5 Tips for the Personal Finance Beginner
For those just starting out in the real world or even those who’ve been adulting for awhile, the thought of managing your own finances can feel overwhelming. There are lots of articles and gurus out there that make personal finance seem way more complicated than it really is. While each situation is different and nothing can beat the advice of a qualified financial planner, there are some general habits that all of us can develop in order to achieve greater personal financial health.
Accept Free Money
What I mean by this, of course, is to make the most of your employee benefits (though if you know of someone handing out free money, please let me know). Most employers nowadays offer some sort of 401k matching plan. In case you don’t know what that is, a 401k is a retirement account set up for you through your employer. You are allowed to set aside pre-tax dollars from your paycheck for retirement through your 401k. Most employers have a matching program where the company will match, up to a certain percentage, whatever you contribute to your 401k and put that into your 401k as well (i.e. free money). Also, a 401k is a diversified investment account, so that money grows over time. Having a diversified investment account is a lot less risky than buying individual stocks. While that sometimes can be a very lucrative investment, investing in one company can be very risky. Even large, well-established companies, can be displaced and eventually replaced by newer companies thanks to the process of creative destruction. If you’re just starting out with investing and saving for retirement, it’s best to start with a diversified investment account.
You’ll never be successful with personal finance until you know exactly where your money is going. This is the first step in taking control of your finances. If you’re not sure where to start with creating a budget, there are plenty of helpful online templates that can get you started. The first step is to start keeping track of how much your spending. In a spreadsheet, layout how much you spend for rent, cell phone bills, utilities, etc. Start keeping your receipts and figure out how much you spend each month on groceries, gas, eating out, and entertainment. As best you can, try to track down how much you spend each month and where your spending it. Once you’ve done this, it will become abundantly clear where you are wasting money and thus where you can start cutting expenses. Once you’ve cut down on frivolous expenses, figure out how much you actually need to spend each month and then stick to that budget.
In order to save money, you must follow the cardinal principle of personal finance which is to spend less than you earn. The more you cut down on your expenses, the more money you’ll have available to you to save. Try to fight the temptation to blow that money on something you don’t need. Have savings be a part of your budget. Just like you have to set aside so much money for rent each month, budget out how much money you want to save each month and treat as an expense. Get it into your financial psyche that you HAVE to pay your savings. Don’t worry if that amount is fairly small at first. Just like how a lot of $2.00 items can add up to a huge grocery bill, small deposits to your savings account will add up over time.
Get Out of Debt
The best course of action is to stay out of debt in the first place, but that’s an unproductive thought if the debt has already been incurred. The first step in getting out of debt is to stop accruing it. You have to plug the holes in the ship first before you can start pumping the water out. Debt can be overwhelming, but if your methodical and consistent with paying it off, it can be resolved much quicker than most people think. The best way that I’ve found to manage and pay off debt is through something called the Debt Snowball Method. How it works, is you organize all of your debts by interest rate with the largest interest rate at the top of the list. Then you pay the minimum payment on all of your debt except for the one with the highest interest rate (usually a credit card). For that one you throw as much money at it as you can. Once you’ve paid it off, you take all of the money you were using to pay the previous debt and put it towards the next largest interest rate and so on and so forth until you have paid off all of your debts.
Have a Splurge Fund
This may sound counter-intuitive, but I feel that it’s very important for your financial mental health to have some money set aside each month that you can do whatever you want with. Depending on your situation, this could be $100.00 or it could be $20.00. Maybe right now it’s only $5.00. Whatever the amount, have some money that isn’t so tightly budgeted. One of the main reasons people fail to stick to budgets and achieve the financial health they want is because they get burned out. They feel too restrained by their budgets. While you should always spend less than you earn, make sure to cut yourself a little bit of slack as you work toward your financial dreams.