what is personal finance 
personal finance is a term that covers managing your money as well as saving and investing it encompasses budgeting banking insurance mortgages investments and retirement tax and estate planning the term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities individual goals and desires and a plan to fulfill those needs within your financial constraints also impact how you approach the above items to make the most of your income and savings it s essential to become financially savvy it will help you distinguish between good and bad advice and make intelligent financial decisions the importance of personal financepersonal finance is about meeting your personal financial goals these goals could be anything having enough for short term financial needs planning for retirement or saving for your child s college education it depends on your income spending saving investing and personal protection insurance and estate planning not understanding how to manage finances or be financially disciplined has led americans to accumulate enormous debt in february 2024 the federal reserve bank reported household debt had increased by 3 4 trillion since december 2019 prior to the recession in addition the following balances increased from the third quarter of 2023 to the fourth student loans remained unchanged at about 1 6 trillion 1americans are taking on an ever increasing amount of debt to finance purchases making managing personal finances more critical than ever especially when inflation is eating away at purchasing power and prices are rising areas of personal financethe five areas of personal finance are income saving spending investing and protection income is the starting point of personal finance it is the entire amount of cash inflow that you receive and can allocate to expenses savings investments and protection income is all the money you bring in this includes salaries wages dividends and other sources of cash inflow spending is an outflow of cash and typically where the bulk of income goes spending is whatever an individual uses their income to buy this includes rent mortgage groceries hobbies eating out home furnishings home repairs travel and entertainment being able to manage spending is a critical aspect of personal finance individuals must ensure their spending is less than their income otherwise they won t have enough money to cover their expenses or will fall into debt debt can be devastating financially particularly with the high interest rates credit cards charge savings is the income left over after spending everyone should aim to have savings to cover large expenses or emergencies however this means not using all your income which can be difficult regardless of the difficulty everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending somewhere between three and 12 months of expenses beyond that cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time instead cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow such as investments investing involves purchasing assets usually stocks and bonds to earn a return on the money invested investing aims to increase an individual s wealth beyond the amount they invested investing does come with risks as not all assets appreciate and can incur a loss investing can be difficult for those unfamiliar with it it helps to dedicate some time to gain an understanding through readings and studying if you don t have time you might benefit from hiring a professional to help you invest your money protection refers to the methods people take to protect themselves from unexpected events such as illnesses or accidents and as a means to preserve wealth protection includes life and health insurance and estate and retirement planning personal finance servicesseveral financial planning services fall under one or more of the five areas you re likely to find many businesses that provide these services to clients to help them plan and manage their finances these services include personal finance strategiesthe sooner you start financial planning the better but it s never too late to create financial goals to give yourself and your family financial security and freedom here are the best practices and tips for personal finance the 2022 investopedia financial literacy survey surveyed 4 000 adults and found that most americans are concerned about personal finance basics retirement funding and investing in crypto it s all for nothing if you don t know how much you bring home after taxes and withholding so before deciding anything ensure you know exactly how much take home pay you receive a budget is essential to living within your means and saving enough to meet your long term goals the 50 30 20 budgeting method offers a great framework it breaks down like this it s never been easier to manage money thanks to a growing number of smartphone personal budgeting apps that put day to day finances in the palm of your hand here are just two examples it s important to pay yourself first to ensure money is set aside for unexpected expenses such as medical bills a significant car repair day to day expenses if you get laid off and more the ideal safety net is three to 12 months of living expenses financial experts generally recommend putting away 20 of each paycheck every month once you ve filled up your emergency fund don t stop continue funneling the monthly 20 toward other financial goals such as a retirement fund or a down payment on a home it sounds simple enough don t spend more than you earn to keep debt from getting out of hand but of course most people have to borrow from time to time and sometimes going into debt can be advantageous for example if it leads to acquiring an asset taking out a mortgage to buy a house might be one such case still leasing sometimes can be more economical than buying outright whether renting a property leasing a car or even getting a subscription to computer software on the other hand minimizing repayments to interest only for instance can free up income to invest elsewhere or put into retirement savings while you re young when your nest egg gets the maximum benefit from compounding interest some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay 45student loans account for 1 59 trillion of consumer debt if you have an outstanding student loan you should prioritize it 1 there are myriad loan repayment plans and payment reduction strategies available if you re stuck with a high interest rate paying off the principal faster can make sense flexible federal repayment programs worth checking out include 6credit cards can be major debt traps but it s unrealistic not to own any in the contemporary world furthermore they have applications beyond buying things they are crucial to establishing your credit rating and a great way to track spending which can be a considerable budgeting aid credit needs to be managed correctly meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum that is keep your account balances below 30 of your total available credit 7given the extraordinary reward and incentives offered these days such as cashback it makes sense to charge as many purchases as possible if you can pay your bills in full avoid maxing out credit cards at all costs and always pay bills on time one of the fastest ways to ruin your credit score is to constantly pay bills late or even worse miss payments using a debit card which takes money directly from your bank account is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest credit cards are the primary vehicle through which your credit score is built and maintained so watching credit spending goes hand in hand with monitoring your credit score if you ever want to obtain a lease mortgage or any other type of financing then you ll need a solid credit report there are a variety of credit scores available but the most popular one is the fico score 8factors that determine your fico score include 9fico scores are calculated from 300 to 850 here s how your credit is rated 10to pay bills set up direct debiting where possible so you never miss a payment and subscribe to reporting agencies that provide regular credit score updates in addition you can detect and address mistakes or fraudulent activity by monitoring your credit report federal law allows you to obtain free credit reports once a year from the big three major credit bureaus equifax experian and transunion 11reports can be obtained directly from each agency or you can sign up at annualcreditreport com a federally authorized site sponsored by the big three some credit card providers such as capital one will provide customers with complimentary regular credit score updates but it may not be your fico score instead capital one s creditwise program offers your vantagescore 12due to the covid 19 pandemic the three major credit bureaus are providing free credit reports weekly the program was extended twice in 2022 and it is now permanent 13to protect the assets in your estate and ensure that your wishes are followed when you die be sure you make a will and depending on your needs possibly set up one or more trusts you also should look into insurance and find ways to reduce your premiums if possible auto home life disability and long term care ltc periodically review your policy to ensure it meets your family s needs through life s major milestones other critical documents include a living will and a healthcare power of attorney while not all of these documents directly affect you all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated retirement may seem like a lifetime away but it arrives much sooner than expected experts suggest that most people will need about 80 of their current salary in retirement 14 the younger you start the more you benefit from what advisors call the magic of compounding interest how small amounts grow over time setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax advantaged plan such as an individual retirement account ira a 401 k or a 403 b while your children are young take the time to teach them about the value of money and how to save invest and spend wisely if your employer offers a 401 k or 403 b plan start paying into it immediately especially if your employer matches your contribution by not doing so you re giving up free money take time to learn the difference between a roth 401 k and a traditional 401 k if your company offers both investing is only one part of planning for retirement other strategies include waiting as long as possible before opting to receive social security benefits which is smart for most people and converting a term life insurance policy to permanent life as you age it s natural for you to accumulate many of the same things your parents did a family home or apartment belongings and health issues insurance can be expensive if you wait too long to get it health care long term care insurance life insurance it all increases in cost the older you get additionally you never know what life will send your way if you re the sole breadwinner for the family or you and your partner both work to make ends meet a lot depends on your ability to work insurance can cover most of the hospital bills as you age leaving your hard earned savings in your family s hands medical expenses are one of the leading reasons for debt 15 if something happens to you life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially due to an overly complex tax code many people leave hundreds or even thousands of dollars sitting on the table every year by maximizing your tax savings you ll free up money that can be invested in your reduction of past debts enjoyment of the present and plans for the future you should start saving receipts and tracking expenditures for all possible tax deductions and tax credits many office supply stores sell helpful tax organizers that have the main categories already labeled after you re organized you ll want to focus on taking advantage of every tax deduction and credit available as well as deciding between the two when necessary in short a tax deduction reduces the amount of income on which you are taxed whereas a tax credit reduces the amount of tax that you owe this means that a 1 000 tax credit will save you much more than a 1 000 deduction 16budgeting and planning can seem full of deprivations make sure you reward yourself now and then whether it s a vacation a purchase or an occasional night on the town you need to enjoy the fruits of your labor doing so gives you a taste of the financial independence you re working so hard for last but not least don t forget to delegate when needed even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks it doesn t mean you should setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant cpa or a financial planner at least once might be a good way to jump start your planning personal finance skillsthe key to getting your finances on the right track is using skills you likely already have it s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management three key skills are finance prioritization assessing the costs and benefits and restraining your spending personal finance educationpersonal money management isn t one of the most popular topics in educational systems many college degrees require some financial education but it isn t geared toward individuals which means that most of us will need to get our personal finance education from our parents if we re lucky or learn it ourselves fortunately you don t have to spend much money to find out how to manage it better you can learn everything you need to know for free online and in library books almost all media publications regularly dole out personal finance advice too reading personal finance blogs is a great way to start learning about personal finance instead of the general advice you ll get in personal finance articles you ll learn exactly which challenges real people face and how they address them mr money mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices 17 centsai helps you navigate myriad financial decisions via first person accounts 18 million mile secrets and the points guy each teach you how to travel for a fraction of the retail price using credit card rewards these sites often link to other blogs so you ll discover more sites as you read 1920of course we can t help tooting our own horn in this category investopedia offers a wealth of free personal finance education you might start with our special sections on budgeting buying a home and planning for retirement or the thousands of other articles in our personal finance section you may need to visit your library in person to get a library card if you don t already have one but after that you can check out personal finance audiobooks and e books online without leaving home some of the following best sellers may be available from your local library i will teach you to be rich the millionaire next door your money or your life and rich dad poor dad personal finance classics such as personal finance for dummies the total money makeover the little book of common sense investing and think and grow rich are also available as audiobooks if you enjoy the structure of lessons and quizzes try one of these free digital personal finance courses personal finance podcasts are a great way to learn how to manage your money if you re short on free time while you re getting ready in the morning exercising driving to work running errands or preparing for bed you can listen to expert advice on becoming more financially secure in addition to the investopedia express with caleb silver you may find these valuable the most important thing is to find resources that work for your learning style and that you find interesting and engaging if one blog book course or podcast is dull or difficult to understand keep trying until you find something that clicks education shouldn t stop once you learn the basics the economy changes and new financial tools like the budgeting apps mentioned earlier are always being developed find resources you enjoy and trust and keep refining your money skills through retirement and beyond 