A Beginner's Guide to Building a Solid Personal Finance System
Let's delve into the very basics of personal finance. This is what should be taught at schools because 90% of people only need this information to have a healthy relationship with their finances.
5 min read
Taking control of your finances is essential to financial stability and a better future. However, managing your money can feel overwhelming, especially if you're just starting out. The good news is that with a solid personal finance system in place, you can establish healthy financial habits and work towards your financial goals.
In this blog post, we'll walk you through a beginner's personal finance steps, and some of the tools I personally use to help you take charge of your money and make smarter financial decisions. Now look for your favorite note-taking device and begin here to take control of your financial well-being!
THE FIRST STEP
If you do not know the scope of your personal finances you will not be able to successfully build a system. The first step anyone should take is to acknowledge the problem and understand the problem. Track Your Income and Expenses to gain control over your finances. It's crucial to understand where your money is coming from and where it's going. Start by tracking your income and expenses. Personally, I use my bank account checking statements and Mint (not sponsored), a mobile app that lets you track most accounts and transactions.
FINANCIAL GOALS
I would recommend having this list of priorities:
Priority 1: Have an emergency savings account that could fund your current expenses for six months without having any income. Life is unpredictable, and having an emergency fund is essential for financial security. Aim to save three to six months' worth of living expenses in a separate savings account. This fund will provide a safety net in case of unexpected events like job loss, medical emergencies, or car repairs.
Priority 2: If you have debt, lay out every single penny you owe, to who you owe it, the interests of each, and any other detail that you deem important. Pay off high-interest debt first. Prioritize paying off high-interest debts like credit cards or personal loans. Once you pay off high-interest debts, you'll free up more money to put towards savings and investments.
Keep in mind, if the debt is large enough and the interests are terrible, it won’t make sense to start investing because whatever you gain investing will be lost in the debt interests. So prioritize destroying those nasty debts first.
Priority 3: Become an expert at allocating your money. By this point, you should already have your finances organized. This means all debts are being tracked and all bills are being tracked. Now you need to understand what big expenses you are planning (e.g. car, house, marriage, etc.) and you should start breaking out your income in percentages for each financial goal. Become an expert in understanding how much money is coming and where it’s going and begin to automate your bill payments, savings, and investments.
A good starting point as seen in the book I Will Teach You to Be Rich is to have 60% of your income into bills, 10% in investments, 5% in savings, and 25% in spending. However, if your bills do not take up as much and if you reduce your spending I would recommend being more aggressive with your savings and investing. Have a goal to reach 20% investing and 10% savings.
Priority 4: Save more and invest for your retirement. I won’t delve into the details of each investment type in this post because it would make it too long but most financial experts will recommend this as a starting point:
Step 1: If you work for a company with a 401k match. Invest in the percentage of this match. THIS IS FREE MONEY! You will be receiving a 100% return on these investments.
Step 2: Open a ROTH IRA account and start investing a percentage of your income.
Step 3: This part is debatable but what I personally did is that I worked my way up to invest at least 20% of my income. Of course, you need to have your priorities right. Don’t starve your family just to see some more digits on the screen!
Investing is not storing your life savings into crypto, if you do this you are more likely to end up broke than becoming rich so stick with the basics, at least until you absolutely understand your financial system.
FINANCIAL MAINTENANCE
Regularly review your financial progress and make adjustments as needed. Life circumstances and goals can change, so it's important to adapt your personal finance system accordingly. Revisit your budget, reassess your goals, and make necessary tweaks to stay on track.
I regularly check my Mint app, as well as my financial institution’s apps. Two times a month I verify my asset allocation and readjust if necessary. It is not complicated at all!
EDUCATE YOURSELF
Yes, it’s unfortunate that most schools will not teach you these topics which are essential for everyone’s survival in this day and age. However, it is critical to educate yourself and your loved ones to ensure economic health. Read books, follow personal finance blogs, watch finance YouTube and attend seminars or webinars to expand your knowledge.
I would recommend you start with the book I Will Teach You To Be Rich by Ramit Sethi. This book taught me 80% of what I know about personal finance. It will give you the fundamentals of credit cards, debt, saving, and investing. It will also provide you with a basic understanding of concepts like compound interest, and budgeting.
Personally, I enjoy listening to audiobooks whenever I drive, do the dishes, and cook. This will put you ahead of 90% of people who consume meaningless entertainment.
A YouTube channel I enjoy watching in my free time is Caleb Hammer. Caleb interviews people about their finances. It will teach you what not to do with your finances.
I am not sponsored by any of these.
CONCLUSION
Building a personal finance system may seem daunting at first, but by following these steps, you'll be well on your way to financial stability. Remember, consistency is key. By setting clear goals, tracking your income and expenses, automating savings, and continuously educating yourself, you can establish healthy financial habits and work towards a brighter financial future. Take control of your finances today and enjoy the peace of mind that comes with financial security.