What is personal finance? The term might seem a bit lofty to those of us who are just beginning to consider our financial health. However, personal finance simply refers to how you manage your money to meet your financial goals.
As you develop your personal finance strategies, you must consider things like investing, savings, budgets, taxes, debts, retirement, insurance, and, of course, other financial goals like paying for college or purchasing a home.
Personal finance is about planning how to make your dreams financially feasible and making sure that you and your loved ones are taken care of in the future.
To begin developing personal finance strategies, take a look at these suggestions:
1. Develop financial literacy
The first step to taking control of your personal finances is to develop financial literacy—a set of knowledge and skills related to understanding and managing income, savings, debt, investments, spending, and other financial processes.
Folks with solid financial literacy are able to answer the following questions:
- Do you have your short, medium, and long-term financial goals clear?
- Do you have a plan to eliminate your debt?
- Do you regularly track and plan your spending, savings, investments, etc.?
- Are you adequately balancing your spending with earnings?
- Are you investing?
- Are you saving for retirement and other important life goals?
Did you stumble with any of these questions? Don’t worry, you’re not alone. Most Americans don’t have much financial literacy and it hurts their long-term economic health.
The good news about financial literacy is that you can build it by reading articles like this, consulting with financial advisors, and investigating investment opportunities.
2. Understand and improve your “money scripts”
A key to improving your personal finance is understanding your money scripts, or the underlying (and often subconscious) beliefs that shape your relationship with money. We begin to form our money scripts in childhood and they contribute to many financial behaviors like spending, saving, and investing.
Do you think that money will solve all of your problems? Do you think money is bad? Do you think that you can’t have or don’t deserve to accumulate wealth? Does your bank account impact your self-worth?
Considering such questions can help you unravel your subconscious beliefs about money and begin to form a healthy perspective about your personal finances.
If we ignore our money scripts, even the most carefully constructed financial strategy is no match for the self-sabotage that can result from unaddressed financial fears, anxieties, aversions, and misconceptions.
3. Create a spending plan
If you pop open a carton of Ben & Jerry’s one lonely Friday evening, you’re probably going to eat a little more than the recommended half-cup serving, right? Right. The same is true of your income.
Before you even receive your income, it is important to plan how you need to divvy it up. The 50-30-20 budget strategy is one highly recommended by experts to help you invest in what you need, value, and want in the present and future. Remember:
- 50% of your budget should go to absolute essentials like groceries, housing, transport, and insurance
- 30% should be reserved for flexible spending on things that improve your quality of life (dinner out, fancy exercise classes, and weekend getaways)
- 20% should be dedicated to fulfilling your personal financial goals like saving, investing, paying off debts, and building an emergency fund.
Automating savings, debt, and bill payments will help make the work of carving up your income according to this strategy infinitely easier.
4. Plan to eliminate debt and pay off loans
Most of us have consumer debt, loans, and/or other types of debt. Although it’s extremely common, debt is so scary to us that it is actually named as a risk-factor for depression and anxiety.
High interest rates on (particularly credit card) debt can also limit our financial possibilities if we do not strategize.
To begin the process of becoming debt-free, begin with these steps:
- Prevent future debt by creating an emergency fund to prevent you from reaching for your credit card the next time disaster strikes
- Organize your debts according to the amount and interest rate in order to determine which ones ultimately cost you the most
- Strategize your payments such that you are at least making minimum payments on all debts and larger payments on those with the highest interest rate or that are of the greatest amount. This may very well mean prioritizing paying credit card debts first.
Following these strategies can prevent you from accumulating new debt and help you to pay off debt faster.
5. Pay yourself first
Some experts claim that paying yourself first (PYF) is key to helping you “develop tremendous wealth.”
According to this principle, you should prioritize your financial goals above all other spending. Pairing PYF with the 50-30-20 rule, this means that you should immediately invest 20% of your monthly income into investing, savings, and paying off debt before spending on anything else (including essentials!).
Setting money aside for savings before paying off your rent may seem risky. But, when it comes to personal finance management, strategizing is ultimately just as important as income. Giving your money a purpose through savings and investments is key to improving your financial health.
As scary as it might sound, personal finance is accessible and necessary for everyone. Try out these smart money management tips to start saving, investing, and otherwise improving your financial health!
