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Personal Finance 101

The following are some concepts that every single financially independent adult should know. With a few tips and some good habits, you can practice healthy budget management, build savings and save for retirement.

If no one ever taught you how to manage your finances, it can come as a shock to you how quickly your paycheck disappears. But with a bit of time invested into managing your finances and setting up a budget, you’ll be able to have spending money and save some as well, both for a rainy day and retirement.

Understanding Expenses versus Income

Your personal finances can be divided into income and expenses:

  • Income refers to any money that you make through a job, disability or interest from property. It’s money coming in (it’s “incoming;” get it?).
  • Expenses are what you spend money on, including rent and utilities, food, clothing and entertainment.

To balance your account, you should make as much or more than you spend on expenses. If your expenses are greater than your income, you will be in deficit, and may incur fees for overdrawing on your bank account. Rather than use credit cards to pay for the deficit, here are some better ways to manage your finances.

  1. Look to see where you are spending money. Are you eating out each week? Buying cigarettes? Shopping a lot?
  2. Determine what expenses you can cut. Bring your lunch to work. Try to quit smoking. Limit your shopping budget.
  3. Try to make more income. Take on a part time job or ask for a raise.

Creating a Budget

The key to a well-managed financial situation is a budget. In it, you will list out both your income and expenses, and set limits on how much you spend in each expense category. You can create a budget using a financial software program like Quicken or set up a spreadsheet finance statement.

Start by listing your income. Include any alimony, child support, disability or rent revenues you get. Include any money that you get through any means as part of your income. Only include after tax income.

Below that, list your expenses. Include:

  • Rent
  • Electricity, water and trash
  • Cable and Internet
  • Grocery
  • Eating out
  • Entertainment
  • Insurance
  • Car payment
  • Gym membership
  • School loan
  • Clothing
  • Haircuts and personal maintenance
  • Savings

It’s important that you list all expenses and categorize them. Go back through your last few months of bank account statements to ensure you cover all of them.

Next, set your budget for each category, making sure you don’t go over the income limit. So if you have been spending $500 a month on clothing, but that puts you over your $3000 a month income, it’s a good idea to lower your monthly clothing budget to maybe $100. Listing out your expenses can be a real eye opener as to where you are spending money unnecessarily, and by forcing yourself to list out all expenses, you may find it easier to spend less.

Each month, record all of your expenses, whether you pay for them in cash or debit card. Attribute each to the appropriate budget category so you track your expenses.

A Word on Savings

It’s important to save, both for unforeseen emergencies as well as retirement. Put savings at the top of your list of expenses, and cut out other costs to ensure you can save enough. It’s more important to have money to retire when you’re older than to feed your daily coffee addiction.

Aim to put away a certain percentage of your salary for savings. As your salary increases, you can save more. Save annual bonuses too, as they’re above and beyond what’s in your budget, and you will never miss them.

More Tips

Here are more tips to help you practice healthy personal finance.

  • Avoid using credit cards. It’s easy to use them instead of cash for purchases, which can be dangerous if you rack up more debt than you can pay off.
  • Reassess your budget a few times a year, as expenses can change.
  • Try to pay larger installments for things like car insurance to lower the overall cost.
  • Use online banking services to balance your checkbook regularly.
  • Understand the difference between wants and needs, and put off the wants until you can afford them.
 
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