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Personal finance is one of those topics that most people don’t want to talk about because it makes them feel like they are being judged. But personal finances affect everyone.
Whether we know it or not, there are some important lessons we can learn from personal finance. Here are the most important things you must know about personal finance.
What Is Personal Finance?
Personal finance is about managing money, how much we spend, save, borrow, invest, and pay off our debt. We use personal finance to manage our finances, including setting up budgets, planning ahead, and making smart decisions.
There are many different ways to make money, and some people prefer to put their savings into stocks or bonds, whereas others like to buy real estates. A financial advisor helps you decide what type of investments will work best for you.
The Importance of Personal Finance
Managing personal finances is important if you want to achieve some of your financial goals. You don’t want to spend too much money on something that doesn’t benefit you in the long run. If you’re trying to pay down debt, having a good credit score will help you build wealth over time because it makes borrowing easier.
What Are the 5 Main Components of Personal Finance?
Personal finance is the practice of managing one’s resources, such as cash, investments, insurance, home ownership, debt, etc. – in a way that maximizes financial well-being.
This includes making sure that those resources are used efficiently while still maintaining sufficient amounts to meet future needs.
There are five main components of personal finance: budgeting, saving, investing, credit management and insurance. Each component plays a role in helping people reach their goals.
Personal Finance Strategies
1. Know Your income
The IRS requires employers to withhold taxes from your paychecks. This amount varies based on where you work. If you don’t know how much to withhold, talk to your employer or contact the IRS.
➢ File your return early.
You’ll receive a 1099 form from each job you held during 2018. You must file your federal income tax return within 15 days of receiving it. Filing early allows you to claim any itemized deductions you might qualify for.
➢ Claim state income tax credits.
Some states offer additional state income taxes deductions. Check out our blog post for a list of states offering additional tax breaks.
➢ Take advantage of retirement savings plans.
If you’re enrolled in a 401(k), 403(b), 457 plan, profit sharing plan or similar workplace retirement account, contribute up to 18% of your salary.
2. Devise a Budget
A budget is an essential tool used to help you save money while living within your means.
There are many different types of budgets, including the 50/50/20 method, where you allocate 20% of your income to savings, 30% towards debt repayment, and 50% towards spending.
Another way to create a budget is to use the 50/30/10 method, where you spend 10% of your income on necessities, 30% on discretionary items, and 50% on entertainment.
Many people rely on smartphones to manage their finances because it allows them to track expenses and monitor spending habits. However, there are some apps that can do the same thing without having to download anything.
3. Pay Yourself First
The best way to save money is to start paying yourself first. You’ll feel better about having extra cash in your pocket because it makes you feel like you’re earning money rather than just spending it.
If you don’t already do this, set up an automatic transfer from every paycheck into a separate savings account.
If you want to make sure you actually use the money, put a small amount aside each month into a high interest savings account.
You might think this sounds too good to be true, but there are several reasons why doing this could benefit you.
For example, studies show that people who regularly deposit money into a savings account earn almost twice as much as those who don’t.
Another study found that people who saved $100 per week earned $1,300 more over 30 years than those who didn’t.
4. Limit and Reduce Debt
Student loan debt is a huge issue in America today. In fact, it’s the second largest household debt category behind mortgage debt.
While some people think there’s no way out of paying off your student loans, there are actually several ways to make things easier. Here are four tips to help you limit and reduce your student loan debt.
1. Start small
If you’re looking to start paying off your student loans sooner, start with the smallest one first. This could be your undergraduate school or even your current employer. You might be surprised at just how easy it is to cut up to $100 per month.
2. Consolidate your loans
The best thing you can do to save money is to consolidate your loans into one payment plan. If you already have multiple loans, talk to your lender about consolidating them into one. You’ll end up saving hundreds of dollars every month by doing this.
3. Find scholarships and grants
There are plenty of opportunities to find free money to use toward your education. Look around online for local scholarships and grants.
Some schools offer tuition waivers for students willing to work certain hours. There are also national organizations like AmeriCorps and Teach for America that provide financial aid for college graduates.
5. Only Borrow What You Can Repay
Credit cards are great tools for building wealth. They offer convenient access to cash and allow you to build up a balance without having to pay interest.
Like anything else, too much debt can hurt your financial health. If you carry a balance, it could negatively impact your credit score.
If you don’t make enough money to cover the monthly payments, you’ll end up paying even more in interest charges.
To help you avoid getting into trouble, here are some tips for managing your credit card use.
➢ Don’t Carry a Balance
If you’re carrying a balance on your credit card, you’re spending money you don’t have. This puts you in danger of falling behind on bills and incurring late fees. If you find yourself in this situation, stop charging purchases to the card immediately. Instead, pay the entire amount due with another method — such as a debit card or check — and close out of the account.
➢ Make Your Payments on Time
The best way to keep your credit score healthy is to pay your accounts in full and on time. If you miss a payment, you risk being charged a late fee. Late fees can damage your credit score because they show lenders that you aren’t reliable. To ensure timely payments, set up automatic payments and monitor your statements closely.
➢ Avoid Fees
6. Monitor Your Credit Score
Credit scores are one of the most important tools lenders use to decide whether to approve you for a loan. If you want to know what your current score is, check it out here.
You can also find out where you stand compared to others in your area.
You can monitor your credit score online every month at AnnualCreditReport.com. There, you can see your latest score, along with your account balance, number of open accounts, amount owed, types of credit used, and more.
If you pay bills electronically, you can set up automatic payments each month. For example, you could make a monthly payment to your mortgage lender, auto lender, student loan provider, etc.
Monitoring your credit score helps you understand your financial situation better and plan ahead. By paying attention to your credit reports and scores, you can spot potential issues early and take steps to fix them.
7. Plan for Your Future
A will protects your property and makes sure your wishes are carried out. If you don’t have one, it’s important to set up a trust now.
Insurance helps pay for medical bills and other expenses in case you’re injured or become ill. And setting up a trust can help keep your estate safe from creditors.
If you die without having established a will, your state may appoint someone else to make decisions about your property. This could mean that your family members receive less money than they deserve because of court rules and laws.
You can use a trust to protect yourself and your loved ones. You might want to consider creating a trust during your early 20’s while you still have plenty of financial resources.
The longer you wait to start planning, the harder it will be to do so later. By waiting until you reach age 70 to begin collecting Social Security benefits, you’ll increase your monthly payments. But there are ways to delay receiving Social Security benefits.
Term Life Insurance Policies vs. Permanent Life Insurance Policies
Term life insurance policies offer lower premiums than permanent life insurance policies. They typically cover fewer people and have shorter terms.
8. Buy Insurance
As you age, it is imperative to purchase adequate insurance coverage to protect yourself against financial hardship.
Life insurance can help pay down outstanding debt and provide funds for loved ones after you pass away. You don’t want to let your family members suffer financially because of your death.
Your health history is an integral part of determining how much insurance you should purchase. If you are diagnosed with cancer or another serious illness, you might qualify for additional benefits.
The amount of insurance you need depends on several factors such as your age, income level, and lifestyle. There are many different types of life insurance policies available. Some cover just your spouse while others include children and grandchildren.
You can find out what type of policy best suits your needs by speaking with a professional agent.
9. Maximize Tax Breaks
There are many different ways to take advantage of tax breaks. Here are some tips to help you do just that.
➢ Offer Bonuses for Employees Who Pay Taxes Early
If your company offers bonuses for employees who pay their taxes early, consider doing it again for 2023. This could make sense because there are no tax penalties for paying early.
If you want to give out bonuses, make sure you’re giving them to everyone, including those who didn’t qualify for the bonus in previous years.
➢ Consider Offering Free Tuition to Your Employees’ Children
Another way to reward good behavior is to offer free tuition to children of employees. You’ll need to check with your state department of revenue to see what qualifies as “free.” For example, Massachusetts allows up to $5,000 per child.
➢ Give Employees Time off to Attend School Events
Some employers allow employees to use paid time off to attend school events such as proms, graduations, etc. Make sure you understand how much time off you can provide. In most cases, employees must use vacation days to attend school events.
10. Give Yourself a Break
You don’t always have to do everything yourself. If you are feeling overwhelmed, take a step back and delegate some tasks. You might find that it helps you relax a bit and gives you a chance to recharge.
When you are ready to tackle something again, you’ll be able to focus better because you won’t be thinking about what else needs to be done.
Personal Finance Tips Everyone Should Know
The best way to save money is to start saving it now. If you want to learn how to do this, read our article on personal finance tips everyone should know. You’ll find out what you need to pay attention to and what kind of budgeting you must follow. In addition, we’ve included some useful advice on how to avoid getting into debt.
➢ Avoid credit card debt like the plague
Credit card debt is a huge problem for many people. In fact, according to NerdWallet, Americans owe $967 billion in outstanding balances. If you’re one of those people, we’ve got some tips that could help you avoid getting into trouble again.
First off, make sure you know what your credit score really is. You can check your credit report for free once every 12 months from each of the three major bureaus, Experian, Equifax, and TransUnion — by visiting AnnualCreditReport.com. Make sure you actually read your reports thoroughly; there are lots of mistakes that you’ll want to correct immediately.
Next, take advantage of the 0% APR introductory offer on purchases and balance transfers. This is usually offered during the promotional period, so look around for offers that give you up to 18 months of no interest. Once you’ve paid down your balance, use your rewards points to transfer the rest of your balance to another card.
Finally, consider consolidating your debts. Consolidation allows you to combine multiple loans into a single loan that has lower monthly payments. For example, say you have four separate credit card accounts with different terms, and you carry a total of $5,000 in debt. By combining all of your debts into a single account, you’d end up paying about $300 less per month.
Of course, consolidation isn’t always possible. But if you do find yourself struggling with high interest rates, try applying for a secured credit card. These types of cards require security deposits ranging anywhere from $100 to $500, depending on how much you’re borrowing. While you won’t be able to use the deposit toward your current balance, it will protect against future charges.
If none of these options work out for you, you might just have to accept the fact that you’re stuck with a large balance. But that doesn’t mean you have to live with it.
➢ Building credit is important
The importance of having a good credit score cannot be overstated. People with lower scores tend to spend more money than people with better ones.
This is because lenders look at your credit report and decide whether or not to lend you money based on what it says about your ability to repay loans.
If you have a low credit score, lenders think you are likely to default on loans. They are less willing to give you a loan.
You can build up your credit score in several different ways. You can make sure your payments are on time every month.
You can keep balances low on cards. And you can avoid taking out too many loans at once. These things help you build up your credit history.
Your credit score is calculated by looking at your payment history, your total debt amount, and your length of credit history. In addition, there are some factors that don’t show up on your credit report, such as bankruptcy filings, tax liens, foreclosures, collections accounts, and judgments against you.
If you want to see your credit score, you can go to Experian, Equifax, TransUnion, or one of the other three major credit reporting agencies. Each agency offers free access to your credit reports online.
➢ Live below your means, not within your means
Living within your means will help build wealth over time. If you live beyond your means, it will lead to financial ruin. You must set aside money for retirement.
How much do you spend each month? How much are you spending now? What about next month? Next year?
The average American spends $8,300 per year. We want to know how much you spend every month.
We’ll give you some tips on living within your means.
➢ If you want to understand your priorities look at where you spend money each month
If you don’t know how much you spend on certain categories, it can be hard to figure out whether you’re saving enough for retirement or paying off debt.
A budget is one way to track your expenses and help you make better financial decisions.
You can use a spreadsheet or online tool like Mint or YNAB to keep track of your finances.
Once you’ve got a handle on your income and expenditures, you’ll be able to see exactly where your money goes and adjust accordingly.
➢ Build up your liquid savings account
If you want to save money, it helps to set aside some cash every month. But where do you put it? A lot of people think about investing in stocks and bonds, but there are better options out there. In fact, one of the best ways to save money is to simply keep some extra cash in a separate savings account. Here’s how to start saving today.
➢ Cover your insurable needs
Insurance is about protecting yourself financially. Whether you’re looking for car insurance, home insurance, health insurance, life insurance, disability insurance, long term care insurance or even pet insurance, there are many different types of insurance available.
Each type of insurance protects against specific risks – such as fire damage, theft, medical expenses, unemployment costs and much more.
There are many different kinds of coverage offered by insurance companies. Some policies protect against financial losses caused by accidents, while others offer protection against certain illnesses or conditions.
For example, some policies provide money to help pay for routine dental work, while other policies offer reimbursement for major dental procedures.
Some policies allow people to purchase additional benefits, such as travel accident insurance or credit card replacement. These policies usually require a small monthly fee to keep the policy active.
➢ Save a little more each year
If you want to save some cash, start saving now. You’ll see better returns over time.
The best way to do it is to increase your savings rate each year. If you’re already putting away 10% of your income, add another 5%. If you’re putting away 20%, bump it up to 25%.
You might think that you’d lose out on spending money, but that won’t happen because you’ll always have something left over. And even if you end up having less than you had planned, you’ll still come out ahead.
So, how much should you set aside every month? Well, it depends on where you live and how much money you make. But here are some general guidelines:
• In Australia, the average person spends around $1,500 per month. So, if you earn about $50,000 per year, you could put away around $600 per month.
• In Canada, the average household spends around $2,100 per month. So, someone earning $60,000 per year could put away around $900 per month.
• For the UK, the average monthly expenditure is £1,200. So, someone making £40,000 per year could save around £360 per month.
➢ Talk about money more often
Talking about money can be uncomfortable. But it will save you a ton of headaches down the road. You don’t want to end up like this guy.
In fact, talking about money can help you avoid some common financial mistakes.
For example, we know that most people tend to spend more than they earn, and that leads to debt.
If you start talking about how much you make, you could prevent yourself from getting into trouble.
You might even find that you enjoy talking about money. And that’s okay. As long as you’re honest and open, there’s no reason why you shouldn’t discuss finances with friends and family.
➢ Material purchases won’t make you happier in the long run
The average person spends about $8,500 per year on material goods. This includes everything from clothing to cars to electronics.
While some people spend less and others more, it seems like most of us are spending way too much money on things we don’t really need.
In fact, according to research conducted by psychologists, buying material items doesn’t actually make us feel better.
In one study published in Psychological Science, researchers asked participants to complete a survey asking questions such as “How often do you think about death?” and “How often do you worry about being poor?”.
They found that those who spent more money had lower levels of anxiety and depression. However, people who bought more expensive products didn’t report feeling better.
Another study showed that people who buy lots of stuff tend to be unhappy because they’re comparing themselves to others.
When they look around at what everyone else owns, they start thinking about how they aren’t as good as everyone else. And that leads to feelings of jealousy and frustration.
So next time you want to go shopping, ask yourself whether you really need that thing. If you find yourself doing something just because you’ve always done it, try changing up your habits. You might find that you end up having more fun and making better choices.
➢ Taxes matter
Taxes are something we hear about every day, but many people don’t really understand how they work. This article explains some things you need to know about tax breaks, deductions, exemptions and credits.
➢ Make more money
There is always something you can learn about improving your earning potential. If you want to make more money, there are many things you can do. This article shares some tips on negotiating salary increases and offers ways to improve your skills.
Negotiating Salary Increases
You might feel intimidated when it comes to negotiating salary increases, especially if you’re in a position where you don’t feel like you deserve what you’re being offered.
However, there are plenty of reasons why employers offer lower salaries than what you’d like.
For example, you could be competing against someone who has been working for the same employer for longer than you.
Or maybe you’ve recently graduated, and your resume isn’t quite up to par. Whatever the reason, you should never let fear hold you back from asking for a raise.
If you haven’t negotiated a raise in a while, here are some tips to help you out.
First, start small. You don’t necessarily have to ask for 10% more — you can start with 5%.
Second, keep your expectations low. Don’t ask for too much because you’ll probably end up disappointed.
Third, know your worth. Ask around to see what others in your industry are making.
Fourth, prepare for rejection. If you’re rejected for a raise, don’t take it personally. Instead, use the information you gathered to negotiate next time.
Finally, remember that you aren’t alone. Many employees struggle with negotiating raises, so talk to your coworkers and peers. They can give you advice on how to approach your boss and what to say during negotiations.
Financial independence is about having enough cash to live comfortably without worrying about how much money you have left over each month. Many people are afraid of saving because they don’t want to miss out on spending money.
But there’s no reason why you shouldn’t start saving early. You’ll never regret it later. There’s no magic number of dollars that you need to retire on; it depends on your personal situation.
If you’re young and single, you might need less than $50,000 per year. If you’re older and married, you could spend up to $150,000 per year.
If you’re starting off early, consider investing in index funds. They’re low cost and offer diversification across many stocks.
You won’t make a lot of money, but you’ll avoid losing money too. Consider putting away 10% of your income into a 401(k), Roth IRA, or regular savings account.
In conclusion, personal finance is like any other skill: practice makes perfect, and if you put in the work now, you’ll reap the rewards later. Start using the tips and strategies you learned in this article today and watch your financial future grow brighter than ever before.