Generations ago, people went to work, got a paycheck, and spent money on the stuff they needed. It was all so simple. There may not have been easy ways to get ahead and become rich, but there wasn’t that much confusion out there about money.
Financial Planning Basics – Personal Finance 101
Today, nothing could be further from the truth. Unless you really dig in and spend some time researching, it’s hard to separate the good advice and the must-do financial moves from the crackpot scams and pyramid schemes.
If you’re feeling overwhelmed, don’t worry. It is all very confusing! The key is to start by familiarizing yourself with the basics and then build from there. To help you in this journey, here we present four of the key principles of Finance 101.
1] Set a Budget
You can’t win without a game plan-every coach will tell you that. The same thing applies to finance, and you’ll need good info to start using your money best and start building for the future. The first step is to tally up all your income and all your expenses for the month in a budget.
This is always easier with a stable, steady income, but those with more peaks and valleys can do some averaging. You need to have some left over.
There are various strategies on what to do with the remainder, but the critical part is to make sure you’re living in the black and not falling into the red each month.
2] Start Saving Money
The best thing to do with that leftover money at the start is save it. Put some away and build up an emergency fund. Initially, your goal can be around $2,000 or so. This will protect you against common “emergencies” (like car trouble, home repair, minor health incidents, and more).
This way, you don’t have to use credit cards and go into debt over a relatively minor inconvenience. Then, over time, you want to build it higher. You need to have at least several months of expenses saved. Ideally, this will be six months worth – or more for the cautious – in case you lose your job or are otherwise faced with a massive setback.
At some point, saving everything starts to become senseless. Do you really need a full year’s salary in you sock drawer? Is there a realistic situation where you won’t have any income for that long or a massive debilitating setback?
There’s a difference between being cautious and silly. Instead, start putting some money into the market. Mutual funds are safe with good growth potential, bonds can be useful, and some individual stocks can make sense.
The best are usually 401ks or IRAs as they offer major pre-tax benefits and allow you to get the most growth over the longest horizon. Except in rare cases, these should be your first moves in the investment world.
4] Take Advantage of Perks
If you look around, some companies seem to be offering free money. Can it really be? Often, no, it is just a scam. It is too good to be true. But this is actually how it works when it comes to credit card benefits.
There are so many companies competing for your business (and hoping you pay them interest) that there is an arms race to offer the best rewards.
You can now get discounts, savings, and even cash back on purchases all over. So if you get the right credit card through a top-ranked provider, you can enjoy all of these perks and effectively be getting a free lunch. Just remember to be responsible with the card and not fall into debt by splurging.
Finding Basic Financial Security
We all want financial security. For some, this becomes all important and they spend their entire career trying to get rich. Others just want to feel comfortable, live sensibly, and know they’ve done right by their family.
Neither way is right or wrong, but both paths start by learning the basics. First off, just figure out a budget and stick to it. Then save a reasonable emergency fund that grows over time to a solid security blanket.
Next you can start investing to set up your future self even better. And if you take advantage of credit card rewards, you will be effectively adding free money to your income.
There is certainly a lot more complexity out there if you want to pursue it. Wall Street probably made up a new financial instrument in the time it took you to read this article. But you only need to go as deep into this world as you want. Just by nailing the basics, you can start living with a lot more confidence about your future.