Feeling Financially Frustrated? Take Control With Personal Finance Basics for Beginners (Even With No Accounting Degree!)
Financial literacy isn't just about understanding debits and credits (although that's important too!). It's about gaining the knowledge and tools to confidently manage your money and achieve your financial goals. This beginner-friendly guide to personal finance basics will equip you with the fundamental building blocks for financial success. In simpler terms, we'll break down the key concepts you need to know to make informed decisions about your money, avoid costly mistakes, and build a secure financial future.
Personal finance is a phrase that is used to describe how you manage the money you have (your financial resources). If you are good at managing money, then you are good at personal finance and vice versa.
Key Takeaways:
- Personal finance means how you spend, save, invest, and control the financial resources you have.
- Personal finance matters because it affects the kind of lifestyle you can enjoy both now and in the future.
- At its simplest level, personal finance is about spending less than you make and using what’s left to achieve your goals.
- You can improve your financial literacy by looking for personal finance podcasts, books, apps, and other resources.
Personal Finance: What It Means and How to Do It
Personal finance is a term used to describe how well you handle your money. It examines how you spend, save, protect, and invest your financial resources to create the kind of lifestyle you desire.
Personal finance includes a variety of topics, such as:
Income generation
- Insurance
- Budgeting
- Banking
- Investments
- Loans and mortgages
- Retirement planning
- Tax and estate planning
“Personal finance is just the way we use money,” said Todd Christensen, AFCPE at Debt Reduction Services and author of “Everyday Money for Everyday People.”
Christensen said that some examples of personal finance are:
- Planning your monthly spending
- Keeping track of your checkbook or debit account
- Moving money from your checking account to your savings account
- Setting up automatic deposit for an IRA
- Bringing only the cash you intend to use on groceries into the store so you don't overspend
Personal Finance: What It Is
You may have heard your grandparents say, “Spend less than you earn and save the rest.” This is the core of personal finance—making wise choices with your money now so you have flexibility and opportunities later on.
“Personal finance is not just budgeting,” said Lauren Zangardi Haynes, a CFP, CIMA, and CEPA at Spark Financial Advisors. “It’s knowing credit cards, how compound interest affects you (positively or negatively), knowing Roth vs. pre-tax savings, preparing for emergencies, making housing decisions, and saving for college and retirement. It’s connected to our daily lives at every turn.”
Zangardi Haynes added that understanding personal finance is essential to easing stress around money. You don’t have to be a pro. You just need to know the basics.
Why is Personal Finance Important?
Personal finance is important because it determines the kind of lifestyle you can enjoy both now and in the future. By managing your personal finances well, you can:
- Achieve your financial goals, such as buying a home, saving for your children's education, or retiring early
- Reduce stress and anxiety around money
- Improve your well-being and health
- Give you freedom and choice in life
- Help you cope with financial crises that may occur, such as job loss, illness or natural disasters
- Build wealth and legacy for yourself and your family
Personal Finance: How to Master It
Personal finance is about making your money work for you—no matter how much you have.
“Money affects every aspect of life, and if a person doesn’t know how to handle it, then it can cause a lot of problems and stress,” said Ksenia Yudina, CFA, founder, and CEO of UNest. “Once a person learns how to manage their finances, then they can focus on the things that are important to them in life.”
Here’s how to improve your personal finance skills.
Define Your Financial Goals
Everyone has a different idea of what financial success means to them. Maybe for you, it’s having a credit score above 800, retiring by age 50, or helping your kids pay for college without loans. For others, it may be driving a fancy car or owning a vacation home by the sea.
Whatever your goals are, you need to have a clear plan to achieve them if you want to be successful. Be SMART about your goals. Make them specific, measurable, achievable, realistic, and time-bound (SMART).
Create a Budget
Budgeting is one of the fundamentals of personal finance. It involves tracking your income and expenses so you can see how your money is spent each month. When done well, a budget gives you the power over your money. It allows you to spend more on things you enjoy by spending less on things you don’t. There are many budgeting apps to help you simplify the process.
Save for Emergencies
If you often struggle to make ends meet, an emergency fund could help. It’s one of the fundamentals of personal finance because it gives you a buffer to cope with if something unexpected happens (such as your car needs a fix or your cat needs a sudden vet visit).
Many financial advisors recommend you have three to six months of basic expenses in a savings account for your emergency fund. If that sounds too hard, start small with a $1,000 initial fund or one month’s worth of expenses. Something is better than nothing.
Eliminate Debt
Getting rid of debt can be tough. But there are many benefits to doing it. Being debt-free boosts your financial stability, gives you more money to spend on things you love, and enhances your credit score.
Creating a strategy to eliminate your debt can be one of the best things you do for your personal finances—especially if you have high-interest debt. “Getting rid of high-interest debt should be a main goal when it comes to personal finance,” said Yudina. “This kind of debt can easily get out of hand and ruin any financial plan you have in place.”
Save for Retirement
Saving for retirement has many advantages—you can lower your taxes by making contributions, you accumulate a fund for the future, and you may receive extra money if your employer offers matching contributions.
Many financial experts suggest saving 15% of your pre-tax income for retirement.1 If you’re not saving anything right now, contribute at least enough to get the full employer match, if there’s one. After that, think about maxing out a Roth IRA, then going back to your 401(k). (This is a common retirement savings guideline people follow.)
Keep It Up
The aim of personal finance is to spend less so you have more money to save and invest. Even though it’s an easy concept to understand, it can be hard to keep it up when you’re constantly exposed to marketing messages telling you to buy more, more, more.
Every time you go to buy something, ask yourself, “Does this item help me achieve the life I want to live? Will I appreciate this purchase or am I just buying it for the sake of it?” By asking yourself questions like these, you match your spending with your values and reduce your chances of spending money on something that takes you away from your goals.
Boost Your Personal Finance Knowledge
When you have financial literacy, you know all the details, tools, and rules you need to be wise with money. Sadly, financial literacy isn’t taught in many U.S. schools. It’s your responsibility to find this information if you want to be successful with your finances.
Not sure where to begin? Here are three resources you can use to boost your personal finance knowledge.
Personal Finance Podcasts
Some personal finance topics can be complex, even boring—especially if you’re a beginner. Podcasts that explain topics in simple, engaging ways can help you better understand how they relate to your life. There are plenty of excellent personal finance podcasts to enjoy and learn from.
Here is a possible rephrased version of the text, using a friendly, professional, and accountant voice:
Personal Finance Books
Reading personal finance books is another good way to learn how to handle your money better. Books cover all the personal finance essentials, including how to invest, get out of debt, improve your money attitude, boost your income, and more.
Save money by getting personal finance books for free from your local library.
Personal Finance Software
Personal finance software and apps are practical tools you can use to control your money and achieve your goals. Some help you plan and track expenses while others help you manage your investments.
The End of Personal Finance
Personal finance is the process of planning and managing personal financial activities such as income, expenses, savings, investments and protection. The process of managing personal finance can be summarized in a budget or financial plan.
Personal finance is important because it determines the kind of lifestyle you can enjoy both now and in the future. By managing your personal finances well, you can achieve your financial goals, reduce stress and anxiety around money, improve your well-being and health, give you freedom and choice in life, help you overcome financial crises that may occur, and build wealth and legacy for yourself and your family.
To manage your personal finances well, you need to generate sufficient income, make a realistic budget, save and invest for your future, protect your assets and income, reduce and avoid debt, understand and utilize financial products and services, comply with your tax and legal obligations, and plan for your legacy and inheritance.