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Financial planning basics: Personal finance 101

As everyone who lives on Earth has noticed, money (unfortunately) doesn't come for free or manage itself. Some people might have a natural ability to be careful with cash, but a little planning and effort are required for the rest of us. Mastering basic finance is the first step toward being in control of your money instead of trying to stretch each paycheck using the force of sheer will.

In this article, you'll learn what personal finance is so you can become more financially savvy.

What is personal finance?

Personal finance is the opposite of business finance, meaning it's all about how you manage your money. It covers everything from budgeting and banking to insurance and tax. And while it might not be the most exciting thing, managing your personal finances carefully means you can live your best life and do more exciting stuff over the long term.

Dreaming of what you'd love to have in the future is a great way of goal-setting. Those fantasies of going on fancy vacations and buying your dream home can become a reality—but only if you commit to making it work. You'll need to learn the basics of finance so you avoid taking shady advice and make smart choices with your hard-earned dough.

Once you've got clear goals in mind, you can plan how to meet them with your available resources. You don't even have to be overly rigid or restrictive to be financially savvy—just disciplined and honest with yourself.

Why does personal finance matter?

Ask anyone who's gone broke if personal finance matters, and they'll probably say no. And that's why they went broke. People who don't watch their income and expenses tend to swindle away their bag, no matter how much money they earn.

Financial goals might be super future-focused, like paying for kids' college fees, or short-term stuff, like saving for some new drip. People who don't harness the discipline of Yoda when spending money are more likely to end up in debt.

A cycle of debt isn't cool like the water cycle or a bicycle. It's a seemingly endless repayment of debts that snowballs as you continue to borrow more than you can afford. With the world in more debt than ever, the urgency to learn finance and how to manage your money has never been stronger.

Areas of personal finance

Let's look at the five areas of financial planning.

Income

Your income is every cent, dime, and dollar you coin in, and it's something you should keep close tabs on. A salary is most people's primary source of income, but you could also have dividends, a side hustle, or some generous family members that contribute to your accounts.

Total income is everything you have available to allocate toward saving, spending, protection, and investments. Naturally, the more the merrier. So remember to focus as much on making money as you do on conserving what you have.

Saving

For most people to plan their finances well, allocating an amount to save in advance is a must. Some people prefer to calculate how much they spend first—and that's fine, too. Whatever works best for you is the best method.

However, there's an advantage to deciding how much you spend based on income—you can calculate it as a percentage of total earnings. That means as you inevitably climb up the career ladder and your earnings increase, you can easily amend your budget.

An emergency fund is another very useful thing to have. If your car breaks down or your cat needs to go to the vet, it means you'll have that cash available on a dime.

Spending

One of the keys to basic finance savviness is keeping a firm grip on every penny you spend. And, no matter how much you earn, always aim to spend less than you make.

You might wonder why that's necessary when everyone uses a credit card—but it sure is. That's right, it's not a good idea to use credit to spend more than you earn. In fact, it's a surefire way to spiral out of control financially.

When calculating spending, you'll need to prioritize your outgoings depending on whether they're essential, good to have, or luxuries.

Protection

Protection is crucial so you're covered in case of emergencies and have the ability to take care of your future self. Life can be unpredictable, so a retirement fund and insurance are essential. Some types of insurance to think about include:

  • Health insurance

  • Life insurance

  • Homeowners' or renters' insurance

  • Auto insurance

Investments

Investing is the most advanced area of personal finance, and it can be challenging for newcomers. However, taking the time to learn how to make money on stocks and bonds pays dividends.

It's important to study investing before dipping your toes in the waters of investment, as there's a risk of losing all of your money, including your initial investment.

Steps for planning your personal finances

Financial planning shouldn't just be for business owners and accountants. Becoming the boss of your own finances gives you more control over your future and sets you up for habits that leave you feeling like the Batman of personal finance.

1. Set financial goals

There's no denying it, putting what you learn about personal finance into action can be scary to start with. You have to think about the future—and not just planning which restaurant you want to go to next week. Like, 5, 10...even 30 years into the future.

And while it might be a little unsettling at first, you'll always thank yourself for doing it. Think about the type of lifestyle you'd like to have, and be savagely honest about how hard you're willing to work for it. The bigger the house, usually the harder the grind.

2. Organize your priorities

Now that you've considered the lifestyle you're aiming for, it's time to sort your goals in order of the stages of life you expect to achieve them. For example, you might have the following savings goals: save enough to get out of debt, save enough for a luxury holiday, and save for a new home. You'd probably place them in the following order:

  1. Get out of debt

  2. Purchase a new home

  3. Go on a luxury holiday

The importance of saving for retirement can't be overstated. You might think now is too soon if you're in your 20s or 30s, but there's no such thing as too soon. Besides, by starting early, you can make smaller contributions over a longer period. The alternative is scrambling to save big chunks of your income in your 40s and 50s...no thanks!

3. Make a budget

With goals in mind, you're ready to allocate your current income and debts. Making a budget is a crucial element of financial planning and essential for properly taking care of your money. It helps you live within your means and save enough for those big, life-changing future purchases.

Strategies to help you plan your finances

Just like learning how to take care of your health, it's never too early or late to start financial planning. Everyone starts with basic finance and can continue to build on that until they reach Jay-Z status.

Below are some starter strategies to help those who are ready to make a fresh financial start.

Think about future you

Most people need around 80% of their income in retirement, and your golden years will likely come around quicker than you expect. It's most people's biggest investment, and early planning means you can spread the cost.

If you can get a 401(k) or 403(b) plan from your employer, do so—especially if they're legendary and offer to match it. This is a great employer benefit to watch out for, as it gives your retirement fund a tasty boost.

But remember to think of the near future, too. Assess the current financial risks in your life, such as auto repairs, home repairs, vet bills, healthcare costs and loss of employment. You should have an emergency and retirement fund as essential basic savings.

Only borrow what you can afford

Credit cards can help you track spending and keep your credit score healthy, but they can also trap you in debt if you're not careful. In this instance, being careful is very simple: Only borrow what you can afford. Aim to pay off your credit cards each month, or at least, keep account balances below 30% of the total amount of credit available.

Keep tabs on your credit score

Your credit score is a mysterious number that lenders use to decide whether to give you a loan. You'll need a decent one to buy a car, get a mortgage, and find a good deal on a personal loan. Credit reference agencies use factors such as payment history and credit mix to assess your score in pretty much the same way Simon Cowell judges AGT contestants.

Don't forget to treat yourself

So, we've covered how important saving and planning is for maintaining your personal finances, but treating yourself is almost as important. Being overly restrictive or harsh will reduce the likelihood of you sticking to your budget—and sticking to it is the most important thing when you start out.

So, whether you love going to the salon to keep your nails looking fly or buying yourself a new game each month, be sure to give yourself small rewards for your hard work.

Top tips for how to become financially literate

Even though they don't teach it at school, financial literacy is one of the most valuable life skills you can learn. Having strong financial knowledge puts you in the best position to make smart decisions with your money that pay off long-term.

You'll have unique needs and wants, which means no two financial plans look the same. However, there's a variety of ways to get clued up on ideas for how to take care of your money:

  • Listen to finance podcasts

  • Read blogs about money

  • Buy personal finance audiobooks or books

  • Head to the library to read about financial planning

  • Take free online courses

  • Speak to trusted friends and family members who've achieved financial success

Basic finance skills

There are a bunch of skills you'll learn from school, work, and life in general that you can apply to manage your finances. Even being hardworking and showing off leadership skills at work are important aspects of effectively managing your finances.

Let's look at some core skills related to managing your personal finances:

  • The ability to prioritize your spending and cut out luxuries when necessary

  • Discipline to keep you on track with your budget

  • A long-term mindset so you're prepared for the future

  • The ability to make financial decisions using logic over emotion

  • The willingness to consider making big investments and save

So, becoming a master of your bank account isn't as glamorous as people make it out to be. But by playing the long game, you make the chances of living a lavish lifestyle in the future significantly more realistic. With so much information and inspiration available online, learning finance has never been so easy or fun, so don't wait to get started.

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