An Introduction to Managing Personal Finances for Beginners

Setting Goals

Setting goals is vital to ensuring healthy personal finances, but the key is to set goals for both the short-term and the long-term. This is important for many reasons, but mostly because your needs will vary in different stages of life. 

First, create a master list of all your goals. While an individual’s goals depend on personal priorities and can be dependent on age, some common goals take precedent in many households. 

Short term goals can include:

• Building an emergency fund to cover at least three months of living expenses
• Limiting new credit card charges to an amount that’s feasible to fully pay off every month
• Paying off existing credit card balances

Longer-term goals can include: 

• Starting to save at least 10% of your gross salary every year for your retirement 
• Saving for a home down payment 
• Saving for a child’s (or grandchild’s) education in a tax-advantaged 529 plan

It’s important that your financial goals be treated seriously. Cultivating the right frame of mind about your finances means you’ll be that much more likely to follow through with your course of action. Create a spreadsheet with sections dedicated to each element:  the timeline, the details of the goals, your plan to achieve them, and any barriers that might stand in your way. 

Keep a Budget

While keeping a budget may not be easy in the current financial climate, that shouldn’t stop you from being organized and disciplined with your spending. Budgeting wisely is possibly the most important financial habit you can develop. 

As with your goals, keep your budget on an active spreadsheet accessible from your laptop or mobile phone. Ease of access to your monthly expenses will help deter you from making non-essential purchases.  

A budget also gives you tremendous peace of mind. All your finances are laid out before you, and you understand precisely where you stand financially. 

But creating a budget is the easy part: sticking to it can be hard. A helpful budgeting strategy is the 50/30/20 framework. The goal is to spend around 50% of your post-tax income on essential things (e.g., rent/mortgage, food, car payments) and 30% on other less essential but still necessary expenses like your phone and data plan. Also included in the 30% are the socio-emotional necessary purchases like going out to dinner with your family. 

The final 20% is strictly reserved for savings, like building your emergency reserves, putting away money for retirement, saving up enough funds for a down payment on a house or car, or starting your own small business.

Another essential part of creating a responsible budget is categorizing all expenses based on the degree of urgency: the “must-have,” the “nice-to-have,” and the “unnecessaries.” 

Saving for a Rainy Day

They say that when it rains, it pours, and none of us are immune from hard times. The scary thing is that these rainy days usually aren’t within our control. Difficult economic times can result from socio-economic and geo-political issues or massive financial and social issues related to a pandemic, as we’ve all experienced recently. 

The point is that you need to save for unforeseen circumstances. A good rule of thumb is to have at least three months of your net salary in savings. While that isn’t always possible, remember this is just a guideline and should not prevent you from saving as much as you’re able for that rainy day. Whether you’re able to dedicate $100 a month or $1000 a month to your savings, the point is that you’re putting something away, and that’s what counts. 

To calculate how much you’re able to save, use your budget and the categories we discussed. If you’re disciplined enough, you should be able to put away a reliable sum each month, no matter how big or small it is. 

Kill Your Credit Card Debt

While credit card debt can be a good thing for your credit record and urgent purchases, the key is to pay it off as quickly as possible. This will build your credit record and give you a favorable interest rate for other credit purchases. 

However, paying the minimum amount or skipping payments will do precisely the opposite: you’ll incur penalty rates and negatively impact your credit record. 

If you have multiple credit cards, you can use the “avalanche” method. Pay the minimum due each month on all your credit cards and add extra money to the card with the highest interest rate. Then, when the balance on your highest-rate card is paid off, start putting the additional payments onto the card with the next-highest interest rate. 

Save For Your Retirement

These days, people are living longer and living more active and fulfilled lives in their old age. So, if you plan to retire in your early to mid-sixties, like most people, you’ll need enough pension savings for 20 to 30 years of living.

No matter your current age, thinking about your retirement is essential. But, of course, the older you get, the more urgent it becomes. While many of us have a pension fund via our employers, many of us do not and will need to establish one for ourselves.

It’s often difficult to know how much money you’ll need in your retirement years, which is why pension funds are always the best option. They calculate how much you’ll need and include variables like inflation in their estimates. 

It’s never too early to start saving for retirement. But know that it’s always better late than never to create that pension fund so you can enjoy the fruits of your labor in the future.

Remember that neither your age nor financial status has any bearing on your ability to be financially savvy and to do the best that you can with what you have.