What Is Personal Finance?
Personal finance is the foundation to living a financially secure life. It’s about creating personal financial goals for different stages of your life so you can develop a plan to meet them. A financial plan helps you decide whether to save your money for the future, invest it in assets, or spend it for short-term financial needs.
But having a financial plan isn’t enough – becoming financially secure also requires building spending and saving habits over time.
To achieve financial security, you have to constantly make smart decisions on expenses, living requirements, and the use of your income so you don’t fall into deep debt. If these habits are practiced well, anyone can live a financially free life.
How to Approach Managing Personal Finances
Managing your personal finances may feel like a difficult challenge. But anyone can get their finances in order once they accept that they are worthy of their money, no matter what their income may be. Your financial life can be improved when you take control of your finances.
The best way to start managing your personal finances is to evaluate your net worth. Assess how much money is flowing into your life from your income and investments and how much is being spent on the things that you owe, such as mortgage loans and retirement plans. The balance that remains is your net worth.
Knowing your net worth helps you set short- and long-term financial goals that once achieved, can help you feel safe and secure.
Differences Between Checking, Savings, and Credit Accounts
Most people use bank accounts to manage their wealth as they’re often the safest places to store money. Checking, savings, and credit accounts are three of the most popular types of accounts that people go for, with each serving different needs. It’s important to put your money into the right account type so you get the appropriate tools for managing your money and meeting your financial goals.
A checking account is one of the most liquid bank accounts that allows you to deposit and withdraw money for everyday needs with ease. Customers are given personal checks and a debit card to take out cash or make transfers to other accounts.
Most people have at least one checking account because it allows them to make unlimited withdrawals and deposits, though the amount is often capped at about $2,500. Because checking accounts tend to have lower interest rates than savings accounts, people usually use them to make daily transactions.
Savings accounts allow you to earn interest on deposits that you don’t plan on using anytime soon. Banks generally offer annual percentage yields (APY) of between 0.06% and 1.00% that customers can accrue as compound interest over years. Unlike checking accounts, they do not allow you to write checks. They may also have limits on the number of withdrawals that can be made each month.
Most people use savings accounts to create emergency funds or put aside some of their money for future goals, such as saving up for a mortgage deposit.
A credit card account gives you a line of credit that can be used to make purchases without having to spend your personal deposits upfront. Each time a credit card is used, a credit card balance is accrued which needs to be paid off each month.
People who use credit cards say that it’s safer and more convenient than cash. Credit cards allow them to make major purchases that can be paid back later in installments. They also give customers zero liability, protecting them against theft and fraud.
How Can I Get Started with Investing for the Future?
Stocks are a good investment for growing your wealth. They’re financial assets that increase in value over time and are often kept for decades by long-term investors. To get started with stocks, all you need is an online brokerage account and a minimum deposit that you’ll need to use to start buying shares.
It’s helpful to consider the types of investments you want to make – such as investments in ethical companies – and the level of risk you’re willing to take on when you open your investment account.
For ethical investors interested in companies with environmental, social, and governance (ESG) commitments, Aspiration’s Redwood Fund is a fossil-fuel-free investment option that provides mutual fund investments in sustainable businesses.
With a $10 minimum deposit, customers can begin investing in the Redwood Fund’s sustainable businesses.
How to Choose the Right Bank
Choosing a bank is one of the most important financial decisions you’ll make. Different banks have different fee structures, interest rates, financial products, and perks, which can determine how well you’re able to grow your wealth.
Determine Your Needs
To choose the right bank that works for you, make sure that your personal needs are a top priority. Determine whether you’re interested in saving more money, having access to local brick-and-mortar branches, or using robust mobile banking options, among other considerations.
Knowing what your priorities are will help you find a bank with the right fees, interest rates, and services that you can use years into the future.
Find Out What Services Each Bank Offers
After you’ve determined the qualities that you want in a bank, choose a bank that meets most, if not all, of your needs. A bank that satisfies your needs is likely to become your trusted banking partner, and one that you can build a close relationship with for processing loans and making financial investments.
Most customers these days choose banks that offer free 24/7 online banking services through mobile applications. Others look for accounts that pay high APYs on deposits. When choosing a bank, it’s also important to select one that is Federal Deposit Insurance Corporation (FDIC)-insured, so that your deposits are protected against financial crises.
Consider Interest Rates
Interest rates should be one of the most important offers to look for in a new bank. That’s because the higher the interest rate given, the more money you’ll earn over time. Your savings account interest may compound daily, monthly, quarterly, or annually depending on the bank’s policy.
For high-yield savings accounts, try our Aspiration Plus account that offers customers 1.00% APY on their savings deposits. For a small fee each month, customers can earn a high APY as well as other perks such as 10% cashback on socially conscious purchases and automatic carbon offsets.
Research Bank Fees
In addition to interest rates, you should also look out for bank fees, which differ from bank to bank. Almost every bank account charges fees for certain types of transactions and services, such as monthly maintenance, so knowing what fees a bank charges can help you determine how much you’re willing to pay for that bank’s products and services.
Several major banks charge high fees because it’s one of their most lucrative income streams. Research by the Federal Financial Institutions Examination Council found that JPMorgan made $1.9 billion from overdraft charges in 2016 while Wells Fargo made $1.8 billion. At Aspiration, we charge no ATM fees, overdraft fees, deposit fees, or debit card fees to ensure that our customers can easily grow their wealth.
Determine How Accessible the Bank Is
In recent years, banks across America have shut down a good number of their brick-and-mortar locations and ATMs due to losses from COVID-19 and weak economic growth. These developments, plus the rise of tech-savvy millennials in the workforce, have led banks to offer more of their products and services online and through mobile applications.
When choosing a bank, determine what options they provide you with for accessing your money. Aspiration offers customers fee-free withdrawals at more than 55,000 Allpoint ATMs nationwide as well as quick-and-easy mobile banking services.
Understand the Bank’s History and Values
Most importantly, find a bank that aligns with your values and has a commitment to do good. You’re much more likely to stay with a bank (and be one of their happy customers) if it has partnerships with businesses you support and funds causes that you care about.
The best way to understand a bank’s values is to read up on its history and mission statement. Look for environmental, social, and governance (ESG) commitments it has made as these factors will influence how your deposits are redeployed as investments.
Aspiration, for one, puts the health of the planet at the heart of our operations. We aim to do good by providing funding to programs that expand economic opportunities for struggling Americans, and also to environmental conservation projects across the planet.
How Do Banks Make Money?
Banks make money by redeploying customers’ deposits as loans and charging interest to borrowers. While banks pay interest on savings deposits, usually between 0.06% and 1.00%, to customers, the interest they charge on loans is usually upwards of 5.00%. The difference made on these interest payments is the bank’s profit.
Banks may also make money by charging fees on different services. These range from account fees such as monthly maintenance charges to penalty fees like overdraft fees and non-sufficient funds (NSF) charges. Some banks may also charge ATM withdrawal fees when customers withdraw cash at an out-of-network ATM.
Are Banks Ethical Institutions?
Recent bank scandals have called into question the state of ethical banking in America. In 2016, Wells Fargo was fined $185 million for creating millions of credit card, checking, and savings accounts using customers’ identities without their consent.
While in 2018, U.S. Bank was charged with two felony violations for concealing suspicious accounts from regulators.
To many industry analysts, these scandals are caused by the banks’ ruthless pursuit of profit. Customers become little more than tools to generate more revenue.
But for ethical financial institutions like Aspiration, we always put our customers first because it’s our mission to help them make positive changes with their money. We don’t invest in any fossil fuel companies, weapons manufacturers, or private prisons as they do damage to society.
Does It Matter Which Bank I Choose?
The bank you choose matters a lot because the services it provides will determine how well you’re able to grow your wealth.
Banks that offer high APYs will allow you to accrue compound interest decades into the future while those that provide special perks such as cash back rewards help you earn a little bit of money when you go shopping.
It’s best to choose a bank that gives you high interest rates and charges you low fees. It may also be good to select a bank based on the variety of financial products they offer that may become useful to you in the future, such as the availability of home loans, insurance, and retirement planning services.
Is It Possible to Switch Banks?
Switching banks is simple and easy. Once you’ve found a bank to switch to, you’ll just need to open a new account with them using a government-issued photo ID, your Social Security number, and some basic personal information and documents.
When that’s done, you can transfer your money from your existing account to the new account using an online bank transfer or a check.
Switching to Aspiration is even easier. We only ask for a $10 minimum deposit, your email, and your Social Security number to get started with us.
How to Manage Your Money: Tips to be More Fiscally Responsible
Being responsible with your money is the best way to meet your lifestyle goals, especially as financial decisions made today have an impact on your future. Here are some tips to help you start building responsible saving and spending habits.
Assess Your Current Financial Situation
Before you create any budgets or financial plans, you need to first assess where you stand financially. Knowing your current financial situation will help you craft a plan with achievable milestones.
The simplest way to audit your personal finances and debt is to list them all down in a spreadsheet or a ledger. Enter all the assets you own, including the money in your bank accounts and any real estate or cars that you have. Then do the same for debt that you owe, such as student loans, credit card debt, and upcoming mortgage payments. Subtract the total debt from your total assets and the balance that you get is your net worth.
Define Your Financial Goals
Once you have a good idea of your net worth, you can move on to defining your financial goals. Think about upcoming life milestones and what short- and long-term financial goals would be necessary to meet them confidently. Your short-term goals should be relatively easy to achieve and give you the momentum to continue saving and investing to meet your long-term goals.
Create goals using the SMART (Specific, Measurable, Achievable, Realistic, and Time-based) principle to make them clear and easy-to-follow. SMART goals can help prevent you from feeling overwhelmed by your financial responsibility project.
Evaluate Your Current Bank
You may want to reevaluate your bank to see if it offers the products and services that will help you achieve your new goals. Perhaps you’re earning low interest from your current savings account that’s making your short-term financial goals take longer to achieve.
Or your bank might already be the best match for you with its low fees and mobile banking services.
Understanding the pros and cons of your current bank will help you determine whether it’s still the right partner on your financial journey. Try to look out for FDIC protection on your deposits and research any complaints other customers might have with your bank – you definitely want to have an ethical banking partner who will protect your money years into the future.
Budgeting ensures that you don’t spend more than the means at your disposal. It also helps you track your most common expenses so you can see which areas of your spending you might be able to cut back on for other purposes.
Living on a budget can help you work your way out of debt, build financial confidence, and most importantly, achieve your financial goals. Most people create budgets by setting spending limits on entertainment, groceries, transportation, living expenses, and utilities.
Find Ways to Cut Spending & Save
Most of us may be spending money on unnecessary expenses without realizing it. Restaurant meals, impulse buys from Amazon, and monthly gym memberships that you barely use – these are all examples of expenses that can be limited to help you set aside more money for your savings.
From the net worth and budgeting exercises, identify expenses that could be substituted with cheaper options to help you cut back on spending. For example, reduce restaurant meals and start cooking more at home. If you have difficulty doing this, try to ask yourself if the items or services you’re spending money on things that bring you value or enjoyment. If it doesn’t, then it might be time to eliminate it from your budget.
Plan with the Future In Mind
As most of us will know, the future is very unpredictable. An economic crisis could be looming without our knowledge or another pandemic could change life as we know it. There are too many uncertainties in life to always be constantly worried about them, but with good investing, budgeting, and goal-setting habits, we can prepare for the worst as best as we can.
With good financial planning, we can protect our money until when we need it most. Setting budgets and goals can help build up our wealth over time while a diversified portfolio of investments can protect us against financial shocks.
Can I Trust a Bank to Manage My Money?
Despite the bank scandals that hit the press every once in a while, most banks are indeed trustworthy. They have anti-fraud systems in place as well as digital security infrastructure to keep your money safe from thieves. Also, nearly all banks are FDIC insured, meaning that up to $250,000 of a customer’s money in depository accounts, such as checking and savings accounts, are protected from bank failures.
The federal government ensures that in the case of a bank failure, it will replace any money that the bank loses using money backed by the U.S. Treasury. This process is expected to take about a day, though delays could potentially occur.
Should I Get a Loan? Type of Loans Banks Offer
Loans are borrowed money that people take out to make expensive purchases, consolidate high-interest debt, or finance emergency expenses. They usually have lower interest rates than credit cards, and don’t require collateral to receive.
If you’re looking to make a major financial decision that requires a large amount of money, a loan could be a good option for you.
A personal loan is a sum of money that you can borrow from a bank, credit union, or online lender for almost any purpose. Also called an unsecured loan, you usually don’t need to show collateral when securing a personal loan, making it one of the easiest loans to get.
The loan amount you qualify for is calculated using your credit history and income.
Most people use personal loans to make expensive home repairs, plan weddings, and buy expensive personal items. Though easy to receive, loans need to be repaid over time, usually with interest. Failure to repay the loan could result in penalties, fees, and a reduction in your credit score.
Student loans are usually considered “good debt” in that they allow you to invest in your education, which can help you generate higher income over the course of your life. They come in two types: federal and private. Both cover tuition fees, living expenses, books, and other supplies during college.
Although borrowers have to pay interest and fees on student loans, they can be paid back over a long period of time and help borrowers improve their credit score.
A mortgage is a type of loan that helps you buy a home or a piece of property. Most borrowers receive mortgage loans that are about 80% of the property’s value, though it’s possible to take out loans that cover the entire cost of the property.
When you secure a mortgage loan, you have possession of the property or the home but you don’t legally own it until you have completely paid off the loan. In case you default on the loan, the lender (usually the bank or the mortgage lender) will have the right to have a legal claim against the property.
Home Equity Loans
In addition to a mortgage, homeowners can also get a home equity loan, which uses their home’s equity as collateral. The loan amount is usually determined by the difference between the home’s current market value and the remaining balance on the existing mortgage loan.
Home equity loans can be used to cover home expenses, business investments, and even college costs. They offer very favorable interest rates and have to be repaid with equal monthly payments over a fixed amount of time.
Other Possible Loans from Banks
Besides the loans mentioned above, you can get a variety of other loans to meet your personal needs.
For people looking to buy cars, auto loans can help make purchases affordable by breaking up payments into monthly payments. Most auto loans have interest rates between 4% and 8% and can be paid back within a period of three to five years.
For others looking to start a small business, a small business loan from a local lender or the Small Business Administration (SBA) can be the cash injection you need to launch your business idea. A formal business plan and your personal assets have to be submitted for review before a small business loan can be approved.
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