Spend any amount of time on the topic of personal finance and you’ll come across hundreds – if not thousands – of different pieces of advice when it comes to this topic. Weaving through all of these tips can make it seem like this whole industry is massive, complicated, and overwhelming. The reality is that many people hype up the size of industry drastically.
Don’t get it wrong, getting rich and enjoying the personal finance system you built is challenging. All that said, if you are jumping into personal finance for the first time, a lot of the basics and foundational information can be summarized into 12 quick and easy tips.
That said, if you’re not doing these things already, developing the habits that can surely help you achieve success is what will be the challenging part.
And we strongly encourage you to implement these into your life. Simply reading them and sitting on them will not help you at all. You should put effort to make these a reality if your goal is to have more money in the end.
Spend Less Than What You Make
This is the basics of the basics: make sure that what you are bringing in is more than what’s going out. It makes perfect sense. It’s so obvious. And yet we have to bring this up as many people are living paycheck to paycheck. According to CNBC, in 2017, 78% of Americans are in this situation.
And we can imagine it’s only gotten worse.
The thing is people know they should be doing this, and yet it’s surprisingly difficult to do. There are so many external factors at work that many people struggle to find a way out. While there’s some that are out of control completely – such as currentpandemic – but beyond that, we have other things we can control.
The biggest way to do this is to keep track of how much you’re spending. Either you can keep track of all this in a spreadsheet or use one of the many free personal finance apps around.
Budgeting does sound like a cringy word along with accounting, but it can be really fun. Furthermore, it’s not a complicated thing to do.
Budgeting, in the simplest of terms, is formulating a plan for your money, so you know what money is coming in and what’s coming out and in what way.
With this in mind, it doesn’t always mean that you’re doing less of what you enjoy. Instead it’s coming up with a more dedicated plan to where your money really ought to go. For example, one of the most popular methods of budgeting is the 50/20/30 rule:
- 50% goes to all your necessities (bills, food, housing, etc.)
- 20% goes to your savings
- 30% can be spent on whatever you want.
This is a nice and easy way to break down your paycheck, though this may require you to make some shifts in your lifestyle regardless.
Divide Income & Expenses
This is an unusual tip, however it can change your perspective drastically when it comes to your money. Overall, this will improve your budgeting capabilities too.
The premise of this idea is to break down both your income and expenses down into daily values. For example, say over the course of the month you make $2,500. That comes down to $83 per day. And let’s say that you pay rent and car insurance too which comes to $800 a month ($27 per day) and $200 a month ($7 a day).
After calculating all of your other expenses (which we’ll assume for this example are $750 a month or $25 a day),the amount of money you’re left with is $24 per day.
That final amount can put a lot of things into perspective for you. For example, after this current pandemic is over, you really want to be travelling. You go and look for plane tickets, a nice hotel, and a few things to do and determine that it’ll cost about $1,000 for the whole thing.
Based on how much extra money that you have after your expenses ($24 per day), you’ll need to save up for the next 42 days in order to pay for this vacation. That’s almost a month and a half of you not spending anything extra beyond survival needs.
Thinking of purchasing a car for $10,000? That’ll cost you about 416 days worth of your spending money to pay for that.
Our time is money and this puts into perspective how much time we need to put into something in order to pay for it. This allows you to put into perspective whether something is truly worth it or not.
Pay Yourself First
Another famous personal finance tip is to always pay yourself first. It might make sense if you’re self employed and running your own business, but this also applies to those doing the 9-to-5 work too. The whole idea with paying yourself first is putting that money into investing.
Investing into your own future.
By investing now, you’re investing into your future you, and future you will thank present you for doing something like this.
But if you’re investing already why not do this at the end of the month? That’s so much easier, right?
Unless you get monthly paychecks, chances are you’ll spend that money as soon as it’s available. Come the end of the month, you may not have any money at all to invest into your future.
However, if you put that money immediately into a savings account or investing account, you’re not going to be all that interested in taking it out. Think about it. When was the last time you paid for something or withdrew money from your savings account? Not once? Thought so.
Another note to this is that if you can’t be bothered to put money into your savings account – or you’re forgetful – you can always set up automatic deposits through your bank online.
Finance goals are incredibly important. If you don’t have a goal, you’re not going to be interested as much in saving. Since when is someone compelled to do something for absolutely no reason?
It doesn’t happen. There is always some reason.
Now just because you’re setting a goal doesn’t mean it needs to be outrageous or out there. If this is the first time you’ve set a goal, make sure you start off with something small and go from there.
Our suggestion is to come up with a goal in each of the following categories:
- A goal that’ll take you 3 months to achieve.
- One that you want to achieve by the next year.
- And one that’ll take you five years to achieve.
Have these particular goals and feeding them off of one another can give you a natural sense of progression. Not only that, but they can serve as milestones for yourself. We’d also encourage you to have personal reasons to pursue these. You want to be answering the question “Why?”
Why do these goals matter to you?
Answer them for yourself and make the reason good.
Credit Cards Were Never Free Money
There is a saying in economics that goes like this:
“There is no such thing as a free lunch.”
The idea is to cover the concept of opportunity costs, but this can be applied broadly as well. There is no such thing as free money.
Understanding this is so important as people naturally feel compelled to whip out their credit card and pay for anything they want. That or take out a loan for that house or car. These days it’s so easy to borrow millions of dollars, however you won’t feel like a millionaire as a result.
Debt – especially credit card debt – is ruthless and it can be a nightmare if you don’t handle it every month.
Not only is paying off your balance every month good for your credit score, there are other incentives as well. Most credit cards offer various benefits like travel points, cash back, or reward points.
If you’re able to pay off your balance every month, do that rather than take the “recommended payment” option. Better yet, treat your credit card like a debit card. Use it and when you come back home, pay off the balance immediately.
Avoid Bad Debt But Use The Good Debt
As you know, debt is money that’s owed to someone. But what exactly is the bad debt? Well, bad debt is a debt that’ll lose its value or generate zero revenue for the company that’s chasing the debtor.
Examples of bad debt would be the accrued debt from auto loans or credit card debt.
All that being said, we would encourage people to get into the good debt instead.
While some would say there is nothing good about debt at all – and we’d agree with that – not everyone goes into debt for bad reasons.
For example, many people take out loans from the government to go to school or build a business or pay partially for a home. Student loans, business debt, and mortgages are all forms of good debt, as these provide big benefits to you for the future.
Have An Emergency Fund
An emergency fund is precisely what it sounds like. It’s a fund that you should only tap into in cases of emergency. Emergencies being things like you’ve lost your job and you need to find a new one. It’s not an emergency if you really want to get that new boat that’s on sale, but it’ll take you a few months of work to pay for it.
That aside, we know that an emergency fund is a challenging thing for people. One study in 2017 found that while Americans were better at saving money, about 57 million people didn’t have any money saved up for cases of emergency.
That number is quite large now considering those facing evictions and millions are claiming for financial relief.
And the current situation really shows that emergencies can happen at any time and that people should be prepared in case something like this happens. Mind you, that the situation we are facing right now was something that no one in America or the world could prepare for, but there are less severe emergencies out there such as sudden job loss or even divorce.
In terms of the future, you want to ensure that your emergency fund should be big enough to cover living expenses for 3 to 6 months. That means if something big and bad happens (like a large medical bill, natural disaster, home repairs, etc.) you have enough of a cushion to survive for that period of time.
Be Aware Of Your Net Worth
Net worth sounds complicated, but it’s a simple concept to understand. Essentially, your net worth is how much money you are worth in the eyes of a financial institution. To calculate your net worth you follow a simple formula:
The financial value of everything that you own – the amount of money that you owe to others = net worth.
Another way to look at this is all your assets minus all liabilities.
But where do you even begin in all this? Well, here is a breakdown of everything.
First, assemble your assets. Assets are any money in your bank account(s) (both checking and savings), investments, real estate, cars, jewelry, and anything that you’ve purchased. Total that amount.
Next is liabilities. For most people these are all the loans that you owe. From credit card debt to auto and student loans.
After that, you total it.
At the end you’ll have either a positive or negative number and you can use this number to determine what sort of planning you should be moving torward.
If it’s positive, then what you’ve been doing has been helping. All you need to do is keep working on growing it.
If it’s negative, you’ll need to look at your own situation. For example, if it’s only been a few years since you graduated college, you’re going to have a massive student loan that’ll take a while to pay off. In those situations, you shouldn’t worry so much, compared to those whose main source of debt is, say, in the credit card column. Aside from those unique situations, it’s smart for you to look at your budget and formulate a plan to build it into the green positive area.
Invest, Invest, Invest
Not necessarily investing in yourself, but rather investing in stocks. While stocks are definitely complicated things with a lot of moving parts, there are several ways to make it easy for you to handle.
Either way you should be investing, since hoarding all of your money in a savings account isn’t the best strategy for financial prosperity. Why? Because money in savings loses value over time.
Most savings accounts provide very little yield every year. Often below the inflation rate. What this means is that each year, money in there has less purchasing power no matter how much you put into your savings.
While having some money in savings is good, your whole strategy shouldn’t be around that one thing. You should be looking to invest in other areas. Some examples are:
- Real estate
- Peer-to-peer lending
- Exchange traded funds
- Index funds
- Or even cryptocurrency – if you’re feeling lucky.
Speak To Your Partner About All This
Partner usually applies to anyone involved in a romantic relationship. This tip doesn’t only apply to married couples though, as money fights can affect many relationships.
And the best way to avoid these fights is to talk to them about it. This is crucial as even if you may have separate bank accounts, you’re still a team in all this. Make a point of talking about your financial goals, plan a day where the two of you review budgets and finances together.
As dull as this can be, it can be thrilling and exciting. Most importantly – this gives you a reason to stick to your goals. After all, if your partner knows, they’re going to be invested in your success as much as you are invested in theirs.
Look For Alternative Income Streams
One thing that the curent times have really enforced is how bad a single income stream can be. Sure, everyone’s life situations are different, however, time and again, many people rely on one income stream only to be kicked to the ground once something happens to impact that one stream.
There are many ways for you to handle this. One of the most obvious ones is having a side hustle. New businesses are formed every day and it’s surprisingly easy for you to build a side hustle of your own. Even when there are dozens of other people doing the exact same thing as you.
What’s different is that there is no one else who can do that job like you do. No one can copy your methods precisely other than you.
With this in mind, we would encourage you to look into a side hustle. There are many things you can do with little to no start-up cost or upkeep costs either. One of the biggest ones is writing articles or even publishing a book and selling them through Amazon.
The beauty about side hustles is also the great income potential. The amount of money you make is virtually limitless. There isn’t a specific cap and for those who are already working, you can consider this as a bonus income you otherwise wouldn’t have had.
What’s also nice is the more that you feed into this side hustle, the more it’ll grow and earn you over time.
Apply These Tips And You’ll Find Success
As simple as these tips seem to be, we know that these can take a lot of time and energy. These are big challenges to keep up, however they can pave a road to your financial success later down the road.
As we’ve mentioned at the beginning, do spend some time considering these things and implementing them as soon as possible. It’s so easy for people to read these and then put them off until next month, year, decade or forget about them entirely. Act now as these particular tips will only benefit you.