The term personal finance encompasses the management of an individual’s financial activities that include budgeting, saving, investing, and planning for future financial goals. It is a necessary part of adult life that all too often gets overlooked in traditional educational systems. As we move through different stages of life, the necessity of being good with personal finances becomes increasingly apparent. This essay will discuss the basics of personal finance, share experiences that make the subject more relatable, and offer up a few practical pointers that could help someone who is not yet a personal finance whiz but would like to become one.
Personal Finance for Beginners: The Importance of Personal Finance
In today’s quick-moving society, it is more crucial than ever to comprehend personal finance. Consumerism is on the rise, as is the ease with which people can access credit, yet so many individuals find themselves in financially unstable waters. A survey that’s part of the National Endowment for Financial Education found that basic financial literacy is at such a low ebb that nearly two-thirds of Americans can’t pass a test of it. This is a 61% pass-fail rate, which speaks volumes about the straightforward necessity of financial awareness.
Managing money is only part of personal finance. The real essence of personal finance is making informed decisions that lead not just to a secure life but a fulfilling one, too. This involves setting not just one but many financial goals and working steadily toward them. Budgeting is another skill you must master. And, of course, saving for many different kinds of “almost certain” emergencies (cf. Murphy’s Law) is another aspect of personal finance you must practice to achieve a kind of financial independence that greatly reduces stress.
My Journey with Personal Finance
Thinking back on my own pathway to understanding personal finance, I remember the mental anguish and uncertainty that accompanied my college years. I, like many of my contemporaries, received an unprecedented number of credit card offers and student loan applications but had absolutely no understanding of how to work with such tools and avoid the disastrous consequences that working with such tools can bring, especially for the young and naive.
My first attempt at budgeting came about as a result of a rather unfortunate realization: my monthly allowance from my parents did not come close to meeting my expenditures. From that point on, I was in a crash course with budgeting, forced to learn by doing the old adage of “living within your means” and of figuring out just what financial sacrifices were worth making.
My initial step was to formulate a straightforward budget. I outlined my sources of income, which included my part-time employment, along with any monetary assistance I received from my family. Then, I noted my expenses, separating them into essentials (like rent and groceries) and non-essentials (like dining out and entertainment). This exercise illuminated my spending habits and enabled me to recognize the specific areas where I had some fat to trim.
For example, I found out that a large chunk of my income was going to coffee and meals from restaurants. By implementing slight alterations, such as making coffee at home and prepping meals for the week, I managed to save a lot of money. That taught me the lesson of spending with awareness and the huge effect that can have on my finances.
Budgeting: The Foundation of Personal Finance
Budgeting is a foundational aspect of personal finance. It allows individuals to apportion their resources in a manner that lets them fulfill their present monetary obligations and yet sets aside some funds for future lumpy expenditures or for wealth accumulation of some sort until those future events occur. There are many methods of budgeting. Some are uncomplicated and consist mainly of basic arithmetic. Others are more sophisticated but still straightforward enough that most individuals can understand them. Here’s a list of some common methods, with very brief descriptions of each.
The 50/30/20 rule, for example, suggests that you divvy up your income as follows: 50% for requirements, 30% for desires, and 20% for future needs (savings) and paying off current debts.
This easy-to-follow framework can help people maintain a budget that covers the essentials but also allows them to spend a little on things that make life enjoyable.
In contrast, zero-based budgeting is much more intense.
Not only does it ensure that you don’t go overboard each month, but it also makes you assign every dollar a task to do or else risk having it declared a wasteful expenditure.
It was essential for me to find a budgeting method that truly clicked for me. I found the rule of thumb 50/30/20 to be very helpful, but as I started to use it, I realized I needed to add some flavor to it in order for it to work for me. So, I took the idea of the spending categories and, instead of using a percentage, I set aside a specific dollar amount for each category. When I ran out of money in a category, I stopped spending on nonessential items until the next month.
The Power of Saving
It is impossible to disregard the act of saving when it comes to personal finance. Building an emergency fund is one of the first things we should do. An emergency fund serves as a safety net and provides peace of mind when unusual expenses arise. Financial professionals recommend saving three to six months of your living expenses in an account that allows you quick access to your funds.
In my own life, I experienced the importance of having an emergency fund firsthand when my laptop broke down just before finals week. Thanks to my savings, I was able to purchase a new laptop without going into debt. This experience reinforced the idea that saving is not just a good habit; it is a necessity.
In addition, having distinct objectives when it comes to saving can inspire individuals to maintain stricter control over their financial lives. Knowing that I was working toward a specific goal—making it to Europe during my junior year—I channeled my energies into funding that trip. And the way I did it was pretty simple. I restricted my spending to only the necessary purchases. I bit the bullet and bailed on the lifestyle that I had enjoyed before realizing that 2013 was the year when I would try to head west for the spring.
Investing: Making Your Money Work for You
Once people have made a budget and constructed a backup fund, the next step is to think about putting their money to work. Investing is a mightily useful process for growing a person’s net worth over time. Still, it’s crucial to do it with your wits about you.
Different kinds of investment options are in existence, such as stocks, bonds, mutual funds, and even real estate. Each option carries its own level of risk, its own potential for reward. Individual investors need to assess their own level of risk tolerance and figure out which of these fits them best and which of these options they are most comfortable with. This is not a short-term game, and the appearance of the stock market is quite deceptive.
One of the most important lessons I learned about investing is the necessity of beginning early. Compound interest is often called the eighth wonder of the world, and with good reason. The sooner you start putting money to work, the more time it has to grow. I opened a retirement account in my sophomore year of college. Although my contributions were small, I was astonished to discover how rapidly my investments began to accumulate.
The Role of Credit
Another critical facet of personal finance that demands attention is credit. It is so important that one might say it is deserving of a special focus. Understanding its mechanics, as well as the things one must (or must not) do to manage it successfully, is quite obviously vital to the establishment of any kind of financial foundation.Core Components of Credit The first step in understanding credit is to look at its core components. They are as follows:
In my early twenties, I foolishly racked up credit card debt without really comprehending what I was doing. I learned the hard way that high interest rates can turn a small balance into a big problem really fast. And I learned about some not-so-great options for getting out of credit card debt. Here are some of those options, in case you find yourself in a similar situation. And let me tell you, none of these are fun, and all of them are better avoided.
Moreover, it is vital to keep a close eye on your credit report. “Mistakes can and do happen, and being vigilant about correcting them is essential to a healthy credit score” (Watson, 2011). Your credit report is not something you want to share with just anyone, but there are companies that will let you see it for free. I suggest signing up for one of these services.
Financial Education: A Lifelong Journey
The journey of personal finance is an education that lasts a lifetime. The financial world is always changing, and keeping abreast of the latest trends, tools, and tactics is a must. To that end, I’ve read books, attended workshops, and followed good financial blogs online. These are some of the things I’ve learned along the way.
Moreover, when we share our experiences and learn from the experiences of others, we gain valuable insights. My discussions with friends and family about personal finance have illuminated for me the many different angles and approaches one can take. I’ve realized that everyone’s financial journey is unique, and there is no one-size-fits-all solution.
Personal Finance for Beginners: Conclusion
To conclude, personal finance is an immensely important part of life that requires not just attention but also education and good old-fashioned discipline. By grasping the fundamentals of budgeting, saving, investing, and credit management, individuals can wrestle their financial lives into some semblance of order. My own journey through the land of personal finance has been filled with more dark alleys than I care to remember, yet I have emerged into the sunlight and am now striding with purpose toward the horizon of my financial future. I walk this road in informed company with many of you. Along the way, I’ve learned lessons both big and small; some have been very hard to learn. But I have never lacked the empowerment that comes from knowing I am the main character in my financial story.