The Beginner's Guide to Personal Finance
You can manage your personal finance today in 6 easy steps. Personal finance management is the first critical step to growing personal wealth. To start, we discuss how to track your finances. This allows you to know exactly how healthy your finances are.
When we know our current financial health, we can then take steps to grow our assets. We'll discuss strategies to start building assets. Once we can grow our assets, we'll speed up growth using investing.
1.Track Your Assets
You need to know what your net assets are before you can manage your personal finance. You can calculate your net assets using basic math and an excel sheet or Google doc sheet.
Set up spreadsheet
Setup a spreadsheet and start tracking your asset growth weekly. We built an in-depth article on how to setup a net assets spreadsheet in a few easy step. We also included a Google sheets template for you to download
Update your sheet once a week to confirm you grew your assets. This helps you make better purchasing choices during the week.
It is critical that you check your assets weekly. This helps you plan in detail for the week and find costs that should be cut.
There are other tools you can use to monitor your finances:
However, to start, a spread sheet is highly recommended. A spread sheet gets you to look at your costs and income in detail. Reviewing the details help you understand how to improve your finances.
A big item people find when they first start are subscription costs they don't use anymore. These costs are easier to spot when you review your personal finances monthly.
2.Get Monthly Income Higher Than Costs
168 Hours a Week
If your income is not enough to cover expenses, before you cut spending, try to increase your total income. Today, their are multiple ways to earn income outside of a 9 to 5 job. Here are just some ideas to increase income:
- Find a gig job. You can use resources like upwork.com to find gig opportunities for a job that fits your talents
- Find a weekend job. Weekend jobs can be found in different services and industrial jobs. Weekend jobs pay more per hour and can fit into a normal work schedule.
- Build a Side Business. Build a side business like an e-commerce site or a media business using YouTube or WordPress. Start building your side business by using these great resources from inspiresmall.biz.
Pay off your high interest debts
The most critical costs to pay off first are high interest debt. Debt is different from person to person. Nonetheless, you typically should pay off debt in this order:
After paying your minimum interest payments, focus on your highest debt interest rate. Typically, the highest interest rate will be in the order listed above.
3.Cut Meaningful Costs
Its great to cut a small cost like your daily coffee. That $5 a day adds up to $1,825 a year! These are great wins that you should cut if you can.
However, your focus should be on your big ticket items first. Frankly, these big costs will be your biggest barriers when trying to save:
- House mortgage or apartment rent
- Car payment
- Food and gas
- Child care
These major ticket items deserve your most focus as they are required expenses. If you lose job or have a surprise medical expense, these costs cannot be cut.
If your net assets are not increasing monthly, try cutting all costs other that these 5 items. Do it thoughtfully as this is a major purge of costs. Once you get these major ticket items below your income, budget in other items.
4.Add Enjoyment to Your Budget
What's the point of all this if you're not enjoying life? Don't take this part of the budget lightly. Enjoyment is critical for your mental health. Without enjoyment, you will not be able to sustain a personal finance cadence.
Here are some tips for budgeting for fun activities.
- Use physical cash for fun activities. Avoid using credit cards. Once you're out of cash then you know you've had enough fun.
- Put cash aside for fun. Do not include physical cash in your net asset spreadsheet. Once you remove it from your bank account, it's your cash to do what you want with it.
Budget for fun activities as soon as you can increase your assets each month. It is very important you reward yourself for managing your personal finances.
5.Beef Up Your Emergency Savings
Once you can budget for fun activities, start adding to your emergency savings. Emergency savings are important. But in practical terms its the last item you need to start saving for. It will take time to accumulate emergency savings, so it's not healthy to put off fun activities. It may take years to save, so you should not push off enjoyment or you will not keep up with your cadence.
You should save up at least 6 months of expenses in your emergency savings. These should be in safe, liquid assets like a savings account or bonds. Do not hold more than 6 months of emergency savings. After you beef up your emergency savings, put the rest of your savings into investments.
Mix in liquid investments into your portfolio. Liquid investments like stocks can be sold in an emergency within a day.
Investing is a critical part of your personal finance. Check out our guide for beginner investors to learn more about investing today. Investments will supplement your costs in the short term. Long term, your investments can overtake your job as your main income source.
Contribute Enough To Earn The Full Employer Match
The best investment return a new investor can make is an employer match in a 401k. An employer match program will differ between companies. Typically, employers match 100% of your investment up to 2% of your income. Then they will match 50% of the next 3% of your income.
Always do the maximum match. When a company matches your $400 investment by giving you $400, you made an immediate 100% return. You received this before you bought your first stock. That is unbeatable by any other investment and must be the first investments you do.
Build an Investing Cadence
An employer match occurs in a retirement account. Though the return is excellent, it comes with a downside. If you want to use that money now, you will pay a hefty fee for withdrawing it from a retirement account before your retirement age. Because of this, you need to invest regularly outside of your retirement account.
These investments help build supplemental income in the form of stock dividends, interest paid to you, and stock growth. Your investments can supplement your costs, which then allow you to invest more. This will gain momentum and overtime you will want your investments to pay all of your costs.
The Bottom Line
There are four objectives that everyone must complete in order to have healthy finances. Each objective is more difficult than the last:
- Increase your income and reduce your spending so that your total assets increase over time
- Have enough cash set aside
- Increase your total net assets until they are positive
- Grow your investments
- Your investments are growing faster than normal income (advanced)
You can meet these objectives by successfully managing your personal finances. Start by building a strong monitoring cadence. When you can measure your financial health, you can control your financial health. Invest immediately and budget money aside for fun activities. Mental health will help you keep to the process.