Despite how important money is in life, personal finance know-how - or "financial literacy" - is not typically taught in schools, or necessarily by parents. Unfortunately, a lack of financial knowledge - and, as a result, planning - has led to many young adults racking up credit card debt, living paycheck to paycheck, and not saving enough for retirement.
The good news is that many money issues can be solved just by getting back to personal finance basics - the basics you likely never learned in high school, like how to set up a budget or the best way to knock down debt.
Gaining financial literacy can help more than just your wallet. A 2021 study by the Financial Industry Regulatory Authority (FINRA) found that people who were able to answer three questions that measured basic financial literacy correctly were significantly less likely to feel financially stressed or anxious.
Here are 10 personal finance basics that can help you become more organized with your money, feel less financially stressed, and achieve your goals.
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Personal finance is a term that involves managing your money and planning for your future. It encompasses spending, saving, investing, insurance, mortgages, banking, taxes and retirement planning.
Personal finance is also about reaching personal financial goals, whether that's having enough for short-term wants like going on a vacation or buying a car, or for the longer term, like saving enough for your child's college education and retirement.
Budgeting and learning how to balance your bank account can be key to making sure what's going out of your account each month isn't exceeding what's coming in. Winging it - and simply hoping it all works out at the end of the month - can lead to bank fees and credit card debt, and keep you from achieving your savings goals.
You can get a quick handle on your finances by going through your statements for the past several months and making a list of your average monthly income (after taxes), as well as your average monthly spending.
It can be helpful to break spending down into categories that include basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, Netflix). To get a real handle on where your money is going every day, you may want to track your spending for a month or so, either with a diary or an app on your phone.
Once you know everything that typically comes in and goes each month, you can see if you're going backward, staying even, or ideally, getting ahead by putting money into savings each month.
If you aren't living within your means, or you'd like to free up more cash for saving, a good first step is to go through your budget and look for ways to cut back discretionary spending. Can you cook more instead of going out? Buy less clothing? Cut out cable? Quit the gym and work out at home?
You can also consider ways to bring in more income, such as asking for a raise or starting a side hustle from home.
You can't predict when your car will break down or when you'll have to make an emergency trip to the dentist. If you don't have money saved up for what life throws at you, you can risk racking up high-interest credit card debt or defaulting on your bills.
To avoid this, you may want to start putting some money aside every month to build an emergency fund. A common rule of thumb is to keep three to six months of basic living expenses set aside in a separate savings account.
It can be a good idea to choose an account where the money can earn interest, but you can easily access it if you need it. Good options include a high-yield savings account, online savings account or cash management account.
When you have a credit card at your disposal, it can be tempting to charge more than you can afford. But carrying a balance from month to month makes those purchases considerably more expensive than they started. The reason is that credit cards have some of the highest interest rates out there, often over 16%. That means a small charge carried over several months can quickly balloon into a much larger sum. The same is true for other high-interest debt, such as some private or payday loans.
If you already have high-interest debt, however, you don't need to panic. There are ways to pay off that debt.
The avalanche method, for example, requires paying the minimums to all your creditors and putting any extra money toward the debt with the highest interest rate first. Once that's paid off, the borrower puts their extra cash toward the debt with the next highest rate, and so on.
If you miss bill payments or make late payments, your creditors might impose late payment penalties. If you delay payment for a prolonged period, your account could go into delinquency or be sent to collections.
Late payments can also affect your credit score - the number lenders use to help judge whether to give you loans and credit. Your payment history accounts for 35% of your credit score, so a history of late and missed bill payments can be a major strike against your score. A poor credit score can make it difficult for you to get loans, and the loans you do get are likely to have higher interest rates.
To make sure you never miss a due date, it can be helpful to make a list of your bills and their due dates, set up auto payments when possible, and sign up for reminders.
When you're young, retirement can feel far away. But putting money away as early as possible means you'll have more years to save, spreading the savings across your life rather than racing to catch up.
Perhaps the biggest reason to start as early as you can, however, is the power of compound interest. Because you earn interest not only on your contributions but also on accumulated interest, small amounts can grow over time. If you have an employer-sponsored plan, such as a 401(k), you may want to consider contributing, especially if your employer offers to match your contributions.
Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA as well.
Saving for retirement may not be enough for you to have what you need to live comfortably after you stop working. Plus, there may be things you want to be able to afford later in life, but before you reach retirement age. If you have children, for example, you may want to start a 529 plan to help you invest for their college educations.
For other long-term savings goals, you may want to invest additional money, keeping in mind that all investments have some level of risk and the market is volatile, meaning it moves up and down over time.
To get started with investing, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundles different types of investments together), or, if you're prepared to do a fair amount of research, pick and choose your own stocks and bonds.
When it comes to insurance, sometimes it's best to prepare for the worst. That means making sure you have health insurance and car insurance (which is required by law). You also may want to consider renters or homeowners insurance to protect your home and belongings.
If you have children or other people who are dependent on you financially, it can be a good idea to get long-term disability insurance and term life insurance. Many people can purchase health and disability insurance through their employers. If you don't have that option, it's possible to go through an insurance agent, broker or the insurance company directly.
If you have a decent credit score, you can look into getting a credit card with rewards that may give you travel miles or cashback on your purchases. If travel is your priority, you may want to look for a flexible travel rewards credit card, meaning their rewards can be applied to many different airlines and hotels.
You may want to look for a card that not only offers rewards but also offers a nice signup bonus for spending a certain amount within the first few months. One with no annual fee would be ideal, too.
Whichever card you pick, it's a good idea to familiarize yourself with its rewards program: the value of its rewards units (points, miles or cashback), how to redeem them, whether your rewards expire, and any minimum redemption amounts.
You may also want to keep in mind that credit card interest rates are typically a lot higher than credit card rewards rates. So, to avoid seeing your earnings swallowed up by finance charges, it can be wise to make sure to pay your full statement balance by the due date every month.
You can request a credit report for free from the three main credit reporting agencies - Equifax, Experian, and TransUnion - at AnnualCreditReport.com. In the past, you could only do this once a year, but due to the COVID-19 pandemic, the three credit agencies are now offering free weekly credit report checks.
It can be a good idea to periodically order a copy of your report and then scan it for any errors or signs of fraudulent activity. If you see anything that isn't right, it's wise to contact the credit reporting agency or the account provider as soon as possible and file a formal dispute if needed.
Checking your report can help you spot - and quickly address - identify theft. It can also help you make sure there aren't any errors on the report that could negatively affect your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you'll likely need a solid credit report.
There are lots of financial institutions out there, so it can be a good idea to shop around and make sure you find a place that really suits your financial needs. Choices include:
When making a bank choice, it can be a good idea to make sure the bank you choose has a user-friendly website and app, as well as conveniently located ATMs that won't charge you a fee for accessing your money.
Once you've established some fundamental procedures, you can start thinking about some overarching rules that can help you make better money decisions. Three rules you may want to keep in mind include:
Being good with your money requires a set of basic skills that many of us were never actually taught in school. Fortunately, It's never too late to educate yourself about personal money management. Learning personal finance basics like how to choose a bank, set up a budget, save for retirement, monitor your credit, avoid (and deal with) high-interest debt, and invest your money are key to reaching your goals and building wealth over time.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi MoneySoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi's ATM policies are subject to change at our discretion at any time.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history, or credit rating. For details, see the FTC'swebsite .Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SoFi InvestThe information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual's specific financial needs, goals and risk profile. SoFi can't guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term "SoFi Invest" refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SoFi Money
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi's ATM policies are subject to change at our discretion at any time.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit record, credit history, or credit rating. For details, see the FTC'swebsite .
FTC's
website
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual's specific financial needs, goals and risk profile. SoFi can't guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term "SoFi Invest" refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.