Managing your finances can feel overwhelming, especially if you’re trying to keep up with the latest budgeting software, personal finance app or investment hack and not just the financial basics. You might feel so swamped by all of the ‘advice’ that you avoid managing your own money. But that lead to problems in the future.
While it’s essential to keep up with some financial news, trying to track every detail can weigh you down. Instead of worrying about or avoiding your finances, focus on the basics. They can help you lay a good foundation for the future and make the most of your money.
Know your financial basics
Managing your money is usually not that exciting. We’re typically hyper-aware of the day-to-day things, like looking for the best price at the gas pump or a good deal on groceries. But the concepts that can really make a difference to your long-term goals, like budgeting and saving for the future, can get ignored in favor of more exciting ideas like playing the stock market or the latest viral TikTok trend.
Ignoring the flash isn’t easy, and creating a system that works for you can take time and trial and error. Spending less than you earn, building an emergency fund, and saving for the future can help you focus on priorities. Plus, it’ll make other financial topics more manageable when they come up.
To get started, develop your financial plan around these personal finance basics. Once you have a good handle on those, branch out to other areas that interest you.
Budgeting
Using a budget can help you build a healthy relationship with personal finance. Knowing how much you have coming in and going out each month can help you avoid debt and work toward your financial goals.
There are multiple ways to create a budget. A popular and relatively straightforward system is the 50/30/20 method. To use this budgeting technique, allocate 50% of your income to needs (rent, food, utilities, car payments, etc.), 30% to wants and 20% to savings and debt repayment.
Your percentages may vary based on your expenses and income. If it feels like you are scraping by each month, look for the most painful spots in your budget. Then develop a plan to help you lessen their impact.
Experiment with different ways of maintaining your budget. Use a personal finance app, like Mint or You Need a Budget (YNAB) or create a spreadsheet to keep track of your spending.
Emergency funds
Having an emergency fund is one of the most important financial basics to keep your finances moving in the right direction.
Even if you’re focusing on paying off as much high-interest debt as possible, contributing to an emergency fund is still a good idea. Saving just $20 from every paycheck can add up and keep you from pulling out a credit card when emergencies happen.
If you’re struggling to make ends meet and still save money for emergencies, look for ways to cut unnecessary costs. Cancel cable or a subscription service. Try cooking at home more instead of eating out. Or, consider developing a side hustle or part-time job to help you increase your income and savings.
To help you earn the most from your money, use a high-yield savings account to park your emergency fund until you need it. Research the best interest rate and lowest fees, and make sure that the bank you choose is FDIC insured.
Paying off debt
Paying off credit cards or other debt can feel like rolling a boulder up a hill. Many people are so uncomfortable looking at their credit card statements that they just avoid them. Doing so creates a cycle of more spending and debt that’s hard to break.
Instead of ignoring your debt, develop a plan. Creating a debt repayment road map, like the snowball or avalanche methods, can keep you motivated, especially as you see the balance getting lower and lower. Use a debt payoff calculator to help you calculate different repayment options.
Although it’s hard when you feel like all your money goes to things like rent, food and debt repayment, try to leave a little space to give yourself small treats every so often. It will be easier to stick with a long-term plan if you don’t feel deprived, and you reduce the risk of getting fed up with the process and giving up.
Saving for retirement
Saving for future expenses can be one of the most challenging financial basics to master. No one has a crystal ball to tell them how much they’ll need in retirement. Plus, a lot of the advice that is available is confusing and hard to fit into a workable plan.
Although it’s a good idea to contribute as much as possible for retirement, don’t despair if you can’t save as much as you’d like right now. Instead, brainstorm ways to save more and look for the easy wins.
For example:
- Once your debt is paid off, start contributing some of your monthly debt payments to your retirement accounts instead.
- In addition to your employer-sponsored retirement plan, like a 401(k) or 403(b), consider opening a Roth IRA or other after-tax retirement account. That way, you will have a combination of pre-tax and after-tax retirement savings.
- Many retirement plans have an auto-escalation feature that will automatically increase your retirement savings by 1% each year, up to a certain point. You likely won’t miss the few extra dollars from each check, and you can breathe easier knowing you’re making your retirement savings grow.
Remember: If your employer offers a matching percentage on retirement savings, it’s important to contribute at least enough to get the whole match. Otherwise, you’re leaving free money on the table.
Building your credit score
Your credit score predicts how you use credit and gives the potential lender insight into how responsible you are with your available credit.
A high credit score can help you improve your financial life since, generally, the higher your credit score, the easier it is to qualify for loans and get a better interest rate.
A credit score comprises multiple factors, including:
- Your payment history
- The current balance of loans or credit cards
- How much of your available credit you’re using
- The number of new applications for credit on your record
- The age of your oldest credit account
- If you’ve ever had debt sent to collections, declared bankruptcy or had a foreclosure
To build your credit score, avoid any late payments on bills and use less than 30% of your available credit at any given time. This shows lenders that you are a responsible credit user, which can help boost your score.
It’s also important to check your credit report regularly for any mistakes or fraudulent accounts. You can check your credit report for free once a year with each of the three main credit bureaus (Experian, Equifax and Transunion) by going to annualcreditreport.com. And consider a credit freeze to prevent your report from being accessed without permission.
Bottom line of financial basics
Personal finance can get complicated quickly, but like with many things in life, complex topics get more manageable when you focus on the foundational basics. To help you stay on track, spend some time reviewing your budget and debt repayment plan and how much you’re setting aside for retirement and emergencies each month.
Focusing on these financial basics can help you ensure you are ready for any surprises and help you build a solid foundation for your financial life.
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