What is Personal Finance?

What really do most people think of personal finance? Do you need to have an MBA or work in the financial industry to know personal finance? Unfortunately, personal finance is not taught as mandatory in majority of our school curriculum systems. Few schools have courses in how to manage our money. It is imperative to learn the basics in personal finance to make smart decisions involving developing investing strategies, budgeting, creating emergency funds, paying off debt, using credit cards wisely, and most important of all saving for retirement.

Topic such as budgeting goes under the subject of personal finance, and it’s tragic that most everyone learned the hard way including myself the value of understanding concepts of personal finance. Why is personal finance so important? It’s very critical that we should all be disciplined in managing our money as well as saving and investing rather than relying on trial and error and realizing the lessons of personal finance after we’ve incurred personal debts and wasted money along the way.

In this article, I’ll try to dispel mysteries surrounding the subject of personal finance, and that it’s essential that we take the responsibility to know how it affects our standard of living and overall quality of life.

Personal Finance Principles

The key to getting your finances on the right track isn’t learning a new set of skills, but rather it’s about understanding that the principles that contribute to success in personal finance and career is personal management of money. The three main principles of personal finance are as follows:

Prioritization-You should be able to discern what keeps money from flowing in, and make sure to stay focused on those efforts.
Assessment-You should have an honest look at the potential costs and benefits of any new financial venture.
Restraint-You should have the ability to limit your personal spending

Ten Personal Finance Strategies

The sooner you start financial planning, the better. And it’s also never too late to create new financial goals for yourself and your family to achieve financial security and financial freedom. The following are some of the best personal finance strategies:

1. Budgeting

A budget is essential to live within your means and to save enough money to meet your long-term and short-term personal finance goals. It entails that 50% of your take-home pay or net income, after taxes, should go toward living essentials such as rent, utilities, and transportation. 30% should be allocated to discretionary expenses such as eating out, premium clothing, and even charities. And finally, 20% should be allocated towards your financial future such as paying down debt and saving for your retirement and for the creation of your emergency fund.

2. Establish an Emergency Fund

Ensure to set aside money for unexpected expenses such as medical bills, big car repairs, in case you lose your job, and other unforeseen financial liabilities. Make sure to pay yourself first. 3 to 6 months’ worth of living expenses is the ideal safety net, or set aside 20% of your paycheck every month. Once you’ve achieved this emergency fund, it’s time to set aside toward other financial goals such as your retirement savings or paying down your mortgage.

3. Manage Your Debt

To keep your personal debt from getting out of control, make sure to stop spending more than what you earn. It sounds simple enough, correct? Yet most people do have to borrow from time to time and get into debt troubles. One of the main tips on managing your debt is paying down the highest interest credit card that you have and make your way down to the least interest-bearing credit card to save money in the long run.

4. Use Credit Cards Correctly

Owning credit cards are not necessarily bad for your personal finance. It just needs to be managed correctly. For instance, paying your credit card bills on time is one way to avoid ruining your credit score. Next, you need to at least keep your “Credit Utilization Ration” at a minimum, which means keeping your credit balance below the 30% level of your total available credit.

5. Your Credit Score Matter

Monitor your credit score from time to time. If you ever want to obtain a lease, mortgage, or any other type of financing, you’ll need a solid credit score. FICO score is the most popular credit score rating.

Factors that determine your FICO score include:

Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
Credit mix (10%)
New credit (10%)

FICO scores are calculated between 300 and 850. Here’s how your credit is rated:

Exceptional: 800 to 850
Very good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Very poor: 300 to 579

6. Protect Your Assets

Have you ever wondered what happens to your assets in case you leave this world? This area of personal finance is one of the most overlooked concepts by most people. To protect your assets in your estate and ensure that your wishes are followed when you die, you must make a will and possibly set up one or more trusts. You also need to look into protecting your family with insurance in auto, home, life, disability, and potential long-term care. This includes having a living will and power of attorney. Finally, you should educate your children on personal finance and teach them the value of money and how to save, invest, and spend wisely.

7. Pay off Student Loans (If you have one)

Some private and federal loans have eligibility for a rate reduction if the borrower enrolls in auto pay. Other flexible federal student loan repayment programs include:

Graduated repayment—Progressively increases the monthly payment over 10 years
Extended repayment—Stretches out the loan over a period that can be as long as 25 years
Income-driven repayment—Limits payments to 10% to 20% of your income (based on your income and family size)
Public Service Loan Forgiveness Program or PSLF

8. Save for Your Retirement

Retirement may seem far from today, but it will arrive much sooner than you’d expect. A good rule of thumb is 80% of your current salary should be your retirement income. The younger you start saving for retirement, the more you benefit from what the experts call the magic of compounding interest. Consider opening a Roth IRA and/or Indexed Universal Life policy.

The Indexed Universal Life or IUL is a tax-free savings plan authorized by the IRS Section 7702 and 72e for college funding insurance policy. IUL allows you to earn interest on your savings without having to pay taxes, borrow against your IUL, guarantee no loss, avoid market volatility, setup retirement savings, and have protection with death benefit or living benefits.

What is Indexing Strategies? An index is a statistical composite that measures changes in the financial markets. Indices are hypothetical portfolios of securities designed to represent a certain market or portion of the overall market.

Benefits of Index Interest Accounts include:

Built in safety – no loss during market downturn, therefore you’re guaranteed not to lose any money
Upside potential/ability to earn interest based in part of the performance of the external index
Some of the most popular indexes include S&P 500, Barclays Trailblazer Sectors 5, Nasdaq, Dow Jones, US Real Estate, Gold Commodity, ML Strategic Balance, PIMCO, MCSI, and Russell 2000

9. Take Advantage of Tax Breaks

It is recommended that you start each year saving receipts and tracking your expenditures for all possible tax deductions and tax credits. Since the tax code is overly complex, most people fail to take advantage of tax breaks at the end of each tax season. You can maximize your tax savings by freeing up your money that can be invested in paying off past debts and realize tax deduction that reduces the amount of income that you are taxed on.

10. Treat Yourself from Time to Time

After all is said and done regarding personal finance, make sure to reward yourself now and then. Treat yourself and/or your family on vacation, buy something from your wish list, go on an occasional night out, and enjoy some of the fruits of your labor whatever that means to you.

Some Final Thoughts

Personal finance is unique to each individual circumstances, and it’s a great idea for all consumers, especially the young adults who need to understand investing basics and credit management. The cost of not knowing personal finance can be expensive and heart-breaking. Most people get into debt troubles because they didn’t know any better about personal finance. I wish you the best on your personal finance journey, and good luck!

Below are some of the best personal finance resources: