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10 Personal Finance Basics

By Jacqueline DeMarco · October 27, 2021 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

10 Personal Finance Basics

Despite how important money is in life, personal finance know-how — or “financial literacy” — is not typically taught in schools, or necessarily by parents.

Unfortunately, a lack of financial knowledge — and, as a result, planning — has led to many young adults racking up credit card debt, living paycheck to paycheck, and not saving enough for retirement.

The good news is that many money issues can be solved just by getting back to personal finance basics — the basics you likely never learned in high school, like how to set up a budget or the best way to knock down debt.

Gaining financial literacy can help more than just your wallet. A 2021 study by the Financial Industry Regulatory Authority (FINRA) found that people who were able to answer three questions that measured basic financial literacy correctly were significantly less likely to feel financially stressed or anxious.

Here are 10 personal finance basics that can help you become more organized with your money, feel less financially stressed, and achieve your goals.

Personal Finance Definition

Personal finance is a term that involves managing your money and planning for your future. It encompasses spending, saving, investing, insurance, mortgages, banking, taxes, and retirement planning.

Personal finance is also about reaching personal financial goals, whether that’s having enough for short-term wants like going on a vacation or buying a car, or for the longer term, like saving enough for your child’s college education and retirement.

Top 10 Basics of Personal Finance

1. Budgeting Is You Friend

Budgeting and learning how to balance your bank account can be key to making sure what’s going out of your account each month isn’t exceeding what’s coming in. Winging it — and simply hoping it all works out at the end of the month — can lead to bank fees and credit card debt, and keep you from achieving your savings goals.

You can get a quick handle on your finances by going through your statements for the past several months and making a list of your average monthly income (after taxes), as well as your average monthly spending.

It can be helpful to break spending down into categories that include basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, Netflix). To get a real handle on where your money is going every day, you may want to track your spending for a month or so, either with a diary or an app on your phone.

Once you know everything that typically comes in and goes each month, you can see if you’re going backward, staying even, or ideally, getting ahead by putting money into savings each month.

If you aren’t living within your means, or you’d like to free up more cash for saving, a good first step is to go through your budget and look for ways to cut back discretionary spending. Can you cook more instead of going out? Buy less clothing? Cut out cable? Quit the gym and work out at home?

You can also consider ways to bring in more income, such as asking for a raise or starting a side hustle from home.

2. Building an Emergency Fund

You can’t predict when your car will break down or when you’ll have to make an emergency trip to the dentist. If you don’t have money saved up for what life throws at you, you can risk racking up high interest credit card debt or defaulting on your bills.

To avoid this, you may want to start putting some money aside every month to build an emergency fund. A common rule of thumb is to keep three to six months of basic living expenses set aside in a separate savings account.

It can be a good idea to choose an account where the money can earn interest, but you can easily access it if you need it. Good options include: a high-yield savings account, online savings account, or cash management account.

3. Avoiding a Credit Card Balance

When you have a credit card at your disposal, it can be tempting to charge more than you can afford. But carrying a balance from month to month makes those purchases considerably more expensive than they started.

The reason is that credit cards have some of the highest interest rates out there, often over 16%. That means a small charge carried over several months can quickly balloon into a much larger sum. The same is true for other high interest debt, such as some private or payday loans.

If you already have high-interest debt, however, you don’t need to panic. There are ways to pay off that debt.

The avalanche method, for example, requires paying the minimums to all your creditors, and putting any extra money toward the debt with the highest interest rate first. Once that’s paid off, the borrower puts their extra cash toward the debt with the next highest rate, and so on.

4. Paying Your Bills on Time

If you miss bill payments or make late payments, your creditors might impose late payment penalties. If you delay payment for a prolonged period, your account could go into delinquency or be sent to collections.

Late payments can also affect your credit score — the number lenders use to help judge whether to give you loans and credit.

Your payment history accounts for 35% of your credit score, so a history of late and missed bill payments can be a major strike against your score. A poor credit score can make it difficult for you to get loans, and the loans you do get are likely to have higher interest rates.

To make sure you never miss a due date, it can be helpful to make a list of your bills and their due dates, set up auto payments when possible, and sign up for reminders.

5. Starting Early to Save for Retirement

When you’re young, retirement can feel far away. But putting money away as early as possible means you’ll have more years to save, spreading the savings across your life rather than racing to catch up.

Perhaps the biggest reason to start as early as you can, however, is the power of compound interest.

Because you earn interest not only on your contributions, but also on accumulated interest, small amounts can grow over time. If you have an employer-sponsored plan, such as a 401(k), you may want to consider contributing, especially if your employer offers to match your contributions.

Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA, as well.

6. Investing

Saving for retirement may not be enough for you to have what you need to live comfortably after you stop working. Plus, there may be things you want to be able to afford later in life, but before you reach retirement age.

If you have children, for example, you may want to start a 529 plan to help you invest for their college educations.

For other long-term savings goals, you may want to invest additional money, keeping in mind that all investments have some level of risk and the market is volatile, meaning it moves up and down over time.

To get started with investing, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundle different types of investments together), or, if you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.

7. Getting Insured

When it comes to insurance, sometimes it’s best to prepare for the worst. That means making sure you have health insurance and car insurance (which is required by law). You also may want to consider renters or homeowners insurance to protect your home and belongings.

If you have children or other people who are dependent on you financially, it can be a good idea to get long-term disability insurance and term life insurance. Many people can purchase health and disability insurance through their employers. If you don’t have that option, it’s possible to go through an insurance agent, broker, or the insurance company directly.

8. Taking Advantage of Credit Card Rewards

If you have a decent credit score, you can look into getting a credit card with rewards that may give you travel miles or cash back on your purchases. If travel is your priority, you may want to look for a flexible travel rewards credit card, meaning their rewards can be applied to many different airlines and hotels.

You may want to look for a card that not only offers rewards, but also offers a nice signup bonus for spending a certain amount within the first few months. One with no annual fee would be ideal, too.

Whichever card you pick, it’s a good idea to familiarize yourself with its rewards program: the value of its rewards units (points, miles or cash back), how to redeem them, whether your rewards expire, and any minimum redemption amounts.

You may also want to keep in mind that credit card interest rates are typically a lot higher than credit card rewards rates. So, to avoid seeing your earnings swallowed up by finance charges, it can be wise to make sure to pay your full statement balance by the due date every month.

9. Checking Your Credit Reports Regularly

You can request a credit report for free from the three main credit reporting agencies — Equifax, Experian, and TransUnion — at AnnualCreditReport.com . In the past, you could only do this once a year, but due to the COVID-19 pandemic, the three credit agencies are now offering free weekly credit report checks.

It can be a good idea to periodically order a copy of your report and then scan it for any errors or signs of fraudulent activity. If you see anything that isn’t right, it’s wise to contact the credit reporting agency or the account provider as soon as possible and file a formal dispute if needed.

Checking your report can help you spot — and quickly address — identify theft. It can also help you make sure there aren’t any errors on the report that could negatively affect your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll likely need a solid credit report.

10. Choosing Your Bank Wisely

There are lots of financial institutions out there, so it can be a good idea to shop around and make sure you find a place that really suits your financial needs. Choices include:

A traditional Bank. These typically have physical locations throughout the country and offer a wide range of financial products and services. If you want to know you can have an in-person chat about your money, this option might work well for you.

Credit Union. These are non-profit organizations owned by the members of the union. They’re similar to a traditional bank, but membership is required to join, and they’re often smaller in scale and have fewer in-person locations. However, they may have lower fees and higher interest rates than a traditional bank.

Online Bank. These institutions don’t usually have any in-person locations — everything happens online. Because of this, they often have very competitive fees and interest rates. If you don’t necessarily need in-person money talk, and would prefer to handle your money at home (or on the go), an online bank could be a great option.

When making a bank choice, it can be a good idea to make sure the bank you choose has a user-friendly website and app, as well as conveniently located ATMs that won’t charge you a fee for accessing your money.

3 Personal Finance Rules to Know

Once you’ve established some fundamental procedures, you can start thinking about some overarching rules that can help you make better money decisions. Three rules you may want to keep in mind include:

•   Keep your goals in mind. Without a clear set of goals, it can be difficult to do the hard work of budgeting and saving. Defining a few specific goals — whether it’s buying a home in five years or being able to retire at 50 — gives you a picture of what personal financial success looks like to you, and can keep you motivated.

•   Learn to distinguish wants from needs. Merging these two concepts can wreak havoc on your personal finances. Needs generally include food, clothing, shelter, health care, and reliable transportation. Everything else is likely a want. This doesn’t mean you have wants, but it can be important not to trade financial security in pursuit of these things.

•   Always pay yourself first. This means taking some money out of each paycheck right off the bat and putting it towards your future goals. Setting aside money in a savings account, IRA, or 401K plan via automatic payroll deductions helps reduce the temptation to spend first and save later.

The Takeaway

Being good with your money requires a set of basic skills that many of were never actually taught in school.
Fortunately, It’s never too late to educate yourself about personal money management. Learning personal finance basics like how to choose a bank, set up a budget, save for retirement, monitor your credit, avoid (and deal with) high interest debt, and invest your money are key to reaching your goals and building wealth over time.

Looking for Something Different?

One simple way to become more organized with your money is to open a SoFi Money® cash management account.

With SoFi Money, you can earn competitive interest, spend, and save all in one place. Using the “vaults” feature, you can create separate savings vaults for separate savings goals (such as an emergency fund) without opening a separate account. Plus, you’ll have access to over 55,000 fee-free ATMs worldwide within the Allpoint® Network.

Check out how SoFi Money can help you keep better track of your personal finances today.


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