Living a stress-free, financially secure life doesn’t have to be a pipedream. Anyone can get their personal finances in order with just a few tweaks to their financial habits and a better understanding of how to manage their money.
Becoming more financially secure is important because it’ll make you’ll feel more in control of your money. You won’t have to worry about living paycheck to paycheck. You’ll have enough money to pay the bills and also cover an emergency if it were to happen.
Good personal finances can give you the time and headspace to focus on the things that matter to us most, be it more time for your family or money to care for your aging parents.
Here are 7 tips to kickstart your personal finances.
What is personal finance, anyway?
Personal finance is the process of planning and managing your money so that you have enough to meet your personal financial goals. It’s unique to you because how you plan to use your money is probably different from how your parents, friends, and coworkers decide to use theirs.
It covers every financial activity that can help you live a more financially secure life. This includes budgeting, banking, mortgages, income generation, investing, and retirement planning. Good personal finances allow you to keep your money, make it grow over time, and spend it on the things that matter most to you.
They can also help you save up for retirement, plan for vacations, and put your children through college without burdening the entire family.
Why is it important to have a handle on your personal finances?
Having a handle on your personal finances allows you to live a healthy, happy, and secure life.
Whether we’re aware of it or not, we make personal finance decisions every day. Where we choose to shop, how much of our income we save, and what we do for entertainment are all linked to our finances.
How well we understand the fundamentals of budgeting, saving, debt, and investing can set us up for prosperity or poverty. Our lives are increasingly influenced by our finances as every major life decision and daily need requires money.
This is especially important because the average amount of credit card debt owed by each American family stands at $6,720 while a quarter of Americans do not have any retirement savings or pensions at all.
Good personal finances can help prevent these stressful scenarios. Being financial literate helps people choose financial choices that are beneficial for their futures over ones that will put them in debt and financial hardship. More importantly, personal finance habits give you the confidence to plan for your future.
What are some of the biggest mistakes people make in their personal finances?
Getting a good handle on your personal finances can be a difficult journey at times. Without adequate personal finance knowledge, some people may squander their money on non-essential items, while others may trap themselves in cycles of debt.
Knowing some of the personal finance mistakes that others have fallen for can help you know what to avoid. Here’s a look at them.
Spending more than they can afford
Excessive spending is one of the biggest money mistakes people often make.
Small purchases, like a cup of coffee or takeaway meals, can slowly add up. Bigger purchases, like an expensive brand new car that you don’t need, will also add to your expenses greatly. If these unbudgeted spends go uncontrolled, the money that you could have saved up for other financial goals would be lost.
Living on credit cards
Using credit cards to buy essentials and pay for utility bills can make your finances more complicated. Though convenient to use, the high-interest rates charged by credit card companies can make things more expensive than if they were paid upfront, and trap you in a cycle of debt if you’re unable to pay off the balance each month.
Couples don’t discuss shared financial goals
People in long-term relationships or marriages may feel it unnecessary or awkward to talk about their shared financial goals.
Without an open discussion of what both people want, it can become difficult to discuss savings goals, mortgages, and other expensive life expenses. This can lead to stress as one person handles all the finances or to economic hardship as there is not enough money to pay for things like tuition fees.
Using money from retirement funds to buy stocks and assets
Some people have made the mistake of transferring large amounts of money from their IRA to invest in stocks and assets that seem like they are booming in value but eventually plunge.
This can happen during periods of investment frenzies, like during the dot-com boom or the bitcoin craze. The stock or asset may seem like it’s increasing in value until the bubble bursts and prices come crashing down. Ultimately, you’re left with no value assets and just a fraction of your retirement funds.
7 tips to kickstarting your personal finances
If you’re looking to get your personal finances in order, we’ve got some tips to help you get started. The key to becoming financially secure is to make these personal finance habits a regular routine as soon as possible.
Figure out your financial goals
The first, and most important, tip is to spend some time writing down the financial goals that matter most to you. These are both long- and short-term goals that you want to work towards to gain a confident sense of financial security.
It could be a short-term goal to pay off your credit card debt within the next six months or a long-term goal to save up for your child’s college education.
As with any goal, the key is to make your financial goals as specific and measurable as possible, so you know what conditions to meet to consider your goal successful. Try to also give yourself a deadline so you have a date to work toward.
Build a budget and stick to it
With clear financial goals, you can set yourself a budget to allocate where different amounts of your income will go to.
The goals will act as a roadmap for you to create budgets for your regular expenses, your wants, and your short- and long-term goals. The budget will help you control your spending, and plan for the best way to live within your means comfortably.
You can create a budget by using a spreadsheet or an app that helps you set different budget categories. The key thing to remember is to identify the amount of income you have coming in, as this will be the base amount that you will use to divide your budget.
Build a separate fund for emergencies
While building good personal finance habits means thinking about your future financial goals, it also means preparing for the unexpected emergencies that life throws up. The best way to cope with these uncertainties, according to financial experts, is to build an emergency fund using a bank account that’s separate from your regular checking or savings account.
This emergency fund will help you weather emergencies such as job loss, economic crises, medical bills, natural disasters, and pandemics. It’s recommended that you set aside 3 to 6 months of living expenses in a high yield savings account that’s set aside for emergencies only. You’ll be less tempted to access these funds, and they’ll accrue compound interest over time.
The 50-30-20 Rule: why it might help your finances
Made popular by Senator Elizabeth Warren, the 50-30-20 rule is a budgeting framework that helps you divide your after-tax income into the three most essential finance categories: essential costs, wants and gifts, and savings.
The framework’s strength lies in how it helps you build an emergency fund and saving for retirement without sacrificing too much of your other expenses.
The framework asks you to allocate 50% of your after-tax income on essential expenses such as rent, food, medical expenses, and utility bills. The other 30% can be spent on things you might want such as a short vacation trip or a streaming entertainment subscription. The final 20% can be put towards saving up for a mortgage, IRA, or an emergency fund.
Get out of credit card debt ASAP
If you have credit card debt, it’s best to pay it off as soon as possible. Doing so will help you stop paying excessive interest rates and start using the money saved for your future financial goals. The best way to start is by creating a debt reduction plan that will help you see how much to set aside each month to bring down the balance.
Focus on the credit card with the highest interest rate first if you have multiple cards as conquering it will help you build the momentum to wipe out the debts. You will need a mix of planning and perseverance to reach this goal, and with time this is possible.
Start saving for retirement as early as possible
The sooner you start saving for retirement, the more money you will have available when you retire. Even if you can only set aside a small percentage of your income each month for an IRA or retirement savings account it will slowly build up over time with the magic of compound interest.
Plus, the sooner you save, the more you will have in your retirement fund before you need to spend your money on other important life expenses such as mortgages and family expenses. It will also help build a saving habit that, when it becomes second nature, can help you control your spending.
Pick credit and debit cards that earn you money, or echo your values
Personal finance is also about finding the right financial products that reflect your values. That includes credit cards, debit cards, and savings schemes that help you manage your money according to your principles.
It’s a concept that we at Aspiration understand very well. We’re an ethical online finance platform that helps customers grow their wealth in ways that benefit society. We don’t invest any money in environmentally-destructive fossil fuel companies. Instead, we allow our customers to contribute toward charitable causes such as poverty reduction and medical research.
We offer high-yield savings accounts that give our customers up to 1.00% APY with no hidden fees. We also help our customers buy automatic carbon offsets through our Plant Your Change program, which can be linked to any debit or credit card.
Try Aspiration today to do banking that’s aligned with your values.