Everyone wants to be financially independent enough to live comfortably and worry-free.
Mastering personal finance can stand to have a legitimate impact on the way you carry out the rest of your life, the security of your future, and so much more.
Personal finance management is such an underrated skill – with most education systems failing to teach this stuff earlier on.
Between 2009 and 2018, financial literacy in America has dropped significantly.
More specifically; according to the report, there was an 8% drop in the percentage of people that could accurately answer questions about financial management. And yes, those numbers are still dropping.
Americans are not only dreadfully lacking necessary personal finance skills, but from the fact that a massive chunk of them come from the age groups of 18-34 year-olds.
It’s never a good sign – especially when you assume you’re too young to worry about finances.
These are the same people that fall into the rabbit hole of thinking it’s “not their time” to start budgeting and saving up for the future.
Chances are if you’re here, and you don’t want to be one of those people.
Or maybe you’re starting to notice some bad spending habits in your lifestyle. Perhaps you’re finally ready to be thrown a lifeline before total financial destruction.
For that, we applaud you!
You deserve to reach your financial peak. Everyone deserves to live with a healthy, comfortable income topped off with evergreen savings account for the future.
However, to do that (or even to get your necessary, everyday finances straight!) you need to start re-evaluating how you earn, spend, and manage your money.
Taking control of your money management isn’t a skill that is as hard as you think it is.
Let’s get you started with 11 downright simple steps how to manage personal finance today.
Browse Our Guide:
1. Start with Proper Goals
You might be tempted to rush into consolidating debt, or slashing your monthly expenses (and we appreciate the enthusiasm), but wait!
To stay on top of your money, you need to start by setting some goals.
Not to mention, strategic goal-setting works wonders for any number of things!
There are no right or wrong goals, and could range from:
- Going on a 1-month long vacation after you graduate.
- Paying off the mortgage from your first house.
- Raising capital for your own business.
When creating your goals, keep a few things in mind. Are they within your means and realistic? How important are them to you, and what holds a bigger priority at the moment?
We know we also emphasized a whole lot on saving for retirement. You totally can do this -but you’re better off getting started with smaller, shorter-term goals.
Starting with more achievable goals is mostly just a process to condition and prepare you psychologically if we’re honest.
Let’s say you set a goal to backpack around Asia with $3,000 to fund it all.
Scrounging up three grand for a vacation is entirely possible with the correct budgeting – so it’s much easier to cross off your list.
When you do, you’re reaping the benefits of all that hard sowing early on! Budgeting makes it so much easier to see the fruit of your labor – rather than just saving up an unspecified amount for an undetermined amount of time.
Managing your money involves so much more than cracking numbers and breaking down the math. A lot of it, in fact, depends on your total shift in mindset and the way you choose to view personal finance.
2. Creating and Sticking to a Financial Plan
The more straightforward way to explain this would be to come up with a budget.
Honestly, we prefer defining it as a financial plan – for the sole reason that it’s much more complicated than just cutting back on expenses.
So when we’re on the topic of a financial plan per se, we’re not talking about adopting a Scrooge-like behavior when it comes to money.
A little tip when it comes to how to do personal finance budgeting? Just staying at home every weekend and surviving on baked beans for dinner isn’t going to cut it!
A proper financial plan is the BEST way to reach your goals. It gives you a clear, cohesive guideline to follow -which mostly works through steps and milestones.
If you’re starting with the basics, a sample financial plan might include things like an estimate monthly spending limit, breakdown of bills, and total savings over some time.
One of our favorite financial plan mantras to go by is the 50/30/20 budgeting rule.
This budgeting rule was coined by Massachusetts senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. This book should be on your list of must-reads if you’re just getting started with how to manage personal finance!
The 50/30/20 rule goes along something like this. It involves the division of your after-tax income into three categories; your wants, needs, and savings.
Here are the best ways to break it down:
50% for NEEDS
(Groceries, insurance, credit cards, utilities, mortgage, etc.)
Of course, the listed “needs” above are always subjective! For instance, some American households might not need to set aside mortgage payments – but instead monthly car bills, phone bills, and student loans. You get the picture. According to Warren, this category should only take up 50% of your monthly income. Make sure everything listed here is something you’re sure you CAN’T live without. This includes other expenses (besides minor inconveniences like fixing a roof leak, etc.) that are essential to the quality of your life.
30% for WANTS
(Netflix subscriptions, phone bills, eating out, etc.)
Coming up with a financial plan doesn’t mean you’ve got to live on a bare-bones budget. Allocating a small portion of your income for entertainment and a little bit of fun is fine! However, this doesn’t mean that you’ve got to indulge in the extravagant. Stuff like your monthly Netflix and Spotify subscriptions count as your 30% as well – so be sure to keep it at a decent minimum.
Jot down everything that comes to your mind as “wants”. You’d be surprised to know just how much money you funnel out this way! Reducing expenses here can be done via Trim; an app that allows you to view and manage any pricey subscriptions. Using a budget tracker could save you A LOT – trust us because being aware of what you spend on is one of the most important things to stay on top of.
20% for SAVINGS
(Debt repayments, emergency funds, investments, etc.)
With the remainder of your income – it’d do you well to stash it away towards savings for your future. You want to be well prepared for a rainy day; so trust that this 20% is a step that you don’t want to skimp on.
We’ve included debt repayments in this one.
Why? Because anything more than the monthly minimum wouldn’t be considered a “need”, but would still save you cash when it all boils down (but we talk more about this in the next step!).
If you need extra help recording your cash flow, HUSTLR recommends using money management apps.
What are the best personal finance app available?
At heart, they all perform similar functions. They record your income and expenses, tracking the categories that you spend on the most and giving you a rough breakdown of your cash flow.
However, having excellent money management apps would go the extra mile.
Look for one that syncs with your bank account, allows for receipt scan features and one that’s preferably minimalist + easy to use!
Seriously though. We’ve tried the fancy-schmancy ones that offer an unnecessary amount of features and integrations. It gets too complicated to use, after time.
They’ve got everything mentioned above; with gorgeous interfaces that make sticking to your financial plan a total breeze!
3. Paying Off Your Debt
Lugging around debt is no fun.
If you’re carrying vast amounts of debt, poor money management can severely slow down your journey towards reaching your financial goals. Which is why slashing it should be way up there as a priority!
A debt elimination plan is the best way to go about this.
Before anything, you’re going to want to assess the damage.
Grab a calculator and add any existing loans, medical bills, credit card debts that you may have. Don’t skip out on this – it helps move the process along! Especially when it comes to tracking just how much you’ve managed to pay off with time.
Once that’s done; we recommend to start spending more than the minimum on your repayments.
Such an underrated technique. But one that can save you thousands of $$$ when you break it down.
Let’s say you’re $40k in student loan debt. Your loan term is 20 years long, with an 8% interest each year. This amount of debt would make the minimum you have to fork out around $334/month.
Follow this structure, and you’re paying $28,425 in interest alone over 20 years. Now throw in an extra $80 per month to your repayments. Guess what! You just saved $4,119 at the end of the day.
When you think and manage your debt this way; you’re skipping the killer interest rates by mostly using spare change for your repayments.
Another method that we love to use is also the debt snowball. To simplify it, this involves you throwing any excess funds you can find towards the smallest debt you have.
It’s an interesting (and a very feel-good!) method that lets you gain momentum as you move on from debt to debt.
Another way how to manage personal finance by paying off your debts would be to start consolidating it.
On the whole, this involves taking out one single personal loan to manage all of your repayments.
A little extreme, we know. But…it works exceptionally for the ones that want to skip the hassle of numerous creditors.
National banks are a great place to start looking. But you can look through qualified online lenders through the Next Day Personal Loan platform too!
A few other methods of tackling the issue of debt are:
- Refinancing student loans. Credible is an excellent place to start refinancing private and public loans. Smart refinancing equals having lower interest rates and better repayment terms.
- Debt money management apps. Another way how to manage personal finance is to start downloading debt tracker apps. ChangED works to chip off student debt through spare change, and Tally works to manage your credit card debt.
4. Investing Your Money
We’ll talk about how to manage personal finance through multiple income sources in a bit.
For now, how about literally generating money in your sleep?
This is where investments come into play! The best piece of advice we can give you with investing is to get started today.
Your first $100 might not seem like a lot. However, with consistency and discipline – that first hundred bucks can turn into $10,000 or more after a few years.
If you’re wet behind the ears with the whole concept; we recommend starting with Robo-advisors.
All you need to get started is by setting your goals, risk options, and other essential details like your social security number, risk appetite, and investment goals. Robo-advisors eliminate the need for you to check back on market trends or monitor winning stocks consistently.
Betterment and Wealthfront remain the best platforms get started with Robo-advisors. If Robo investing is not your thing, another option is the copy trading platform eToro. eToro allows you to copy the portfolios and activities of other successful investors.
Keep in mind, though. Most of these platforms’ aim is to improve your financial situation in the long run. So that’s why most of them are low to medium-risk at best; with only average returns (8-10% per annum).
If you’re new to investing in general, it’s always best to start with a Robo-advisor without a doubt. However, once you start getting the hang of investing and going beyond the basics -consider getting into the game with self-managed investing.
Robinhood is a commission-free trading platform that lets you invest in cryptocurrency, stocks, ETFs, and more. It’s designed for newcomers to intermediate investors – and gives more control over your returns.
5. Growing Your Income!
If you take anything from this article – let it be the utmost importance of diversifying your income.
Look anywhere. Some of the best pieces of advice from top experts on how to manage personal finance would be to have more than one source of income!
Are you rocking your full/part-time job? If you are then good for you! If you’re working hard enough to justify negotiating a pay raise, make sure you get paid what you’re worth.
Be that as it may; there’s a limit on how high the ladder you can go. Plus, it doesn’t help that working a 9-5 corporate job comes with its own set of hazards – and it’s risky to put all of your eggs into one basket.
Not to mention, outdated.
In 2019, over 44 million Americans are already working a side hustle.
Earning through passive incomes are popular. If you can make money over and over again for something you infrequently do – you’ve got passive income!
Having an alternative passive income stream makes it entirely possible to work around a full or part-time job. The main point that we’re trying to make here would be to build up multiple income streams that would allow you to throw extra money at investing, paying off your debts, (see Step #3) and improve your financial health.
If your side hustle takes off and you get your debt out of the way soon enough – you could start thinking about your retirement!
You can even learn a thing or two from this piece right here. It tells the story of how I started a million-dollar business with a mere $300 in capital.
So how do you build a passive income business from the ground up?
It’d require a lot of hard work, but with the right method, this could be something both rewarding and fun to do with your past time.
According to your interests, here are a few ways you could get started with a passive income business and grow your wealth:
1. TAKE ADVANTAGE OF YOUR CREATIVE SKILLS
2. STARTING A PERSONAL BRAND
3. TEACHING SKILLS TO AN AUDIENCE
4. EARNING THROUGH EVERYDAY STUFF
6. Mastering Your Credit Cards
It’s so painless to sign up for a credit card.
But then reality sets in – and you quickly find yourself on a slippery slope of massive debts you can’t shake.
Credit card debt is an early financial grave for many Americans.
How do you avoid becoming overwhelmed? Simple.
The shorter version of this explanation of how to do personal finance with credit cards can be broken down into two essential golden rules:
The above two principles are the absolute fundamentals of using your credit card. If you can already practice these two habits with discipline – you’re already on the fast track of mastering credit cards!
You may wonder what’s the use of having a credit card if you’re supposed to stay away from what you can’t afford. Why not just use debit instead?
Long story short – it has everything to do with interest.
Let’s say you indulge in a pair of expensive, designer shoes. You pay a sum of $500 through your credit card. If you have the means to pay the full amount back at the end of the month, please do that!
If you don’t, it’s going to suck.
This is because credit card companies are going to immediately charge you extra fees on top of that purchase; which is how interest works. Credit card interest rates are one of the “deadliest” interest rates in the market, and you have to be extra careful how you use it.
For each month the full balance isn’t paid is another month that you’re spending unnecessary money.
Even paying the minimum amount each month doesn’t mean you get to avoid interest!
Only a small part of your $500 balance is being chipped away. This means that a massive chunk of your repayments is just going towards the interest generated each month. Yikes.
We mentioned this in Step #3 of debt repayment – but let’s reiterate.
Always pay more than the minimum each month! Even if you’re not paying off the whole balance -always throw extra cash towards each repayment.
You can compare credit card deals right here if you’re looking for one.
Having a credit card doesn’t always have to be daunting! They can teach you a lot about how to manage personal finance.
You can also be on the receiving end of a few of these great benefits:
EARNING REWARDS & POINTS
Always make it a point to check what types of rewards you qualify for. Most cards would give you things like cashback, airline miles, and even birthday rewards!
PROTECTION AGAINST THEFT
If you lose your wallet, your cash could be spent the very next day with no hopes of you getting back. On the other hand, credit cards are 100% protected against fraud – and a quick call to your bank could have them help you out in getting any unauthorized charges revoked.
PEACE OF MIND WHEN TRAVELING
Admittedly, we still do love how credit cards are crazy easy to use. VISA and Mastercard options are accepted anywhere in the world; so you don’t have to worry about currency exchanges with a credit card.
Did you know you can also negotiate for lower interest rates?
Credit card companies do this more often than you think! Just give them a call and start by asking them if they offer interest waives for several months, lower account fees or something along those lines.
Speaking of – here are some of the best ways you can negotiate with your credit card company.
7. Managing a Healthy Credit Score
If you’ve ever applied for a loan before, you would have come across something known as a credit score.
A credit score is there for banks, financial institutions, and other private lenders. So when you do apply for a loan, this is how they gauge whether or not you’ve got a good rap when it comes to paying back what you owe.
Maintaining your credit score is more than just a mere option.
Having an excellent credit score would also give you access to your lower-interest car loans, more housing options, and even better mobile plans!
Needless to say, it’s pretty significant in a lot of areas in your life.
Generally, a decent amount to abide by is anything between 580 and 720. You can check your credit score on websites like Credit Karma for totally free!
Interested in how to manage personal finance and improve your credit score? These are five areas you need to start watching out for:
5 KEY AREAS IN IMPROVING YOUR CREDIT SCORE
8. Understanding How Taxes Work
It’s impossible to write a piece on what is personal finance without talking about taxes.
We know you’re not crazy about managing your taxes. For millennials especially, tax season is probably a day of dread.
So let’s try to simplify this in the best possible way.
You need to start paying your taxes for two main reasons:
- To avoid over or under-paying and subsequently checking if you qualify for refunds.
- Your income then determines your tax amount.
The US uses the progressive tax system according to tax brackets. Technically, this means that the amount you pay in taxes could range anywhere from 10-37% according to the bracket you fall under.
You can refer to this article to see how much you’re required to pay according to 2019 tax law.
All caught up? Let’s move on!
If you’re working a regular full-time job, your employer will also prepare something called a W-2 form for you. The W-2 form includes your personal and income details, how much your earnings are, and amounts deducted for tax.
The W-2 submission process is explained comprehensively here. All you need to do is attach this alongside your federal income tax return when you mail it in.
Note that freelancers and other self-employed contractors might need to prepare the 1099 form instead of the W-2. The 1099 form has to be filled out by clients that pay you at least $600 during the tax year.
There’s also getting an accountant to do it for you – if all else fails. However, not everyone can afford to pay for someone to fill out some paperwork.
Plus, once you get over the initial fear of learning how to manage personal finance through your taxes; it’s not all that bad.
Did you know? The average tax refund for the first half of 2019 was $3,143.
If you even qualify for half of that, it’s a remarkable amount to keep as savings or settling a debt. Make it a point to use tax refunds to pay off your debts!
9. Never Avoid Health Insurance!
By not giving yourself proper health insurance coverage, you’re flipping off both your wellbeing and personal finance.
Seriously though. The longer you wait, the higher your premiums go up according to your age! Some younger crowds especially; are cocky about the fact it’ll never happen to them.
We hate to break it to you – but this is the truth.
Let’s say you don’t have the coverage. If misfortune strikes, any accident, hospitalization or injury is probably going to cost you quadruple of the insurance premiums you’re so scared about.
Signing yourself up for a health insurance plan is one of the best ways to secure yourself financially for the future.
Here are some ways you can shop around for a health insurance carrier:
Here are some ways you can shop around for a
HEALTH INSURANCE CARRIER:
10. Setting Aside an Emergency Fund
Knowing how to manage personal finance isn’t that complicated at all.
Sometimes, it just involves something as simple as setting aside funds for a rainy day.
Having an emergency fund around will help you out with things like a major car breakdown, home damages, a visit to the ER or even unemployment.
The matter of the truth is, most Americans don’t even have the $1,000 it would take to cover up an emergency.
Crazy right? Having an emergency fund is one of the many vital ways to stay out of debt. While other people may have to take out personal loans to cover any emergencies -you’re already one step ahead with your fund!
But just how much should you save?
A good rule of thumb would be to stash away four to six months worth of your expenses.
Let’s go back to the 50/30/20 budgeting rule. Let’s say you spend around $2,000 in expenses per month when it comes to just your “needs”.
Thus, your emergency fund should safely have anywhere upwards $8,000 at a given point.
Worst case scenario, this money would come in handy if you lose your job. An emergency fund helps to cover your necessities and other living expenses for a few months.
Bad luck can happen at any time of the year.
So while you’re going to want to put your money somewhere you’re not tempted to dip into – it still has to be accessible. Stay conscious not to dip your hands into the cookie jar for something unnecessary.
We recommend saving your emergency funds in a high-yield savings account! Here are some great options you can look into.
Saving up for an emergency fund can come from any number of places. As with anything you want to achieve – set a goal before you start!
Use a portion of your 20% budgeting into an emergency fund, channel your tax refunds, or go traditional and keep the spare change when it comes to breaking $10 and $20 bills.
11. Saving for Retirement
When you think about retiring, what’s an appropriate amount you need to achieve the lifestyle you envision?
According to Fidelity, you should at least have 10x your income by the age of 67. At the age of 30, a good number to have is at least your annual income, moving on to 3x that amount by age 40, 6x by age 50, and at least 8x times by age 60.
Of course, this number also depends on factors like lifestyle choices, location, health issues, and other preferences.
Regardless, you don’t want to be part of Americans who are retiring with less than $60,000 at the age of 65.
So, take advantage of your 401(k) plan!
If you’re working full-time, it should be a no brainer that you need a 401(k) plan. A 401(k) account is a tax-advantaged retirement account that a small portion of your salary goes to; preparing you for old age.
At the moment of writing, the maximum amount you can contribute each year to a 401(k) is $19,000. Turning 50 years of age will then increase this number to $25,000 a year.
If you want to maximize this (and if you can afford it!), it’s going to put you way ahead of the game.
You can calculate your estimated retirement savings through NerdWallet’s calculator.
Some companies would annually ask you to adjust your 401(k) percentage contributions. Sometimes you might need to log on to your provider’s site and tweak it from there.
If by chance your employers don’t offer a 401(k) plan (or you’re only working part-time) – consider opening up a Roth IRA.
You can open a Roth IRA at any age; with a $6,000/year limit in savings. It’s a great option as this isn’t tax-deductible like the traditional IRA.
To reduce the hassle of funneling money into your Roth IRA account manually, you can set up a direct deposit to whichever account you prefer. With just $500 of your monthly income stashed here – you can already maximize yearly contributions!
Wrapping It Up
When all is said and done, managing your finances should come as naturally as breathing to you.
You don’t immediately have to start employing all 11 steps above. Starting with just two today already puts you in a better position than you were yesterday.
Get extra help when needed. Here’s a free monthly saving planner you can use to record all of your bills, income, and expenses to give you a clear, fresher view of your cash flow.
Go forth and conquer your financial future! I’m rooting for you.