5‍ Foundations of Personal Finance for Beginners

5‍ foundations of personal finance will help you get a handle on your financial future.

Many young adults struggle to deal with their personal finances. Personal finance is more than just balancing checkbooks and tracking expense categories; it’s an opportunity to take control of your long-term financial future. Good personal financial management habits can be challenging for anyone at any age, but especially so when you’re first starting out in the world as an adult with independent expenses and responsibilities.

According to a recent survey, 63% of millennials report having little or no knowledge about personal finance, and 66% say they need to learn more about it.

Even if you feel like you don’t have much knowledge on this topic right now, by reading through these foundations of personal finance, you’ll be taking a big step toward building your money smarts.

Let’s jump into the 5‍ foundations of personal finance together.

1) Know the difference between needs and wants

Before you can get your finances under control, you need to understand the difference between needs and wants.

Needs are things you must have to survive and thrive — things like food, shelter, and health care. Wants, on the other hand, are the things that make your life more comfortable or luxurious but aren’t necessary to survive, like vacations, high-end clothes, or fancy frappuccinos.

Meeting your needs is your top financial priority while meeting your wants should be treated as an extra — something you do once you’ve taken care of the basics. By making this distinction, you’ll be able to shift your spending away from wants and toward your needs, which will help you put a budget together and get your finances under control.

2) Track your spending

As the old adage goes, you’ve got to spend money to make money. But before you can start investing for the future, you need to know where you stand in terms of current expenses. Start by tracking your spending for a couple of months so you know where your money is going.

You can use a simple spreadsheet or a money management app to get a clear picture of where your money is going each month. Knowing where your money is going will make it easier to create a budget that accounts for all your expenses while leaving enough room for saving and investing.

Plus, if you’re struggling with debt, tracking your spending can help you identify areas where you can cut back in order to start paying off your debts more quickly.

3) Budgeting & saving

Once you start tracking your spending, you will have a better idea of how you can start saving money for your future.

Planning is essential to making ends meet. It’s important to consider your financial situation and know where you stand before you start buying things.  Once you have an idea of where your money is going, it’s easier to make smart decisions about what to buy and save for.

• Step 1: List out all of your necessary monthly expenses, including things like rent or mortgage payments, car payments, utilities, cell phone bills, etc.
• Step 2: Leave out all unnecessary expenses(wants) that we mentioned.
• Step 3: Then, add up all of your monthly income sources such as employee salary, pension plan or retirement savings account (if any), social security benefits, or other sources of income like rental income.
• Step 4: Finally, subtract the total amount from step 1 from the total amount listed in step 3 to get the amount that you actually have available to spend every month. Now that you know your actual available funds every month it is easier to make smart choices when it comes to spending and saving money.

Once the calculation is complete, you may see that your personal budget might be in deficit even though all the unnecessary expenses are excluded.

This is obviously not sustainable without borrowing money or increasing your income. In this case, you may want to consider lowering the amount designated for necessary expenses. Such as moving to a cheaper neighborhood, lowering your energy bills, and looking for a more affordable mobile network.

An essential aspect of mastering personal finance basics is understanding the various strategies for budgeting and saving. One such strategy is the fire movement. This approach, which stands for “Financial Independence, Retire Early,” is a lifestyle choice focused on extreme savings and investment.

The fire movement is all about saving a substantial portion of your income, as much as 50% to 75%, and investing those savings wisely. It’s a disciplined approach to personal finance, with the ultimate goal of creating enough wealth to enable early retirement, often well before the traditional retirement age.

4) Pay off your debt — fast!

As we said, paying off your debt is one of the most important financial moves you can make. Debt — especially high-interest debt like credit card debt — is like a ball and chain around your ankle, holding you back from achieving your long-term financial goals.

The faster you can pay off your debt and get those chains off your ankle, the sooner you’ll be able to start investing for retirement, funding your children’s college education, buying a home, and more. There are two broad categories of debt to keep in mind when prioritizing your debt repayment.

First, consider your short-term debt, like a car loan, or a high-interest credit card balance. Short-term debt (which is often less than 12 months) generally has higher interest rates than long-term debt, and paying it off as soon as possible is a smart move.

Next, consider your long-term debt(maturity of 12 months or longer), like your student loan debt, a mortgage, or a low-interest credit card balance. Long-term debt generally has lower interest rates than short-term debt.

If you already have long-term debt, trying to pay it quickly might not always be ideal. Especially during the times of high inflation like these days. Making your debt payments timely and being wary about taking on new long-term debts might be preferable.

5) Start investing for the future

Investing is the best way to ensure that your money will go further in the future. In fact, research shows that over time, investing your money — even without counting on any kind of magic rate of return — is the best way to grow your savings.

The sooner you start investing, the better, because compound interest means that as time goes on, your investment will earn interest and that interest will earn even more interest on top of itself.

For this, you can set up an investment account with a bank or a building society, depending on your financial needs. Or you

If you have extra cash you can set aside in a savings account, there are many ways to start investing for the future. Stock, government and corporate bonds, commodities, real estate, and derivatives are just a few of the financial instruments that may want to consider. You may even explore investing in Bitcoin and cryptocurrencies if you have a higher risk appetite.

Conclusion

Financial freedom means having complete control over your finances. If you are in charge of your spending and have the ability to save more, then you are on the road to reaching financial freedom. 5 foundations of personal finance will help you make better financial decisions and fulfill your goals.