Personal Finance Basics
Personal finance is an incredibly important aspect of adult life that every adult needs to learn in order to thrive–and avoid major financial pitfalls that could negatively impact your credit score and quality of life.
The following finance guide will help you understand the basic components of healthy personal finance.
Budgeting
Budgeting is the cornerstone of successful finance management. Budgeting involves creating a basic understanding of the money you bring in, or income; the money you spend, or expenses; and through this knowledge, helps you to create a budget plan that will ensure you do not spend beyond your means.
Creating a budget can be a daunting task. There are many budget outlines and planners available which will help you get started.
In general, make sure that you take the time to consider the best budget for your particular needs. You should be as realistic as possible so that you don’t end up needing to go into debt in order to pay your bills. For instance, if you don’t have a lot of extra income, look for ways to cut down unnecessary expenses, so that you will have a larger financial cushion after paying your bills.
Savings
Savings refers to money that you set aside in savings accounts for future needs. There are multiple types of savings accounts that you will want to consider, including: a traditional savings account; high-yield savings accounts which offer a high APY, or annual percentage yield; money market accounts, which are a hybrid-account which combines features of savings and checking accounts; certificate of deposit or COD account which is a time-based deposit; and more.
At the very least, you need a traditional savings account. As you improve upon your finances, you should consider optional types of savings accounts in order to help your savings earn more money over time.
Savings are essential for several reasons; namely, you will need some money set aside for various purposes in the future. Savings can be used for emergencies, for vacations, for college; they can also be used to save up for specific items or as people often put it, “a rainy day.”
Beginner Investing (Low Risk)
Investments are an optional consideration when it comes to your finances. You should ideally be on strong financial footing before you dive into investments, because there is an inherent risk that comes with many types of investments. You should avoid investing in anything risky if you are just beginning to understand finances. If you are a beginner, consider less risky options such as: high-yield savings accounts, which typically pay higher-than-average interests; COD accounts, which can be done in time frames as little as a few months to a year or more; or 401(k)s and similar plans.
Debt
Should you take out loans or credit cards? The answer is not quite simple. It’s important to have a healthy credit score, but you shouldn’t take out credit card after credit card, particularly if you are unable to pay off the cards in a timely manner. The longer it takes to pay off a credit card, the more interest you will pay in the end. As a general rule, avoid relying on credit cards for bills or other necessities, and use them for larger purchases that you can then pay off over a period of time instead.
