Money.
It’s on everyone’s mind. All the time.
Unfortunately, it’s not always in a positive way. In a Northwestern Mutual survey, 44 percent of people said their biggest form of stress is money.
If you’re one of the people who feel like your personal finances could use some work (or they’re a total mess), there’s good news: You have time to take action. And you have loads of options to help get to where you want to be.
The problem is that the whole topic of personal finances can get overwhelming – fast.
How can I manage to pay off all this debt? What should my budget be? How can I shift to a long-term mindset instead of just paying this month’s bills?
These questions are all more common than you might think.
While there’s a lot to learn and a lot of options, fret not. The first step is to sit down and dive right in. And that’s just what we’re here for.
In this article, I’m going to break down the personal finance basics. We’ll also look at a five-step breakdown to guide your own personal finance journey, as well as a few tools that can help you keep things smooth and organized.
Let’s do this.
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What Is Personal Finance?
In a nutshell, personal finance is what you do with all the money you earn or receive.
Personal finance typically involves having a specific plan for where the money goes. You might take your income and split it between saving, spending, protecting your assets, and investing for the future.
Let’s break these down a bit more.
- Income. All the money you earn or get. These sources include your salary and bonuses, pension, and dividends, as well as money you get as an inheritance or gift.
- Spending. Where does your money go? This involves necessities like rent or mortgage and food, and non-essentials like going out, hobbies, and whatever you buy simply because you want to.
- Saving. Do you have a shoebox full of cash? You might also save by keeping your money in a checking or savings account or low-risk money market securities.
- Investing. Typical investments include stocks, bonds, and mutual funds, as well as investments in things like real estate properties or private companies.
- Protection. Planning for accidents or unforeseen events. This involves getting various types of insurance, like health or life insurance. It might also involve estate planning.
So how do all these pieces fit into the personal finances puzzle? Glad you asked.
How to Manage Personal Finances
A personal finance plan is as unique as each person who makes it. There’s no single right way, but there are some guidelines to keep in mind as you build your own.
Here are five foundations of managing personal finances.
1. Think about your goals and priorities
Let’s put the “personal” in personal finances. The whole point of all this is to dig deep into your own needs, wants, and dreams, then to commit to slowly working toward them.
To make your budget and start your plan, you need to understand what you really want in the short-term and the long-term.
Ask yourself the “big” questions like:
- Where do I want to be in one, five, ten, and twenty years?
- How much money do I want to have?
- What items do I want to own?
- What experiences do I want to have?
- What are my work, family, and personal life like?
- What do I want to change about my current life?
If these questions are intimidating or if you simply don’t know the answers, don’t worry. The point of the exercise isn’t to plan your whole life – it’s to get yourself thinking about it so you’re better equipped to start building your plan.
Remember that your personal finance plan is just as flexible as your life is. Keep it fluid and try to avoid “analysis paralysis” that keeps you from ever starting!
2. Assess your current financial situation
Now that you’ve done some dreaming, it’s time to kick into action mode.
Before you can build a personal finances plan that actually makes sense for your life and your desires, you need to understand where you are.
This starts with a simple analysis of a couple things:
- Cash flow, or “money in vs. money out:” how much money you’re earning and spending every month
- Net worth: the money and assets you have now minus what you owe toward things like credit cards, car payments, and student loans
There are plenty of ways you can figure these values out.
For example, the Mint app lets you bring together all your income, investments and expenses so you can have a real time view of these values. We’ll talk more about Mint later.
For now, we’re going to take the old fashioned route: a spreadsheet.
We’ve made a spreadsheet where you can write your income and expenses for every month.
Click here to access the Monthly Cash Flow spreadsheet. Keep in mind that you can’t write directly into this sheet – you need to make a copy and save it to your Google Drive, or download an Excel sheet to use on your computer.
I recommend filling out this spreadsheet for at least the past six months so you can have a handle on your spending patterns and averages.
How the cash flow spreadsheet works
We set up some quick calculations so you don’t need to do all the math by hand. When you enter your expenses for the month, like your rent, utilities bills, and health insurance, those amounts will be automatically totaled in row 10. Same goes for your income in row 4.
Then, the spreadsheet takes the dollar value from row 4 and subtracts row 10. You’ll see this calculation in row 2. This is your cash flow, or the amount of cash that’s left after your expenses.
If this number is negative, don’t get too stressed. You’ll need to focus your personal finance strategies on making it positive, then growing from there so you can start saving.
You can do this!
3. Work to pay off your debt
If you have debt (student debt, credit card, etc.), set your sights to paying them off as fast as you can. The faster you can manage, the less interest you’ll pay. Which means more of your money that you can keep in the long run.
CreditKarma has a great free debt calculator you can use to work into your budget.
Enter your debt info and how much you’re paying off currently, and it’ll give you some projections for how long it will take to pay off completely. It also tells you how much of your money will go toward your principal, which is the core debt amount, versus the interest payments.
You’ll also see a nifty chart that shows you different outcomes based on how fast you can pay it off. In this example, if I increased my monthly payments by 20% per month, I can pay off my debt 10 months faster.
It might hurt to look at the numbers, but this is a critical step in managing personal finances. The sooner you can build and execute your plan, the closer you’ll be to the financial situation that you’ve been dreaming about.
4. Set (and stick to!) a budget
The infamous “B word.” Perhaps not the B word you usually think of, but this one packs a punch too.
Setting and following a budget is the most powerful step you can take in your personal finances. It makes sure that you’re working toward your goals, and setting a tangible number to follow will help to keep you accountable every day, week, month, and year.
Now that you have a handle on your cash flow and debt, you have a better idea of what your budget should be.
Look at all of your expenses for any given month:
- Do your expenses usually exceed your income?
- If so, by how much?
- Where can you afford to cut down your expenses? (We’ll get into this a bit more in the next section.)
- On the other side of the cash flow coin, is there a side hustle opportunity or other way you can earn more income?
- How much money do you want to pay toward your debt every month? Toward your savings? Toward your retirement?
Choose a dollar amount to spend each month that can help you bridge the gap between your expenses and income – or make the gap bigger so you can save more money.
Keep tracking in your spreadsheet or app so that you can hold yourself accountable every month.
5. Try to save some money every month
Every financial advisor will tell you to build an emergency fund. Ideally, this fund covers at least three-to-six months of your expenses in the event that you lose your income.
If you have significant debt, it might seem lofty to save that much money. Totally understandable.
But you can and should start by saving even a little bit.
Start out by adding $5 a week to your piggy bank or savings account. Add “Savings” to your cash flow spreadsheet as an expense so you can keep track of it.
Over time, as you feel more comfortable, you can bump up this number to $10, then $20, and so on.
If this feels like a struggle, think of some ways you can spend less money on a daily basis.
Think about what you really enjoy, and what can afford to be cut down on. Don’t torture yourself – it’s necessary to still do some of the things that make you happy.
If you deprive yourself too much, your mental health will start to suffer. And that kind of defeats the purpose of all this, right?
Start by asking what expenses you can comfortably cut down on without being miserable. Here are some examples:
- Look for sale items or generic versions of your favorite products to save a few extra bucks.
- Never (I mean NEVER) go grocery shopping when you’re hungry. I keep learning this lesson the hard way.
- If groceries are cheaper than eating out, cook more. While you’re at it, cook extra so you have some for lunch the next day.
- Cancel or pause the memberships and subscriptions you can do without.
- Explore skill and service trades with people you know, like a haircut in exchange for pet-sitting.
- If you have a car, set up more carpools with family and friends.
- Walk or ride a bicycle instead of taking an Uber or driving your car and using your gas. You’ll get the added bonus of some refreshing exercise.
- Sell some stuff you have laying around but never actually use. We all have a lot of those.
Personal Finance Software & Apps
Here are a few personal finance tools that can help you on your adventure:
Mint. As I mentioned earlier, Mint helps you roll everything into one place. You can track all your expenses, manage your budget, and outline a personal finance plan. A lot of Mint’s features are free, and you can upgrade to premium for $16.99 per month if you want to add credit score tracking.
You Need a Budget. The name says it all. This personal finance software helps you pay off your debts and stay on top of your budget. You can sign up for the 34-day free trial to test it out. Then it’s $11.99 monthly or $84 annually.
Clarity Money. This app was made by financial services company Marcus by Goldman Sachs. It helps you set up a high-yield savings account in just a few clicks, which helps you earn money back on your savings. It also helps you manage your subscriptions so you never waste money on forgotten accounts.
Prism. In addition to tracking your cash flow, this personal finance app helps you stay on top of all your monthly bill payments. You can connect them to your account and pay them all in one place. You can even see all your account balances to know which account to pay your bills with.
Become a Personal Finance Ninja
When you first start the endeavor, personal finance management is not exactly a walk in the park. But as you better understand how it all works, and combine that knowledge with your own goals and situation, it gets simpler and smoother.
The important thing is to take a close look at where you are now and where you want to be. From there, you have lots of options and tools you can use to help build and maintain your personal finance plan.
The biggest obstacle will be holding yourself accountable and sticking to the plan.
Do you have a friend or family member you can work with to help stay engaged and on top of things? The buddy system works great here, just like it does with your gym buddy.
With some planning and work, you’ll be well on your way to making those goals, priorities, and pipe dreams come true.