Ultimate Guide to Personal Finance

The RAVE Guide to Personal Finance

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Money is the key to making your life livable. It keeps a roof over your head, a car to drive, clothes on your back, food in your pantry, and everything else you need to live your life the way you want. Personal finance planning helps you achieve your financial goals while giving you a baseline for your daily spending needs. It enables you to draw your financial picture, manage your spending habits, save for vacations or rainy days, and grow your retirement savings. Anyone can engage in personal finance planning and management, and there are plenty of personal finance books available to help you reach your goals. 

The sooner you start engaging in personal finance management, the better your results. Time goes by fast, and if you’re not paying attention to your money, you’ll find out why personal finance is important at the worst possible moment. Personal finance planning starts with a budget, then transitioning your savings into investment vehicles for short-term and long-term savings goals. Anyone can learn about personal finance planning, improve their money tracking and use, and create financial security for themselves no matter their income. Here’s a look at the various aspects of financial planning and personal finance help. 

Creating a Personal Budget — AKA Being Realistic About Your Money

Creating a Personal Budget

The personal budget is the core structure and guide for all of your personal finance planning. To borrow from accounting terms, it’s a summary of your payables and receivables. Without it, you’ll have a harder time tracking your money, have difficulty with finding your ways out of financial holes, and be more likely to get yourself into money troubles. The personal budget helps you stay solvent and even get ahead to the point where you can start investing your savings. The ultimate reason why you should learn how to budget is to help you manage your money in a sensible fashion. Here’s a look at how to budget your money:

Get All of Your Financial Paperwork Together

Get All of Your Financial Paperwork Together

The first step when learning how to budget money and save is to gather all of your financial paperwork together. You’ll need:

  • Recurring bills (utilities, mortgage/rent, car payments, student loans, etc)
  • Bank statements
  • Investments
  • Paystubs 
  • 1099s
  • Credit card bills
  • Student loans 

Double-check to make sure you’ve collected all of your paperwork for income and bills. It’s important to create a complete financial picture when working out how to budget. Forgetting a bill or paystub will make your budget go out of balance quickly and defeat its purpose. 

Calculate Your Monthly Income

In order to see how much money you have every month, you need to total up the monthly household income. This is important when looking at how to budget money and save due to the fact that bills are paid on a monthly basis, but arrive at different times of the month. One of the important tips on how to budget includes making a calendar that has due dates for bills marked out. You’ll be able to anticipate the larger bills and be prepared to pay them. 

Another one of the important tips on how to budget is figuring out your net income. A household with W-2 income has taxes taken out of their paychecks with the resulting amount creating net income. Contract income, or 1099 income, is gross income because it’s not subject to FICA taxes. Make sure to deduct estimated FICA taxes from 1099 income when figuring out how to budget and save money. The total amount that’s left after subtracting FICA taxes leaves you with net income that you use for your budget. 

Budgeting for the Household

When you’re looking into how to budget your money and save, you start by creating line items, or buckets, for your money. A line item is literally just that; an item on a line. The item can be a mortgage or rent, groceries, daily spend for meals or drinks, car loan, and anything else that you spend money on regularly. Some line items like groceries tend to fluctuate every week. The best way to figure out how to budget groceries is to take your highest month of spending and use that as your benchmark for spending on groceries every month. Using the month with the highest total for your monthly spending limit helps you set your expectations for an expensive month while letting you save money in months that you spend less. This tactic works with anything you purchase that doesn’t have a fixed dollar amount.

Budgeting for Specific Goals

Eventually you’ll want to budget your money and save for other things that go beyond household expenses such as buying a home, investments, and retirement. Buying a house requires a down payment, and the more you can put down, the better your monthly mortgage payment and interest rates. You can put a line item for a down payment on a house when looking into how to budget for a house. The same goes for any other financial goal that requires a large amount of money. It can be difficult at times to figure out how to stick to a budget, but you can always reduce line items in one area to favor a line item in another area of your budget. 

How to Budget Money on Low Income

It can be difficult to learn how to budget money on a low income as just about every penny seems to be spoken for every month. The tips for how to budget money and save every month are the same no matter how low or high your income happens to be. The only difference is the line items for budgeting each month are fewer for someone with lower income than they are with higher income. Anyone can figure out how to learn to budget and stick to it, but some households have less money available for things outside of monthly expenses. Learning how to budget on a low income can help a household find their way to having extra money and find better income making opportunities to improve their quality of life. 

Getting Into the Habit of Saving Money

Getting Into the Habit of Saving Money

Saving money is one of the earliest things most people learn about finance. Adults teach children the concept of putting money into a piggy bank or savings account and leaving the money in place to use later. As an adult that’s working out how to budget and save money, you need to be aware of the aspects of saving that can grow your money and cost you money in the form of compound interest and fees. 

Compound interest is the core function of a traditional savings account as well as any type of account that pays interest. The bank pays interest on the balance in the account every month. If the account remains untouched, the next payment of interest will be paid on the current balance that has the previous month’s interest included. This helps a savings account grow steadily over the years.

An account that pays compound interest may also charge fees that wind up erasing the gains made by compound interest. Always look for accounts that waive fees, or better yet, don’t charge them at all. 

Savings Accounts

Savings accounts are a type of interest-bearing account that usually has limitations on how many withdrawals you can make every month. They’re intended for saving money over time with the interest being an incentive for leaving funds in the bank. The typical interest on a savings account is tied to the benchmark interest rate set by the Federal Reserve. When the benchmark rate is low, banks pay lower interest on savings accounts. 

Certificate of Deposit (CD)

The certificate of deposit, or CD, works by locking away your funds for a period of time that ranges anywhere from six months to five years while allowing interest to accrue. When you open a CD, you acknowledge that you can’t touch the money until the end of the term. The interest rate is usually fixed and stays the same regardless of fluctuations. When the term expires, you receive the funds along with the accrued interest. Alternatively, you can roll the funds over into a new CD and earn more interest.

Money Market Account

A money market account (MMA) is a checking account that pays interest on a balance. Some MMAs have a minimum balance requirement in order to gain access to higher rates of interest, but there are financial institutions that pay some interest regardless of the balance. Because an MMA is a type of checking account, you automatically get FDIC or NCUA insurance for up to $250,000, and you can use the account the same as if it were a standard checking account. This type of account is best used for emergency savings or rainy day funds in order to take advantage of the interest rate.

Emergency Savings

This is something that you’ll frequently find in tips on how to budget for now and the future. The emergency fund is a fund that’s used to cover a minimum of 3 months of living expenses in the event of a job loss, death in the family, unexpected expenses such as a major auto repair or medical care, and other large expenses that can crop up. Find an interest-bearing account that allows you access to the funds while paying the highest possible interest available to stash your emergency 

Rainy Day Fund

A rainy day fund is another kind of “save and forget” account, but instead of saving for an emergency, you save the money for smaller expenses that may or may not be anticipated. Money from this type of fund should be intended for use for car repairs or replacing a hot water heater in the home. You should view the rainy day fund as something that you won’t worry about wiping out in one go because you don’t keep a lot of money in the account to begin with.

Investments and Retirement Accounts

Investments and Retirement Accounts

Investments and retirement accounts are a proven method of making your savings grow quicker than they would in a savings account. You can invest in anything from real estate to bonds and the stock market. A private individual who’s making investments into financial instruments is known as a retail investor due to the fact that you are making a purchase of a security, but you are not involved in the financial industry. As a retail investor, it’s up to you to do your own research on the type of investment that interests you. It should be noted that all investments carry risk of financial losses, and there are no guarantees that you’ll make money on the securities you decide to purchase. 

Real Estate

Learning how to invest in real estate can be an expensive proposition if you decide you want to buy property for income or to hold and sell in the future. How you invest in real estate depends on how much risk you can tolerate because real property is subject to the same market forces as other financial investments. Buying real estate at the top or bottom of the market may leave you holding ownership for longer than you like. If you feel that you don’t want to contend with market forces, you may find real estate investment trusts (REITs) an excellent alternative to owning real property. Make sure to research your plans when looking at how to invest in real estate.

Bonds

A bond is a financial instrument that’s issued by corporations and governments to raise money for a project or operational funds. Investors loan money to the bond issuer, and the issuer promises to repay that amount with interest by a certain date known as maturity. You can also buy into a bond for less than its face value and get the full value when it matures, but you won’t earn interest. Most bonds are active for 10 years, but can be active for up to 30 years. Interest rates on bonds are usually fixed, but some offer variable interest rates throughout their life. There are a variety of bonds available for investment, and all have different characteristics. Buying into a bond means tying up your money for a lengthy period of time, so make sure to read about the bond details prior to putting down your money.   

Stocks

The stock market is a great place to watch your money grow over time as long as you treat it with caution. It’s possible to make a fortune in the short term if you’re prepared to watch the market closely, but you can also get solid returns from buying stocks that are solid performers. When deciding on how much to invest in stocks, invest an amount that you’re comfortable with. There’s an old saying that the stock market is a casino, and sometimes it is just that. There’s nothing wrong with investing a small amount in a meme stock to try and make a quick return, but unless you’ve done your research on stock market trading, play it safe and put the bulk of your money in safe stocks with a proven track record of growth. If you’re not sure of how much to invest in stocks, talk to a stockbroker or financial advisor to get insight into an investment strategy that’s right for you.

Mutual Funds

Mutual funds get their name from the fact that the members of the fund have mutual ownership in the shares of stocks, bonds, or any other security that comprise the portfolio. They enable investors to gain access to stocks that would be otherwise difficult to buy due to a historically high share price. Mutual fund investors put money into the fund on a recurring basis and gain more stock ownership over time. This type of investment is considered low-risk due to the fact there’s a fund manager monitoring the portfolio and ensuring that investor funds are used to purchase more stocks of a stable nature. Fees are a part of investing in a mutual fund, but they’re always listed in the fund description and makes it easier for you to pick a fund with a fee schedule that you can accept. 

Preparing for Retirement

Preparing for Retirement

The sooner you start planning for retirement, the more money you’ll have when the time comes to quit work for good. The most popular type of retirement accounts are the 401(k) and Roth IRAs, but Social Security also provides a steady source of income that acts as a base for budgeting during retirement. Retirement is one of the cornerstones of personal finance planning as you’ll need to be able to live within your means when you decide to leave the workforce. It’s advisable to maximize your retirement savings while you’re still working in order to have a large financial cushion that you can rely upon. 

401(k)

The 401(k) is the best personal retirement fund because it offers tax breaks and a matching contribution from your employer. If you decide to contribute 3% of your pretax income from your paycheck and put it into a 401(k), your employer will match your contribution. It’s money you don’t have to earn to fund your retirement, it’s tax-deferred, and the money grows steadily as you and your employer contribute to the fund. 

Roth IRAs

A Roth individual retirement account (IRA) is an employer- or self-funded retirement account that is funded with after-tax money, and funds aren’t taxed as long as you don’t draw from the account before 59 1/2 years of age. The Roth IRA has few restrictions when it comes to how the account is funded and held. A contribution to the account can be made at any age as long as the account holder has earned income. The maximum contribution limit to a Roth IRA is $6,000 a year for individuals under 50, and up to $7,000 a year for individuals over 50. There are no required minimum distributions while the account is open, and the account holder can withdraw at any time after they reach the age of eligibility to take funds from the account. Younger people are encouraged to open a Roth IRA to take advantage of its benefits and accrual over time.

Social Security

Social Security (SS) is part of the FICA taxes taken out of each paycheck for a W-2 employee. The employer calculates how much is taken out for Social Security based on tables provided by the Social Security Administration, and also matches the amount. On the surface, SS sounds like a 401(k), but that’s where the similarities end. When you’re old enough to draw SS, you are paid an amount based off your highest earnings in 35 years of employment. The amount you pay into SS does not accrue and uses a formula to determine how much you’re paid when you’re eligible to start claiming.

Debt Management

Debt Management

Debt is often viewed as something you shouldn’t have under any circumstances when it comes to personal financial management. The fact is, debt is a necessary part of personal finance planning as it enables you to purchase things you otherwise would wait months and years to buy. Being smart about the use of debt helps minimize the amount of interest you pay over time, retire balances faster, and keep your spending under control. 

Handling Credit Card Debt

Credit card debt is one of the most expensive kinds of debt to handle. If you let your balances grow, you’ll pay about 2% a month in interest on that balance, further increasing the amount owed. Work on keeping the credit card balances low, and pay them off every month if possible. You’ll save a lot of money by not paying large amounts of interest.

Understanding Mortgages and Interest

The most common type of mortgage is the 30-year mortgage with interest that’s calculated on the monthly balance. It’s known as simple interest, and the interest only accrues on the principal balance. The interest on a mortgage is largest at the start of the loan and is reduced over time through regular payments. Lower interest rates mean cheaper loans in that you’ll pay less for the privilege of being granted a loan. 

Student Loan Management

Generation Y/Millennials are most likely to have large student loans that carry high interest rates and fees. Loan deferrals meant that the balances grew as interest accrued. The end result is that student loan borrowers spend decades to pay off their education. The best strategy for dealing with student loan debt is to focus on paying them off as quickly as possible or finding ways to lower the interest rates. 

Personal Loans and Other Types of Borrowing

Personal loans, payday loans, title loans, and pawnshop loans are promoted as ways for people to get cash fast. These types of loans come with higher rates of interest due to their short-term nature and predatory lending practices. Personal loans tend to be lower in interest than a credit card, but other types of borrowing are predatory in nature. Only seek this type of borrowing when there are no other alternatives, and you can repay the outstanding balance quickly. 

Short- and Long-Term Financial Goals

Short- and Long-Term Financial Goals

Two aspects of personal finance planning are your short- and long-term financial goals. They’re part of your budget planning as you lay out where your money needs to go for something you need money for in the near future and money you’ll need in the decades to come. Short-term goals can be anything from paying off debt to funding next year’s vacation. In contrast, long-term goals may involve saving for a down payment on a home or retirement. Both of these are financial goals to set and adjust accordingly. 

Everyone’s short-term goals are going to differ, but they should be set realistically. That is, make sure you can put aside the money in a short time frame, and that you won’t be financially and mentally stressed when you spend the money on its intended purpose. Ideally, you should set your short-term goals after you’ve funded your emergency and rainy day accounts to avoid using them if at all possible. However, it’s not always possible to fund all accounts, but it’s always better to leave some money behind in case it’s needed after a short-term goal has been funded.

Long-term goals should always be a line item in the budget for funding, even if it’s a small amount. The money can eventually be put into investment accounts that accrue money over time, and many investment vehicles don’t require a lot of money up front to get started, and don’t require a large contribution every month. However, you can scale up your long-term investing as your income changes, and you have more money to set aside for the long-term goals. 

Why You Should Engage in Personal Financial Management

Personal finance planning is your roadmap to getting ahead financially. Starting personal finance management early on in your working life not only helps you learn how to handle your income, it also teaches you how to be nimble and flexible with your spending without going broke. Learning how budget works to your benefit when it comes to meeting and exceeding your financial goals and adjust your spending and saving as your income increases throughout the course of your career. Financial planning simply works no matter if you have a goal of buying a home, building a large retirement nest egg, traveling around the world, or all of these things and more. 

Your financial security is why personal finance is so important. If you’re not sure where to start, getting personal finance help with starting a budget is a good idea. Personal finance books are a great place to start researching your budget planning, but you’ll also benefit from talking with financial experts and getting guidance on what to do with your money. You’ll get tips for how to invest in real estate as well as tips on how to invest in stocks. Engaging in personal finance management can make money insecurities disappear and make you engage in fiscal discipline that allows you to spend what you want, when you want, and not worry about the future when retirement is nearing.