The world of finances can be overwhelming and intimidating for many people. Afterall, there’s plenty of advanced financial information available for consumption, but there’s often conflicting opinions and advice that can make the topic of finances even more confusing.
But personal finances don’t have to be complicated. In fact, it can be helpful to simplify your approach when you first begin your financial journey by sticking to the basics.
Here are some financial basics that can help build a solid foundation for understanding and improving your personal finances.
1. Checking Your Credit Report
Your credit report is a great place to start when trying to get a firm understanding of your financial situation. It serves as a record for your credit activity, allowing you to clearly see what debts you owe.
Federal law gives you the right to receive one free copy of your credit report every 12 months from each of the three credit reporting agencies: Equifax, Experian and TransUnion.
Be aware that there are many credit report scams out there, so it’s best to access your credit report by visiting AnnualCreditReport.com.
To access your credit report, you’ll need to provide identifying information (e.g. name, birth date, social security number, etc.) and be able to answer verification questions that might be related to previous employers or loan information.
You may find that your credit report is quite long, but don’t let this deter you from reviewing the details.
Check to make sure all previous and current debt information is accurate. And pay attention to any hard inquiries from lenders who requested to review your credit report.
By periodically checking your credit report, you can flag errors and spot any signs of identity theft early.
2. Improving Your Credit Score
Many people assume their credit score only matters when it’s time to apply for a loan or open a new credit card. But your credit score could influence other important financial situations, like your insurance rates, employment opportunities and living arrangements (e.g. renting an apartment or buying a home).
Your credit score is based on information found in your credit report. But it isn’t included in your credit report itself. Instead, you can use a credit score site to monitor your score. Or see if your credit card issuer tracks your score as an added perk.
One of the most popular types of credit scores is the FICO score, which ranges from 300 to 850. And the higher your score, the better offers you’ll receive for interest rates.
You can boost your credit score by:
- Disputing errors on your credit report
- Maintaining a positive payment history (even an occasional late payment can have a serious impact on your credit score)
- Lowering your credit utilization rate by paying down your credit account balances
Improving your credit score takes time, but it’s well worth the effort since it can open doors to future financial opportunities.
3. Setting a Budget
If you’re ready to overhaul your finances, start by creating a budget that fits your situation. Consider your present and future financial goals. And do a deep dive on where your priorities fall for needs versus wants.
A well-thought-out budget can serve as both a visual aid and a roadmap for your money. It provides clarity on where your money is coming from and where it’s ultimately going.
Start by calculating your monthly income from all sources and tracking your current spending. Review your financial statements, including bank statements, credit card bills, and any other financial documents that will provide detailed information about your expenses.
Use this information to create a list of monthly fixed and variable expenses with an assigned spending value.
If your monthly expenses are higher than your income, you’ll need to find a way to reduce some of your variable expenses.
For example, you might be able to negotiate a lower price for your phone or internet bill. Or cancel services you can live without, like an unused gym membership or subscription boxes.
Keep in mind that it might take some time to find a budgeting technique that works for you.
Some people choose to use zero-based budgeting where every dollar is accounted for and has a purpose. Whereas, other people choose a more loose budgeting model that allows for more flexibility in their spending.
The most important component of budgeting is to gain awareness of where your money is going, so you can better control your monthly expenses.
4. Building an Emergency Fund
Financial emergencies can happen at any time. A sudden job loss, medical emergency or unexpected house repair can quickly wreak havoc on your finances. So, it’s important to have a sufficient emergency fund available when needed.
If you’re starting from scratch, aim to save $1,000 in your emergency fund. Once you hit that goal, work towards saving three to six months’ worth of living expenses.
Be sure to only tap into your emergency fund for true financial emergencies. It can be helpful to set the money aside in a separate savings account that isn’t as accessible as your checking account.
5. Managing Your Debt
If you carry debt (e.g. student loans, credit cards, car loans, etc.), it’s important that you stay on top of your monthly payments. And pay more than the minimum to help pay down your debt faster and avoid unnecessary interest charges.
You can fast track your debt repayment by committing to a debt reduction strategy.
To do this, make a list of all of your debts, including each balance, interest rate and required monthly payment. And then consider using one of the following debt repayment strategies:
Debt snowball method: Pay off your debts from the smallest balance to the largest balance. As you knock out each debt, “roll” your original payment into the payment for the next smallest debt. This strategy provides you with a psychological “win” each time you pay off a debt, which can be extremely motivating for some people.
Debt avalanche method: Pay off your debts from highest interest rate to the lowest interest rate. This strategy will save you the most money in interest charges, but it can take longer to see progress.
Choose a payoff strategy that aligns with your financial goals and money mindset to set yourself up for long-term success.
6. Saving for Retirement
Depending on your age, you might not be too concerned with saving for retirement. But the sooner you start saving, the longer your money can grow thanks to compound interest.
There are a variety of retirement investment tools that each have their own advantages and limitations. This might include a work pension, 401(k), traditional individual retirement account (IRA) or Roth IRA.
At minimum, you should take advantage of your employer’s 401(k) matching contribution. This benefit isn’t always offered, but if it is, you’re essentially getting free money to add to your retirement.
Get Your Financial House in Order
It’s important to have a firm grasp on the financial basics before diving into more complex topics. After all, there’s no benefit to learning about how to invest in stocks and bonds if you’re struggling to pay your bills or have no money left over at the end of each pay period.
By taking the time to work on the fundamentals of your finances, you’ll be laying the groundwork for healthy financial habits that’ll serve you for a lifetime.