If you’re into reading a lot of finance books & blogs, you might have already come across a ton of different personal finance tips and tricks. This can make personal finance seem like a massive, overwhelming, and complicated topic, but it’s absolutely not.
It’s so simple that I’ve broken down the personal finance basics into just 10 quick pointers. If you live by these 10 pieces of financial advice, you’ll have more control over your money, and you’ll live a much better life financially.
Although there are only 10 tips, if you’re not already doing these things it’s going to take time to build up these new habits. Simply reading these 10 personal finance tips and then closing this page is not going to help you. You’ll need to put in some genuinely effort to make it work.
Before we get into the actual list, let’s first start-off with the actual meaning of personal finance.
What Is Personal Finance?
Personal finance is a term that covers managing your money and saving and investing.
It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. It often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.
Personal Finance Explained In More Detail
Personal finance is about meeting personal financial goals, whether it’s having enough for short-term financial needs, planning for retirement, or saving for your child’s college education.
It all depends on your income, expenses, living requirements, and individual goals and desires—and coming up with a plan to fulfill those needs within your financial constraints.
But to make the most of your income and savings it’s important to become financially literate, so you can distinguish between good and bad advice and make savvy decisions.
1. Always Spend Less Than You Make
I know, it sounds obvious, right? This is the #1 Rule in Every Personal Finance Book I have read to date 🙂 And it’s so true.
Well, it must not be because according to CBC, 78% of Canadians working full-time are living pay-check to pay-check.
It’s easy to know that you should be spending less than you earn, it’s a lot harder to actually do it.
However, if you want to escape the pay-check to pay-check lifestyle that so many others live, you need to spend less than you earn. This is one of the most crucial but basic personal finance tips ever.
In order to do this, you need to track your spending.
You can do this by either writing your purchases down or by using a free personal finance app.
2. Master The Art to Budget Every Month
You might hear the word “budget” and cringe a little, but you shouldn’t.
Budgeting is not hard, and it doesn’t mean you have to stop doing things you enjoy.
Budgeting is simply creating a plan for your money so you have a better idea of managing your money every month.
A popular and effective way to budget is with the 50/30/20 rule.
What Is The 50/30/20 Rule?
50% of your income goes towards the basic necessities (bills, food, housing, etc.), 20% of your income goes towards savings and the remaining 30%you can use for whatever you please.
This is a neat and easy way to break down your pay-check, but you might need to adjust it a bit to fit your lifestyle.
3. Breaking Down Your Income & Expenses
This is an odd little trick that can change the perspective you have about your money, and help you budget better.
It’s all about breaking your income and expenses down into daily values.
Case Study: Personal Finance
You make $4,000/month = ~$133/day (Keeping it as 30 days a month)
You pay $2000/month for rent = ~$66/day.
You pay $150/month for car insurance = ~$5/day
Everything else (outside food, phone, gas, etc.) comes to $1000/month = ~$33/day
That means you’re left with $29/day in spending money.
Want to save $1,000 for a nice vacation? You’ll have to save about 34 days worth of your spending money. That means 32 days of not spending a dime more.
Want to buy a new $10,000 car? That’s about 344 days worth of your spending money.
This will help you see how far purchases are going to set you back and affect your spending ability
4. Making Use Of The Savings Account
This personal finance tip is another common one that can have a huge impact on your finances.
When you pay yourself first, you’re investing in your financial future; you’re investing in future you, and future you will thank present you for doing so.
So, why not just pay yourself at the end of the month? That’s a lot easier, right?
Well, the reason why paying yourself first works so well is that once that money is sent to a savings account, you’re a lot less likely to spend it. If you wait until the end of the month to pay yourself, you might not have any money left!
Future you will be very sad with no money. Make future you happy by investing in yourself!
5. Set Realistic Personal Finance Goals
If you want to accomplish financial goals, you need to figure out what goals are important to you first. Having a clear goal can keep you motivated and help you come up with a plan to reach that goal even faster.
Now, don’t think that you need to set outrageous goals. If this is your first time thinking about personal financial goals, start off small and work your way up from there.
I’d suggest coming up with a few different goals in each of these categories:
What you want to achieve in the next 3-months
In the next year
In the next five years
This way you’ll have some short-term goals to look forward too, and some long-term goals to work towards as well. Your short-term goals may even be small stepping stones towards your bigger goals.
Here are some examples of good financial goals:
Buy a house
So, remember to set long-term and short-term goals, and keep track of them too! Write them down somewhere and set a day each month to track your progress.
6. Credit Card Is Never Free Money
A credit card is a useful tool in your finance toolkit, but it’s not free money.
When you purchase something with your credit card, you are borrowing money from the bank. If you don’t give that money back in time, the bank is going to start charging interest on your balance.
This debt can build up and become a monster if you don’t pay off your balance every month.
However, if you use a credit card responsibly and pay off the balance every month, it’s a good way to start building credit. Most credit cards also have other benefits such as rewards points, cash back, or travel points.
So, should you have a credit card? Well, it depends.
If you’re capable of paying off the balance in full every month, then you should have no problem managing a credit card and staying out of debt.
Pro Tip: Treat your credit card as a debit card. Pay it off in full every day if you have to. I try to pay off my balance every couple of weeks so that I don’t forget.
7. Staying Out of Bad Debt
Debt means you owe someone money, and if I’ve learned anything from gangster movies, you never want to owe someone money.
However, not all debt is necessarily bad debt.
What is a Bad Debt in Personal Finance?
Bad debt is any debt that’s acquired through purchasing something that’s going to lose value and generate zero revenue.
Some examples of bad debt would be credit card debt or an auto loan.
What is a Good Debt in Personal Finance?
Good debt is the opposite of bad debt. Good debt is acquired so that you can purchase something that is going to benefit you financially in the future. That means it’s either going to generate income or allow you to make more money in the future.
Good debt usually has a lower interest rate as well. Here are some examples of good debt:
Student Loans: Good or Bad Debt?
Since student loans typically have a very low interest rate and going to school can increase your pay as an employee in the future, student loans can be considered good debt.
However, if you’re going to college just because you don’t know what else to do after high school, that’s probably the wrong move. You could end up wasting a lot of money studying a field that you don’t even enjoy. Then you’ll be stuck working a job you hate to pay off your student loans. Not fun.
Mortgage: Good or Bad Debt?
This one’s a tricky one, but mortgages are generally considered good debt. They are usually long-term loans with low interest rates, so you’ll still have money freed up for investments and such. The interest from mortgages is also tax deductible, so that’s a bonus.
In the end, it’s up to you to decide whether purchasing a home is the right move, as the value of a house will not always rise as some people think. You’ll also have to add in the expenses of property tax, utilities, and home insurance.
What Are Business Debts?
There are a lot of online business ideas you can start on the cheap these days, but a small investment can also go a long way in certain endeavours.
Business loans are considered good debt because they are put towards something with the goal of increasing your net worth.
8. Always Have an Emergency Fund
If you lost your job tomorrow would you have enough money to live off while you look for a new one? If not then you’re not alone.
This study found that although Americans are doing a better job at saving, around 24 percent of them (57 million people) don’t have an emergency fund.
Now I don’t want to be a negative Nancy or a Debbie downer, but emergencies happen all the time. They may not happen to you, but it’s always good to be prepared.
You can’t predict an emergency, but you can prepare for one.
The best way to do so is to set up an emergency fund of 3-6 months living expenses. That means if you lost your job tomorrow, you’d be able to live off your emergency fund for 3-6 months while you look for a new one.
Here are some common financial emergencies:
Medical or dental expenses
Still not convinced that you need an emergency fund? I wrote a story to show you how important having an emergency fund is:
Case Study: Tom’s Personal Finance Story
Tom is an optimistic guy who makes $3,000/month and pays $1,500/month in expenses. The leftover $1500 he uses as pleasure money.
Tom doesn’t think anything bad will ever happen to him, so he doesn’t think he needs an emergency fund. He’s done fine all these years without one, right?
Tom goes into work one day and is told he’s being let go because the company has gone bankrupt. Sorry, Tom.
Tom is shocked, but he’s still optimistic.
He’ll just put his expenses on his credit card while he looks for a new job. He’ll have to live without his $1500 pleasure money for a bit, but he’s okay with that.
Tom works hard to find a new job and 3 months later he’s hired. It pays a bit less at $2,500 a month, but it’s better than nothing.
He’s now racked up $3,000 in credit card debt. Since his new job pays less than his old one, he’ll only have $1000 left each month after paying for the necessities.
With $3,000 on his 15% credit card, it will take him 16 months to become debt free, and he’ll pay about $300 in interest. Keep in mind Tom would have to live without any pleasure money for over a year to pay off his debt at this rate.
If Tom had just set up a 3-month emergency fund, he wouldn’t have had any debt at all, and he would still be able to do fun stuff.
Don’t be like Tom. Set up an emergency fund. You probably didn’t need that silly story to convince you, but it was fun to write.
9. Getting Hold Of Your Net Worth
Net worth can seem like a tricky topic, but it’s quite simple. Your net worth is how much money you are worth. If you were to sell everything you own, then pay off everything you owe, how much money would be left?
That’s your net worth.
Here’s what that looks like in equation form:
Net worth = Assets (what you own) – Liabilities (what you owe)
Ready to calculate your net worth? Here’s how:
First, create a list of all your assets (what you own) and their estimated value.
Here are some examples of assets:
At the bottom of the list, add up the total value of all your assets.
Next, create another list of all your liabilities (what you owe).
Here are some examples of liabilities in personal finance:
Credit card debt
At the bottom of the list, add up the total value of all your liabilities.
Now that you have the total value of your assets and liabilities, plug the numbers into the equation above, and you’ll get your net worth.
Positive vs. Negative Net Worth (Personal Finance)
If you have a positive net worth that’s good. Continue working to increase your net worth even more.
If you have a negative net worth, you need to take a look at your budget and come up with a plan to increase your net worth. If you’re young and you have a big student loan, you shouldn’t worry too much as you haven’t even started working yet.
Make sure to re-calculate your net worth every month or so to keep up to date with your finances.
10. Start Investing Early – Let Compounding Do the Magic on Your Money
Investing is one of the best ways to increase your net worth, but a lot of people stay away from it because they’re scared of losing money. So instead of investing, they keep their money in a savings account. That’s great, and you should have some money in a savings account for emergencies, but the truth is:
Money in a savings account loses value over time.
See, the average savings account has a very tiny 0.06% APY (annual percentage yield), while inflation is around 1.5%. That means that each year, the money you have in a savings account is going to have less and less buying power.
So, what can you invest in to stay ahead of inflation? Here are some options:
Exchange-traded funds (ETFs)
Cryptocurrency (crypto can be volatile, so invest at your own risk)
There you have it, the personal finance basics laid out in 10 simple points.
Did you learn anything new from these personal finance tips and tricks?
If you did: Take action. Start working on improving your finances today, not tomorrow.
It’s easy to read these tips and think, “Oh, I can calculate my net worth tomorrow” or “Ehh, I’ll set up that auto-deposit next month.”
But if you say that stuff, you’re just coming up with excuses. Take action today, and you’ll be one step closer to financial success.
Please leave your thoughts and comments below.