Navigating the world of personal finance can be overwhelming, even for an adult who has quite a bit of experience in the working world. With some smart planning, a good strategy and understanding of the basics you should be able to develop the money-management skills you need to get your finances under control. Here are some fundamental truths of personal finance that everyone should be aware of.
Set Clear Financial Goals
If you don’t have a set destination to work towards it can be hard to find the passion or drive to save. Whether it’s a house you’ve been eyeing or your retirement, carefully defining these goals and figuring out how much you’ll need to save can help you craft a plan for getting there.
As you establish financial goals, consider making them S.M.A.R.T.—specific, measurable, actionable, realistic and time-bound. Creating goals using these guidelines can help ensure that what you're working towards is achievable while giving yourself a timeline for reaching your goal can be a motivator to stay the course.
Start as Soon as You Can
Ever heard of compounding interest? This process allows the interest on your savings to earn even more interest. The sooner you start to save for retirement, the more time your money has to grow and take advantage of compound interest. Time really is a powerful lead for your investments so waiting just a few years to start saving may significantly reduce the size of your retirement nest egg.
Starting early allows money to gain interest, then the interest to gain interest, and so on for however long you maintain it.
Compounding interest can also help you grow your non-retirement savings. For example, you may be contributing to a high yield savings account to establish a down payment for a home. The higher your interest rate and the longer you have to save, the more opportunity your money has to grow.
Spend Less Than You Make
This seems like one of the simplest personal finance rules to follow; however, it can be one of the most challenging. It’s incredibly easy in a consumer-driven society to live beyond your means; a good rule of thumb is to try and save at least 15% of your income. If you find it easy to overspend, try paying for things like clothes and groceries with cash instead of a credit or debit card.
Debit and credit cards make it easier to spend because you have no physical connection to the money that is being spent.
Withdrawing a fixed amount every month helps you be more aware and make better spending choices. If you can't commit to saving 15% of your income to start, decide how much you can save. You can set up an automatic transfer for those savings to move money out of your checking account, thus eliminating the temptation to spend it.
Create a Budget
Budgets play a critical role in paying off debt, controlling your spending and staying on track towards your goals. It’s easy to spend a little extra some days than others but if you have a budget in place or set monthly and daily spending limits you’ll be able to adjust and make up for any oversights another day.
Creating a budget can be as easy as adding up all your expenses for the month and subtracting that amount from your total income. You can make a budget using pen and paper, a spreadsheet, or a budgeting app if you're tech-savvy.
Put Your Savings on Autopilot
Have your savings contributions automatically deducted from your paycheck via the 401k plan and/or direct deposit into a brokerage account. If you put money aside before you even see it, you'll tend to not miss it.
If you get a raise at work each year, consider increasing your 401k contributions automatically as well. Some plans allow you to incrementally raise your contribution rate each year so you can accelerate the amount you're socking away for retirement on a tax-advantaged basis.
Always Take Free Money
If your employer offers to match a percentage of your 401(k) contribution—many do—maximize that benefit by contributing to the match limit. Employers who offer to match your contribution will typically do so between 3% and 6% of your annual salary. So, if you make $50,000 and your boss matches your 401(k) up to 5%, be sure to contribute $2,500 over the course of the year. You should never turn down free money—your nest egg will grow faster.
Don’t Go House Crazy
Be careful not to over-buy when shopping for a new home. A big mortgage payment can set you back with your savings. Try to think about what you truly need out of your home so you have the freedom to spend on other necessities.
This idea is included in the concept of living within your means. Trying to live outside of the lifestyle that you can afford generally results in higher chances of debt and bankruptcy.
Consider a larger down payment if possible. The bigger your down payment is, the less you have to finance—means a smaller mortgage payment and more savings on interest charges in the long run.
A fully complete financial plan includes provisions to protect your life and your future. Life insurance and estate planning are key to making sure your obligations to your loved ones are met, even after you are gone. Start shopping for life insurance as soon as possible if you don’t have it already. As soon as that is done, make your will and get it filed. You can use an attorney or an online legal service like LegalZoom.com.
Don’t Let the Financial World Intimidate You
It has been observed that 80% of personal finance is not financial education, but financial behavior. If you can modify your behavior with your finances, you can modify your financial future. Contrary to popular belief you don’t need to be a financial expert on the stock market to start saving for retirement or preparing for emergencies. All you really need to do is work on building a solid plan and committing to it.