Personal finance skills have lifelong benefits. If you are like the millions of other American households, you may be living paycheck to paycheck, struggling to get ahead and wondering what you can do to get your head above water. Making financial decisions is tough, especially when you don’t have a good understanding of how best to spend and save money. If you are one the households struggling with finances, there are 5 personal finance lessons that never lose their value.
Top 5 Personal Finance Lessons
- Getting out of and avoiding debt
- Building an emergency fund
- Saving for retirement
- Creating a budgeting
- Setting financial goals .
Getting Out of Debt
One of the greatest obstacles when trying to get ahead financially is debt. For every dollar you carry in debt, you will end up paying numerous times over with interest, so paying down your existing debt should be your number one priority. If you are buried in debt, paying off the little debts first will give you the confidence you need to take care of the larger debts. If all of your credit card balances are somewhat similar, start paying off the one with highest interest first. Learn to pay cash for all of your purchases and if you do not have the cash, don’t buy it.
- One way to lower debt is by carefully reviewing all of your bills. You would be surprised at how many mistakes there can be on a credit card statement, a bank statement and even a grocery store receipt.
- If you feel the need to use plastic instead of cash, use the debit card. No credit cards, period.
- If possible, reduce your spending by a minimum of 20 percent. Stay home for meals, use coupons for purchases and shop the sales.
Build an Emergency Fund
An emergency fund is cash kept in savings in the case of an emergency, such as car repairs or living expenses should you lose your job or get injured. Having an emergency fund will not only help you get by, but it will also help you to avoid any additional debt. It is typically recommended that you an emergency fund have 3-6 months’ worth of income available, but you can start with a minimum goal of $1000. If you are worried about finding extra cash among the budget essentials and paying down your debt, there are some easy ways to start. For example, for each dollar you save elsewhere, put in a savings account for your emergency fund.
- Open a separate account for your emergency fund and if at all possible, use a different bank than your bank you use for your personal expenses.
- Creating an emergency fund takes time, you won’t have a large amount in a week, but every dollar you put towards it will add up.
- Keep in mind that even small steps will help you reach your goal of financial security.
Plan Your Retirement
The hardest part of planning for retirement is getting started. If you have a matching 401K through your job, do everything you can to get the full available match. Another way to build your retirement is to schedule increases of at least 1 percent every six months to a year.
- Start with the basic must-do’s, such as thoroughly reviewing what you currently have in a retirement fund.
- Never leave free money for someone else. If you have the opportunity to have your deposit matched, take it.
- Every dollar you put aside now for your retirement will earn interest, giving you a little more padding come retirement.
Create a Budget
Creating a budget is the starting point for every other financial goal in your life. Not only is it important to set a budget, but to follow it as closely as possible. Although there are several ways to create a budget, there are certain costs that should be included in every budget, including rent or mortgage, gas and/or electricity, water, transportation, food, and clothing. To create a simple budget, make a list of all living expenses for one month and deduct this amount from your total income. Any money left over is what you will use to divide up into funds, such as retirement or paying off debt.
- A budget will allow you to decide where your money needs to go now and where you want it to go in the future.
- Managing to live lean now will help you enjoy financial security in the future.
- The more money you trim off of each category, the more you will have left over at the end of the month, so create a realistic, yet disciplined budget.
Set Financial Goals
When setting financial goals, it is essential that you are realistic. Setting smaller, shorter-term goals will allow you reap quicker results. Even something as minor as making a goal to put aside $20 a month for 3 months will allow you to see your goals being met, as well as give you extra money for the emergency fund, retirement fund or the trip you want to take in six months. Long term goals should be limited to one year. For example, you could make a monthly goal to pay an extra $10 month to a minor debt, with a long-term goal of having two credit cards paid off in one year.
- Set specific financial goals. For example, your goals of paying off debt should be specific, such as one credit card paid off every three months or a certain amount put aside in the emergency fund in a specific period of time.
- It is important to remember that the further away a goal seems, the less sure you will be about when it can happen, making it easy to give up.
- Do not use words to describe your goals, instead use numbers and dates to describe what you want to accomplish.
To sum up your financial lessons, the most important thing to remember is that with dedication and determination you can have financial security. Remember that it took you several years to get into debt, so getting out of debt will not happen overnight. If you set small, realistic goals, chances are that you will meet your goals. If your budget only includes your living expenses, any money left out of your paycheck will be thought of as extra, so making savings part of your monthly budget.