What are the Basic Principles of Personal Financing

Managing your money is important. However, without basic personal financing knowledge, you won’t be able to track your spending or save for the future. In addition, you won’t know whether or not you’re overspending based on your income and debts. Thousands of books have been written about personal finance, yet people still struggle with the basic principles that can help you better manage your money. Here are a few of the basic principles of personal finance to help you track your spending, save money for the future, and have better financial habits:

Don’t Spend More Than You Earn

Spending more than you earn means you’re putting yourself in debt. While there are some situations where you must take on debt to pay for large purchases, such as mortgage loans, student loans, and emergency loans, you should never take on debt to pay for necessities unless you truly can’t afford them. 

 

Spending less than you earn means not overspending and can help you start saving. Of course, this is easier said than done if you’re living paycheck to paycheck, so you may have to check your bank accounts to re-evaluate your spending habits. You can also set up a budget and regularly track your spending with professional tax software to ensure you’re not overspending. There are many types of budgeting strategies you can use; the most common is the 50/30/20 rule. With this rule, you spend 50% of your income on essentials like rent, bills, and paying off debts, 30% of your income on items you want, like new shoes or going out to dinner, and put 20% of your monthly income into your savings account. 

Pay Your Bills

While we would all rather avoid our bills, not paying them means incurring fees and penalties. It can also hurt your credit score, affecting your future ability to buy a car or home. Therefore, you should aim to pay your bills in full when they’re due to avoid late fees. In addition, don’t forget to pay your taxes. Forgetting to pay your taxes could leave you in hot water with the IRS, leading to audits and fees. If you’re confused about how taxes work or don’t know how much you owe, you can work with an accountant or use tax software during tax season to help you pay your taxes online. 

Plan for Big Purchases

While sticking to a budget can help improve your financial health, you may need to plan for a large purchase, depending on your needs. Large purchases like buying a house or paying for a wedding mean you’ll have to exceed your regular spending limit and likely take out a loan. If you plan for these large expenses, you can reduce the impact on your financial health. 

 

For example, when buying a house, you’ll need to consider every cost, from the monthly mortgage payment to the down payment, property taxes, insurance, and maintenance. While buying a house is a great financial decision if you can afford it, buying a house you can’t afford will mean having less to save, or it could potentially lead to bankruptcy. 

 

Owning a home doesn’t make sense for everyone, depending on where they live and their current financial situation. Home prices are on the rise, and your income may not be. Therefore, you must determine when the right time to buy is for you based on your unique circumstances. 

Consider Your Saving Habits

If you’re lucky enough to be able to save money every month, you’re already in a good position. However, most bank savings accounts have low APYs that won’t be able to keep up with inflation. So instead, you must invest in a savings strategy that allows you to earn money as you save. A few ways you can earn and save simultaneously include:

 

  • Getting a credit card with cashback: Using a credit card with cashback gives you cash back on all your purchases. Eventually, you could use that cashback to get free items or use them to pay down your credit card bills. 
  • Use a different bank account: Different bank accounts have different benefits. If your bank account charges you fees, consider switching to a bank account that doesn’t. In addition, look for bank accounts with higher interest rates to increase how much you earn every month. You can also try high-yield savings accounts. These accounts are typically provided by online financial institutions but have much higher APYs than any account you’ll find at a bank. 

Invest

Want to make your money work for you? Invest it. The good news about investing is that anyone can do it. We just talked briefly about high-yield savings accounts. These are a type of investment where you park your money in a savings account, allowing it to accrue interest over a few years to help you increase your savings without putting in any additional time at the office. 

You can also consider investing in stocks, bonds, and CDs to grow your wealth. Of course, if you’re new to investing, you may try a robo-advisor or financial advisor who can help you learn the ropes to make great choices when choosing your investments. Remember, what you invest in depends on your risk tolerance. Those with lower risk tolerances can have a conservative investment portfolio with stocks and CDs, while those willing to take on more risk can earn big rewards by investing in cryptocurrency

Have Emergency Savings

You should always be prepared for the unexpected. Things out of your control will continue to happen throughout your life, including job losses, fires, theft, and emergency health problems. If you don’t have the money to cover these surprise expenses, you’ll be forced to take out a loan, putting you further into debt. 

An emergency fund is the best way to prepare for the unexpected by providing you with a buffer. Your emergency fund should have at least three months’ worth of expenses, so you’ll need to check your average monthly spending to come up with the ideal figure. Remember, your emergency savings should be separate from your other types of savings, but it doesn’t have to be in a separate account as long as you’ll remember how much you’re saving toward each goal. 

Be Insured

Everyone needs insurance for various things, including their home, vehicle, and health. For example, if you’re a renter, you should get renter’s insurance to protect you from liability in case someone gets injured in your home. Meanwhile, health insurance can keep you covered if you have to visit a doctor or spend time in the hospital. Since all of these expenses can be high, it’s always best to let insurance cover at least some of your costs to prevent major financial issues in the future. 

Final Thoughts

These are just a few of the basic principles of personal financing. If you struggle to save money, consider consulting a financial advisor who can help you save on your taxes, find the right investment options, and even manage your retirement account. Luckily, most people can take care of their finances independently with proper budgeting. 

 

Ashley Nielsen

Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music. 

 

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