What Is Personal Finance: First Steps Towards Your Financial Goals

Every individual dreams of not having to worry about money. The journey there may not be simple, but it is possible with the knowledge and consistency required to get there. Making informed financial decisions, maintaining healthy financial habits, and understanding your financial picture are all aspects to personal finance, which is the foundation which financial freedom is built on. For all this to happen, one needs to learn the basics for personal finance.

What is Personal Finance?

• Personal finance can be defined as the financial management and activity taken on by an individual or family. 
• Personal finance encompasses the various aspects of the individual's income, spending, saving, investing, risk and debt management.
• The activity within personal finance can typically be associated with some sort of financial goal such as saving $1,000.00 or paying down debt. Financial goals are crucial to forming habits which may eventually lead to financial well-being.

Personal Finance Areas of Focus

Income

• Individuals can have many forms of income, from a full time job (salary), or owning a business (self-employed) or even collecting benefits (beneficiary) 
• Regardless of how many incomes an individual has, it must be managed in that you should not spend more money (expenses) than what you make (income), made famous by Dave Ramsey. 
• People can typically track these incomes and expenses in a personal budget, utilizing tools such as Excel or softwares such as YNAB. 
• If your goal is to have more money, you can either increase your income, or decrease your spending. To increase your income some people turn to side hustles, gig work, and creating more than one source of income.

Spending

• Personal finance can bucket spending into wants versus needs, meaning is the expense necessary for your health, or is the expense more of a nice to have?
• It is important to track expenses to get an understanding of where your money is going; this way individuals can make financial decisions of where to cut and expect to see the results. 
• A spending plan can begin with an individual looking back three to six months, categorizing where their money is being spent into groups such as food, rent, entertainment (among others) and total how much they have spent month over month. While this may be uncomfortable this would be a great first step to understanding where to cut and forming habits around monitoring your spending.

Saving

• There are many types of savings accounts, from traditional to high interest savings. Selecting the right account type will depend on the individual's goals.
• Savings is necessary in a complete and well rounded personal financial plan. They allow individuals to absorb unforeseen costs such as medical expenses and maintain their current level of financial stability. 
• A rule of thumb is to have six months of expenses in your personal savings as a safety net. If this seems near impossible, start small, start by following your budget, and even use tools such as Acorn, which will round up your expenses and automatically add the difference to a savings account.

Investing

• Investments are often thought of as stocks and bonds, however any asset that retains value and can be sold for a higher price is considered an asset. 
• Anyone can invest, there typically are not minimums required to begin in simple stock and exchange fund investments.
• When you’re ready to get investing it's best to create an investment plan which aligns with your personal financial goals. If you are unsure exactly how to get started, contact the broker you’re working with to invest and they may have resources available.  

Insurance 

• Part of personal finance may be considering protecting your wealth. Insurance is a popular vehicle people use to achieve just that. 
• There are many policies such as umbrella policies, which will cover damages over your other existing policies, and business insurances to protect owners from damages caused by the business. Speak to your insurance professional to understand what policies can protect the assets you have in mind.
• Insurances can be expensive and often people find the best way to save is to utilize one or a few companies for all their policies, bundling within those agencies to save.

Interest and debt

• Debt is the amount of money an individual owes to a lends. These are often thought of as auto loans, personal loans, mortgages, and credit cards. 
• Debt is unique in that it has interest tied to it. Calculated typically based on the amount of debt you have, you could be paying interest fees on top of repaying your debt. These fees can add up and sometimes lead to an overwhelming situation to get out of. 
• A great debt plan will understand the current debt picture and understand which debt is the most expensive (highest interest). Based on your budget from here you can plan to pay off your debts in a manner that makes the most financial sense.

Retirement

• A retirement plan encompasses the retirement instruments you have in place, a forecast of when you expect to retire, and the amount of money you will have on that date. 
• There are many types of retirement accounts, typically people will utilize a traditional 401k, which taxes money on withdrawals, and ROTH IRAs, which tax money prior to investing. Speak to your financial advisor to understand which account may work best for your scenario. 
• Retirement is critical to continuing your financial well-being in your later years where your income may decrease due to no longer working. 
• If you qualify, Social Security benefits may act as a supplement to your retirement, providing monthly income from the government, in return for paying into the benefit during your working years. 
• There are maximums you can put into retirement each year, a good rule of thumb is to maximize your retirement if possible to reap the tax benefits and grow your investments over longer periods of time. Brokerages like Fidelity, Etrade, and Charles Schwab offer apps and resources to manage your retirement. You can also check out retirement planning for women.

Taxes

• Taxes exist at the federal level in the United States, and at times at the state and local city level. Taxes affect each individual and their plans uniquely so it is important to pay attention to them. 
• The government offers credit and deductions to individuals to reduce the amount of taxes paid. Examples of deductions include medical deductions, charity, and self-employment, these need to be incurred expenses to qualify. 
• Credits are more incentives in nature from the government to reduce tax burdens including items like child care, and electric vehicle credits. Check with your tax professional to understand further how to fully utilize these benefits.
• Investments and retirement accounts can also impact your tax picture. For example if you take a loss on an investment, you are allowed to deduct a certain amount from your taxable income. Similarly money invested into retirement may also reduce your taxable income. 
• Reducing your taxes is one of the biggest expense items most individuals have that can reduce your overall expenses. Start by understanding your tax picture and determine if any deductions or credits fit your situation. As always, when in doubt, consult with your tax professional.

Housing

• Housing is often an expensive line item in a person's life, whether a mortgage, property taxes, rent due, or short term rental fees.
• Costs associated with owning or renting vary widely. While sometimes a mortgage can be cheaper than renting at face value, owning a home comes with maintaining the home, property taxes, and sometimes homeowners association fees. 
• There are tax benefits to owning a home. Interest from your mortgage is deductible, and can be a great tool to lowering your tax burden. 
• Home ownership can also be an investment, renting a home you own to others can provide income, tax benefits, and write offs associated with maintaining the home. 
• To reduce your housing costs you can shop for cheaper rents, or consider refinancing your mortgage to a lower interest rate.

Paying for College/Higher Education

• Paying for higher education can stress a family's finances. If you have not planned for the large cost of college it may be a surprise how expensive it becomes and at a rapid pace. 
• Luckily there are options for attending higher educations such as student loans and 529 plans
• Student loans come in a variety of instruments, from standardized loans, subsidized loans from the government, or private loans. Choosing the right one depends on your financial situation. 
• On the other hand, repayments of student loans come in many forms from income based, extended periods of 25 to 30 years, or paying in full. 
• There are tax benefits for repaying student loans, interest from your loans can be deductible. 
• Reducing college costs can take many flavors, from starting with a community college and transferring, shopping for used books for your courses, to living with roommates to reduce dorming costs.

Car Expenses

• Car expenses can add up quickly, from light maintenance like oil changes, to major malfunctions like a transmission. Which car you own and its condition are huge factors that play into this expense.
• Gas or electricity consumption, wiper blades, insurance, driving history, tires, and oil are all examples of the auxiliary costs that come with car ownership.
• To reduce your car expense buy a reliable low maintenance car, such as a Toyota Camry. Alternatively consider leasing instead of buying to shift these costs to the dealer.

Why is Personal Finance important?

• There are many long-term benefits of personal finance management. The key is to form habits early that give you the insights into your personal finances, which over time will mature in complexity and leave you financially literate and prepared. 
• The impact of personal finance has a great correlation to financial well-being. The more you manage your personal finances and achieve your financial goals, the more financially well you will be. Over time this effect compounds. 
• With financial well being comes the ultimate financial security, where finances and your financial position are a byproduct of your attitude and savvy financial decisions.

The Finance Planning Process

• A spending plan can begin with an individual looking back three to six months, categorizing where their money is being spent into groups such as food, rent, entertainment (among others) and total how much they have spent month over month. 
• Once you have your financial history understood, forecast what amounts you’d like to spend in each category; this is budgeting. You can also set goals in your budget such as move $100.00 to your savings, or decrease your total spend by 20%.
• To make ease of this process you can leverage technology such as Quicken, YNAB, or Mint. These apps or computer programs can automate the process and even provide tips to continue progress.

Personal Budget Plan – Example

• Below is an example of a personal budget plan. These can be fully customized to as detailed or high level as fits your needs in terms of categories used.

• As a starting point you can check out this free budget template 
• Try setting reminders, alarms, or block time in your day to update your budget; consistency is the key when it comes to budgeting

Tips on Better Financial Management

There are a few tips we can offer when it comes to financial management. Of course these will not work for everyone, but serve as a starting point:

• Always start with creating and sticking to a budge
• Monitor your credit score
• Focus; give this financial journey the time and effort it requires
• Awareness of when you slip up, and recognize its part of the learning process
• Control of emotional reactions - behavioral finance impacts how we think about finances; a psychological school of thought lead by Dan Ariely
• Make the hard decisions that satisfy your budget but may not be optimal; made famous by Herbert A. Simon “satisficing”.
• Try devoting part of the income for saving and for investments

The more you educate and exercise financial management, the longer your list of tips and rules will grow custom to your needs.

How to Educate Yourself in Personal Finance

• Ask family or friends openly about how they manage their finances
• Start reading your financial statements from banks or brokerages, and understand what they are describing
• Read some books, a good read might be “Economics of Household Production” by Margaret G. Reid.
• Use personal finance management tools and apps such as mint, quicken, or SoFi; among others
• Subscribe to daily newsletters to keep you up to date, such as morning brew

Final Word

There are many aspects to personal finance; from understanding the language to putting it into action, and decisioning on those insights. This is a practice that takes time, and discipline, but pays dividends over an individual's lifespan. Understanding costs, understanding the process to start, and sticking to the plan you have set for yourself are all foundations you can build on. Start small, take the first step of understanding your current state and get an idea of where you want to be. Using the tricks and tips in this article, and building on those methods will be sure to improve your personal finance management