Learning how to manage your finances isn’t an easy task.
There are simply too many things to think about: budgeting, debt, credit, savings, spending, interest rates… Even our emotions are at play – after all, everyone is prone to making a few impulse purchases here and there.
If you follow these next 20 tips, though, you won't have to worry about all the stress that goes with managing your personal finances. These easy-to-follow actionable pieces of advice will make your life easier and get you well on your way to financial stability.
So, let's get right to it — here are our 20 tips on personal finance.
#1 Spend less than what you earn
It may sound like a completely obvious rule of thumb, but spending less than you earn is one of those concepts that is easier said than done.
In order to apply this rule properly, you'll want to be paying very close attention to your spending. To do it, you can either use personal finance apps to track your spending or write your purchases down.
On that note, you should also LBYM, or “live below your means.”
It's a pretty simple concept that many find difficult to follow. In short, if you have a limited salary and high debt, you absolutely shouldn't be upgrading to a brand new car, getting an expensive apartment, going out to eat every day, and having unnecessary expenses similar to those.
We often fall into a trap of overspending on things we don’t really need to keep up appearances. The moral of the story here is that it’s okay to live comfortably, but don’t live beyond your means.
#2 Budget the right way
As mentioned previously, the word “budgeting” can sound very off-putting for some, but budgeting is all about creating a plan for your money so you have a better idea of where it's going every month.
One efficient way to budget is to apply the 50/30/20 rule. This means that 50% of your income will go towards necessities like bills, food, and housing, 20% goes towards savings, and the remaining 30% can be used for anything you like.
It's a great way to divide your paycheck, but it's not designed to fit every lifestyle — you might need to add a few tweaks of your own here and there.
#3 Create a financial calendar
Having a financial calendar will save you a lot of time in the long run: you can use it to set reminders for important financial tasks (such as paying quarterly taxes and checking your credit report), and you can also use it to set deadlines for certain financial goals, which leads me to my next tip.
#4 Have clear financial goals
Before you can start using your money to meet financial goals, you need to define what those goals are. Having established goals can keep you motivated, and it can also help you come up with different plans to reach those goals faster.
You should always start small when setting up financial goals — avoid overly ambitious goals, especially if this is your first time thinking about personal financial objectives.
A good way of coming up with financial goals is by asking yourself questions often. For example, you could ask:
- What do I want to accomplish in 3 months?
- What do I want to accomplish in a year?
- What do I want to accomplish in five years?
It's a quick way of setting up short-term goals to look forward to, while also setting some long-term goals that you can keep in mind. In fact, your short-term goals can even be considered as means of achieving your long-term financial goals.
Here are a few examples of great financial goals:
- Save $1,000 in the next three months
- Buy a house in the next 3 years
- Start investing by next month
#5 Break down your income and expenses
This is a trick that can help you budget better, and it might even change the perspective you have about your money.
What I mean by breaking down your income and expenses is basically dividing them down into daily values. For example:
- Your income is $2,500/month = ~$83/day.
- You pay $800/month for rent = ~$27/day.
- You pay $200/month for car insurance = ~$7/day
- Everything else (food, phone, gas, etc.) comes to $750/month = ~$25/day
That means you're left with $24/day in spending money, and you can combine this result with the use of your financial calendar to make plans and meet your previously established financial goals.
This will also help you see how far any purchases are going to either set you back or affect your spending ability.
#6 Understand how credit cards work
Building good credit and using credit cards is important, but it’s even more important to understand how they work to ensure you don’t go into debt.
For starters, it's important to know that all credit cards have a grace period of at least 21 days for you to repay the balance without incurring any interest charges on a given purchase.
Another useful tip that you should keep in mind when using credit cards is that you should avoid making a purchase with them if you cannot quickly repay said purchase in full.
You should also treat your credit card as a debit card — by this, I mean that you shouldn't spend more than your monthly limit, and you should be treating said monthly limit as the only money you have available on your credit card (like if it were a debit card).
Lastly, you should be aware that credit cards have reward programs that typically involve cash back, merchandise discounts or frequent flyer points.
Many different reward schemes have evolved to encourage particular uses as well, such as grocery, dining purchases, and travelling purchases, so make sure what reward programs are eligible for you and take full advantage of them.
#7 Keep your debt at bay
To do this, I recommend you first take the budget you created with tip #2 into consideration. Then, write down the total amount of everything you owe, as well as the interest rates, monthly minimum payments, and any loan payback lengths.
You'll want to keep this document up to date and use the budget you've created to pay these debts little by little.
Also, be aware that if you have a lot of debt, paying off the little debts can give you the confidence to tackle larger debts.
The difference between good debt and bad debt
These terms might sound confusing at first, but let me explain.
Bad debt is any debt that's acquired through the purchase of something that's going to lose value over time and generate zero revenue (for example, credit card debt used to pay for new clothes or an auto loan).
Good debt, on the other hand, is any debt that you've acquired through purchasing something that will benefit you financially in the future. Examples of good debt would be business debt and student loans.
Knowing the difference between good debt and bad debt is important when optimizing your personal finances — avoid bad debt as much as possible, but don't be afraid of good debt if the loan you are taking will help you in the future.
#8 Pay your credit card's balance in a timely manner
It's important to know how your credit card works, but even if you do, you still can't lower your guard — you need to be very responsible with your credit card's balance as well.
If you don't take your credit card's balance seriously, you can easily find yourself in a huge credit card debt with insane interest rates — it's as scary as it sounds.
#9 Keep track of your interest rates
Interest rates are a very significant part of your personal finances— they determine which debts to pay off first and which credit cards to avoid. They also help you understand how debt works – compound interest is a cruel master and should always be avoided if possible.
Even Albert Einstein recognized how important compound interest was. He said the following: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
#10 Pay yourself first
This is another personal finance tip that might seem confusing, but paying yourself first can have a huge impact on your finances.
What I mean by “paying yourself first” is somewhat similar to the concept of good debt — investing in your financial future and the future you.
You might be tempted to pay yourself at the end of the month rather than right away, but the reason why it's better to do the latter is that money sent to a savings account is money you're less likely to spend. If you wait until the end of the month to pay yourself, you might not have any money left to actually pay yourself with, and you'll miss your chance.
#11 Have an emergency fund ready
Emergencies happen all the time, and while they may not always happen to you, it's always good to be prepared in case disaster strikes (for example, if you abruptly lose your job one day).
A good way to prepare for such unforeseeable events is to set up an emergency fund (which usually consists of savings that will cover your living expenses for 3 to 6 months without any income). By doing that, you'd be able to live off your emergency fund during those 3 to 6 months while you look for a new job or while you're not able to work.
But not all emergencies have to do with losing your job. Here are some other situations where having an emergency fund would come in handy:
- Car problems
- House repairs
- Natural disasters
- Medical or dental expenses
#12 Know your net worth
Calculating your net worth can seem like a complex thing to do, but it becomes far easier once you know what your net worth actually means.
In short, your net worth is a measure of how much money you would have left if you were to sell everything you own and pay off everything you owe.
If we turned that into an equation, it would look something like this:
Net worth = Assets (what you own) – Liabilities (what you owe)
To calculate your net worth, you first have to create a list of every asset you have, along with its estimated value.
Here are some examples of assets:
- Money (either as cash or deposited in a bank)
- Real estate
- Jewelry, etc.
Once you have your assets and their estimated values down, add up the total value at the bottom of the list. Then, go through the same process with your liabilities.
Here are some examples of liabilities:
- Credit card debt
- Student loan
- Auto loan
Like you did with your assets, add up the total value of all your liabilities at the bottom of the list.
Now that you have the total value of both sides, plug the numbers into the equation above, and you'll get your net worth.
If you have a positive net worth, then you're good to go. But if you have a negative net worth, you need to take a look at your budget and come up with a plan to increase your net worth.
An obvious way to do that would be by increasing your income by way of investing, finding a better job, getting a second job, etc., but that's not always easy in the short term. The best place to start is by paying off all of your bad debt.
#13 Investing time
Speaking of net worth, investing is a great way to increase it.
Plenty of people stay away from investing in fear of losing money, though, and prefer to keep their money in a savings account in lieu of investing. That's actually a smart move, and as I've mentioned before, you should have some money in a savings account for emergencies.
There's a catch, though — money in a savings account loses value over time.
This is because the average savings account in the U.S. has an average APY (annual percentage yield) of 0.07%, while inflation is around 3.4%. This means that the money you have in a savings account is going to have less and less buying power as the years go by, and that doesn't sound appealing at all.
So, what can you invest in? Here are some options:
- Real estate
- Exchange-traded funds (ETFs)
Peer-to-peer lending and cryptocurrency are also valid investing options, but they're pretty volatile — invest in those at your own risk.
Also, if you're looking for a particular broker, you could also read our review on Capital.com and find out how they can help you invest your money wisely without paying any commission fees.
#14 Find a side hustle (or ways to earn passive income)
One of the best things you can do to improve your finances is to find ways to make extra money. By side hustling, you will be in a much more comfortable financial situation by reducing your money stress, which allows you to pay off debt faster and gives you more money to spend on financial goals (or things that you like).
It comes with pretty neat advantages: for example, you can engage in this side hustle whenever you want and as much (or as little) as you want, and since you're not getting paid by the hour or have a set salary, the amount of extra money you earn is up to you.
There's also the concept of passive income — as the name suggests, passive income consists of money that you keep earning without having to make an active effort.
If you'd like to learn more about passive income, you could read our article on it as well.
#15 Avoid complacency in your career
If you are in a career slump or feel like it’s going nowhere, then it's time to take action. Being complacent in an environment that is not moving forward will hinder or outright freeze any progress you're trying to make in the personal finance department.
It's also worth mentioning that you always have the option of changing careers in case you feel like you're not going anywhere with your current career.
One great career choice would be software development — it's a pretty fulfilling career and there's plenty of coding schools that prepare you to become a software developer in less than a year (and even guarantee job opportunities at the end of the learning process).
#16 Check and improve your credit score
Your credit score is based on a number of factors, including how much debt you have relative to your income, and whether you’ve paid past debts on time.
Many people assume their credit is fine, while others avoid checking because they know it’s not.
What you don’t want to happen is to be close to buying a house, car, or any big purchase and discover you have poor credit. This will either prevent you from borrowing money from traditional lenders or cause you to pay a higher interest rate than you would have with good credit.
Another reason to check is that there could be some inaccuracies that are affecting your credit score. Finally, an occasional checkup may also reveal identity theft.
If your credit score is bad, there are plenty of ways to improve it. A few that come to mind are lowering your credit card balances, paying your bills on time, and fixing any errors on your credit report.
#17 Reevaluate your financial goals
Remember those financial goals you clearly established at the beginning?
Out of all the personal finance tips here, one that should constantly be present in your mind is to reevaluate said goals after some time has passed.
Something you started doing in personal finances before might be different from where you are a year later, or it could also be the same even after a year has passed. You'll never really know if you don't take the time to reevaluate.
It’s important to look at your financial goals through the lens of what you accomplished and where life is taking you.
#18 Sleep on purchases
Cutting back on expenses is, naturally, an effective way of saving money. But the real challenge comes when we see something we want — even the strongest wills succumb to this dilemma from time to time. We're capable of rationalizing when it's not a necessity, but even so, the desire to have that something can win us over.
There's a simple solution to this problem, though: to always sleep on that purchase or wait a few days. It's very likely that after that waiting period (or even as early as the next day), you’ll realize you didn’t really need it and you're capable of moving on.
You can also try a more extreme variation (known as the 30-Day Rule) for larger purchases, which gives you an entire month of waiting time to ponder on your decision.
#19 Work on your financial education
It can sound pretty harsh at first, but your financial education is completely up to you. It's important to know that no one is going to hold your hand and learn everything for you and then help you succeed in your personal finances.
You already took the first step by reading this post, so kudos to you! Now all you have to do is take advantage of that momentum and keep researching and learning more about everything we've covered so far.
This is more of a call to action instead of a spiteful comment — it will be up to you to spend the time necessary to understand how finances work.
Having said that, though, our final tip is…
#20 Go at your own pace
A huge advantage of being the one calling the shots in your learning process is that you can also set your own learning pace — there's no need to rush unless you're understanding these concepts very quickly.
The topic can be confusing, but the material is much easier to grasp when you set a pace. Don’t rush the learning process but be disciplined and organize. It's a good idea to set a schedule you're comfortable with and make sure you stick to it.
If you make sure you're understanding everything as you move forward — your finances will thank you.
There are plenty of important concepts that you need to keep in mind when the topic of personal finances is involved. Among the most important tips to keep in mind in order to manage money better, you should:
- Spend less than what you earn (and live below your means)
- Create a budget (and be strict with it)
- Create a financial calendar
- Clearly establish your financial goals early on
- Break down your income and expenses
- Understand how credit cards work
- Keep your debt at bay (and understand the difference between good and bad debt)
- Pay your credit card's balance in a timely manner
- Understand how interest rates work
- Invest in yourself
- Have an emergency fund ready
- Know your net worth
- Learn about investing options
- Find a side hustle (or ways to have passive income)
- Avoid complacency in your career
- Check and improve your credit score
- Reevaluate your financial goals
- About to make an impulsive purchase? Sleep on it
- Your financial education is in your hands
- Go at your own pace
Personal finance can be difficult, but as long as you follow these 20 tips, you should have a pretty smooth and successful road ahead of you. Good luck!