms of financing are:
- Personal Loans – Personal loans are one of the most versatile types of financing available to borrowers. People with good credit, low credit, or even no credit at all may have access to personal loan funding. Personal installment loans usually come with fixed interest rates, which means borrowers can pay back their loans in consistent monthly payments.
- Credit Cards – Credit cards allow consumers to make purchases on credit now and then pay them back later. As a revolving line of credit, borrowers will have renewed access to their credit limit each month, so there is no need to reapply in order to get additional funding.
- Auto Loans – Auto loans are a type of funding designed to help consumers purchase a vehicle. Borrowers may be able to get auto loans from a bank, a direct lender, or sometimes even directly from their car dealership.
- Mortgages or Home Equity Lines of Credit (HELOC) – Mortgages are loans specifically designed to help people pay for their homes. Homeowners may also use the value of their property to receive a home equity line of credit. However, should borrowers default on their mortgage or home equity line of credit (HELOC), they risk going through foreclosure and having to relocate.
- Car Title Loans – Car title loans, also called auto title loans, allow borrowers to use their qualifying vehicle title as collateral in exchange for loan funding. Although borrowers may usually keep their car while they pay back their car title loan, they risk Repossession should they default on their loan or miss a certain amount of payments.
Areas of Finance
There are five basic areas of finance. They are:
- Income.
- Spending.
- Savings.
- Investing.
- Financial Security.
Income
Your income is the money that you bring in on a regular basis. For most people, their income comes from the paycheck they receive from their employer. Employees usually receive a paycheck on either a weekly or bi-weekly basis. Furthermore, traditional employee income may come in the form of a salary, where employees are paid a standard amount each paycheck, or in the form of an hourly wage, where employees are paid depending on how many hours they work within a given pay period. For others, income can include revenue streams like investments, government-issued funding, or even court-ordered funding.
The amount of income you have coming in will affect several areas of your financial situation. For example, your income will most likely determine if you rent or own your home, what type of car you drive, and perhaps even the neighborhood in which you live.
Spending
Spending is another crucial aspect of finances. Most people spend money in some shape or form just about every day, whether it be making a rent payment, ordering coffee, paying for a new home appliance, or putting gas in their car.
Keeping track of your spending is key to establishing healthy financial habits. Without having a budget or a clear picture of your various financial responsibilities, it can be easy to accidentally overspend and end up with insufficient funds for bills or other payments you are responsible for.
Saving
One important, but commonly overlooked, aspect of finances is saving. When you are living off of a low income or dealing with massive amounts of debt, putting money in your savings account may be the last thing on your priority list. However, consistently putting money aside for savings is one of the most impactful aspects of finances.
When you have a healthy savings account set up, you don’t have to worry about being blindsided by minor financial inconveniences like auto repairs, surprise bills, or unexpected expenses.
Investing
Those who have a steady income or leftover spending money may consider investing a portion of their money in stocks, bonds, or even mutual funds. Investments are a great way to make your money grow with little to no effort required on your part. However, investments are part of a tricky market. An investment that was extremely lucrative yesterday may bring little to no profit the next. So, to protect yourself, make sure you never invest money that you aren’t willing to lose.
Financial Security
Last but certainly not least is financial protection and security. To prevent identity theft, fraud, or other major financial inconveniences, it is important to practice vigilant financial security. Keeping your finances safe involves developing habits like:
- Never share your bank account information or passwords with anyone.
- Never tell anyone your Social Security number.
- Shredding documents with potentially sensitive information, like credit card bills, bank statements, or even credit card offers.
- Never give out your private information, like Social Security or credit card numbers, over the phone.
Why Are Personal Finances Important?
Why is personal finance important? On an individual level, personal finance is important to maintain stability, whether for housing, employment, or even retirement purposes. If you want to have a stable living situation, afford your living expenses, and maybe even have fun from time to time, you’ll have to develop financial education and management skills.
Where To Go for Basic Personal Finance Education
Fortunately, there are plenty of free and paid financial literacy and financial education resources available for people who want them. You can check out your local library for free in-person resources or go online for some virtual education.
Online Personal Finance Blogs or Podcasts
There are various blogs and podcasts that talk about financial management and personal finance topics. However, be sure to take the advice you find via these financial education sources with a grain of salt. To make sure you are getting the most accurate information, seek out several sources instead of taking the first one you see at face value.
First Hand Resources
If you have someone in your life who works within the financial field, you can use their personal finance knowledge to your advantage! You can also access first-hand resources online via blogs, podcasts, or even through finance classes.
Free Online Classes
In addition to informative blogs and podcasts, there are also official finance classes you can take both in-person and online. However, online classes are probably the most convenient. With online financial courses, you can learn about financial topics and trends from the comfort of your own home.
How To Make Smart Financial Decisions
Check out the personal finance strategies below for some advice on how you can make intelligent decisions involving the management of your money.
Know Your Income
Knowing how much money you are bringing in is essential for making smart long-term financial decisions. Whether you are paid on a salary or on an hourly basis, it’s important to keep track of how much money you bring in each pay period. Being familiar with your income will help you establish a budget, set financial goals, and work towards financial stability.
Keep Your Private Data Private
For your own financial security and safety, never share your personal data or financial information with anyone, not even close friends and family members. Personal information you want to keep absolutely private are:
- Social Security number.
- Bank or credit card account logins and passwords.
- Answers to security questions.
Although you may have trusted family members and friends, it is usually never a good idea to share your personal financial data with them. Unfortunately, your information getting into the wrong hands could mean identity theft, fraud, or other inconveniences.
Have a Budget
One of the cornerstones to making informed financial decisions is having an established budget. Being familiar with how much money you have coming in compared to how much needs to go out to pay bills and living expenses is essential if you want to keep your finances organized. Furthermore, establishing a budget will also help you get an idea of how much leftover income you should have each month.
Working with your budget is also a great way to create financial goals and see where there is room for improvement. For example, if you see you are spending a lot of cash each month on restaurants and takeout, you may try setting a financial goal to grocery shop and eat at home more to save money.
Focus On Debt
Along with being familiar with your income, you also want to stay on top of how much debt you currently owe. To pay off debt more efficiently, you can try payment methods like the avalanche or snowball methods. With the avalanche method, you would start with paying off your largest balances first and then work your way down until you are debt free. Alternatively, the snowball method involves paying off your lowest balances first and then working your way up to the larger ones.
Prioritize Paying Yourself
Putting money aside in a savings account or an emergency fund is also essential for long-term financial stability. When you receive your paycheck or another form of income, try to set aside a portion for your savings account. Depending on your income, this can mean putting away a few dollars or a few hundred dollars every time you get paid. Having a savings account or emergency fund set up may prove to be a huge relief if you experience a financial crisis or get slammed with unexpected expenses.
Don’t Borrow More Than You Can Repay
When you need quick money, it can be easy to go out and apply for the first cash advance loan you come across. However, many quick cash loan options usually come with high-interest rates and extremely brief payback terms. Furthermore, you may get stuck with a loan balance that actually increases from month to month, which would put your financial stability at risk.
Instead, before you apply for a loan, consider your alternatives. Ask yourself if you have sufficient funds in your savings account to cover your expenses. Or, if you do decide you need a loan, research your options to find the best deal.
Keep Track of Your Credit Score
If you are new to handling your finances on your own or are trying to get your financial situation organized, be sure to check your credit reports and credit score regularly. Consumers can access free credit reports via just about any bank or credit card account. Furthermore, consumers are entitled to at least one free credit report from each major credit bureau once a year. The three major credit bureaus are TransUnion, Equifax, and Experian.
Checking your credit reports regularly not only gives you a chance to report incorrect information before it can have a negative impact on your score, but it also allows you to see how your financial decisions affect your credit in real-time. This can help you identify and rectify harmful behaviors or habits that are bringing your credit down.
Think About Your Financial Future
It’s never too early to start retirement planning, preparing for your financial future, or even tax and estate planning. If you work for a company that offers employees a 401k plan, take advantage of it and sign up as soon as possible. Or, you can always start a retirement savings fund on your own! Get into the habit of regularly putting away money now so you can thank yourself later.
Get Insurance
Although it can seem like a waste of money on the surface, having insurance can definitely save you a significant amount of money in certain circumstances. For example, if you have an accident and need a trip to the emergency room but don’t have health insurance, you may find yourself with a bill for a few thousand dollars or more for a quick one-time visit!
Take Advantage of Tax Breaks
Qualifying taxpayers can potentially take advantage of tax benefits or breaks when doing their state or federal taxes. Some common tax breaks and deductions you may be able to benefit from are:
- Child tax credit.
- Dependent care credit.
- Earned income tax credit.
- Education credits.
- Adoption credits.
- Income and savings credits.
- Homeowner credits.
- Electric vehicle credits.
- Health care credits.
Give Yourself a Treat Every Now and Then
Being adamant about your financial situation can be draining. To keep yourself motivated, don’t be afraid to give yourself a small treat every now and then. For example, if you already put money away in your savings account and still have a bit of leftover income at the end of the month, consider treating yourself to a little something you’ve been wanting for a while. While it’s important to consistently prioritize your needs over your wants, giving yourself a little treat from time to time can help you stay on track for your long-term goals.
Tips for Developing Great Personal Finance Skills
Being a master of personal finances doesn’t happen overnight. But with determination and consistency, you can be well on your way toward financial freedom!
Stay on Track
Consistency is key when perfecting your money management skills. To set yourself up for success, be realistic when you are setting your personal financial goals. For example, if you live off a relatively low income, you can’t really have lofty goals like setting aside half your paycheck for savings every time you get paid. Instead, think about your budget and financial responsibilities first and how much you will realistically have left over after everything is taken care of. This amount will be a helpful guide in determining how much money you set aside from each paycheck. It is much easier to stay consistent with realistic goals rather than those that are extreme and unmanageable.
Research Before You Commit
One of the core elements of basic personal finance skills is researching before you commit to anything. Whether you are looking for a short-term loan or long-term financing, research your options before signing any kind of binding contract.
Financial products and services are not all the same, and some are even known for predatory lending practices. For example, payday loans are commonly advertised to low-budget consumers even though this form of funding comes with extremely high-interest rates.
Instead of going with the first financial option that seems the most convenient on the surface, gather a bit of information on some different lenders and products available. After comparing products and qualification requirements against your budget and credit score, you may find you are able to get a better deal with a lender or product you may have overlooked before.
Don’t Let Your Feelings Get in the Way
Saving money and striving to meet your financial goals come with challenges and obstacles. It’s important to remember your priorities and not let your feelings or emotions get in the way. For example, it may feel like a bummer to cancel dinner plans with your friends because you are trying to save money and eat at home. But, instead of feeling sad that you canceled dinner plans, think about how happy you will feel once you have achieved your financial goals. Or, suggest a more budget-friendly option, like your friends coming over for a potluck dinner instead of going out. That way, you can still spend time with the people you care about without sacrificing your budget!
References:
Credit Reports and Scores | Consumer Financial Protection Bureau
Credits & Deductions for Individuals | Internal Revenue Service