Personal finance is a broad topic, covering everything from budgeting to credit usage to saving. If you’re new to the world of personal finance, or you just need a refresher, the following are a few personal finance basics everyone should know:
Budgets are essential.
A budget is one of the most basic–and important–tools for overall financial well-being. Simply put, a budget is a record of your incoming and outgoing expenses. Keeping a budget and modifying it as necessary will help you live within your means while keeping spending in check.
You must manage your debt.
Some debt is essential for living. A mortgage, car loan, or student loans are examples. Too much debt, however, can eat away at your monthly budget and make a mess of your finances. Avoid risky forms of debt like credit card balances, payday loans, and any high-interest debt. If you have high interest debt, work to pay it off by paying more than the minimum amount and avoid charging things you can’t afford to pay for with cash.
Your credit report matters.
A credit report is a record of your borrowing history and present. It details whether or not you make your payments on time, the types of credit you have, and your balances. Your credit score is calculated based on the information in your report. This information has a huge impact on your finances. Your credit report is used to determine interest rates and whether or not creditors are willing to loan you money. It’s important to check your credit regularly to monitor for any reporting errors.
Financial goals are important.
Setting financial goals is an important way to prepare for the future, manage debt, and save. Set short, medium and long-term goals and then budget to help you reach your goals. Examples of short-term goals include paying off a credit card balance within a year or saving for a summer vacation. A medium-term goal might be saving the downpayment for a house or car, or a renovation of your current home. Long-term goals include things like retirement or saving for your children’s university education, or paying off your mortgage.
Emergency funds are a must.
Most of us experience at least one unexpected event or emergency at some point, such as a job loss, expensive car or home repair, or medical problem that leads to a reduced income. In cases like these, a savings account or emergency fund to fall back on can save you from a financial crisis. Ideally, you should have at least a few months’ worth of expenses in your fund. If you don’t, start small by saving a portion of your income each month.
Insurance can be key
You would be surprised to hear that many people have no insurance at all — not on their possessions, and not on their lives and health. This could make budgeting sense for someone who is just starting out, with no dependents, and whose possessions have minimal value. However, if you have people who depend on your income, and you have assets to protect, it is vital that you have insurance. If you do not have insurance through your employer, it often requires shopping around to find the plan that works for your situation. If you are young, with lots of earning potential, it may be important to have disability insurance. A permanent disability might leave you without the ability to support yourself or your family. Likewise, life insurance is vital in protecting minor children, should something catastrophic happen to you. It is important to take a careful look at what kind of insurance would be most beneficial, and affordable for your situation.
Knowledge is power.
Many people get into financial problems simply because they don’t know how to manage money. Take the time to educate yourself on things like debt management, saving, investing, interest rates, and debt reduction and insurance. Knowing how to manage your finances can help you reach your goals and avoid financial crisis.
Knowing and practicing personal finance basics like the ones listed here can help ensure that you stay in control of your finances.
Jillian Taylor-Mancusi, LIT
