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What Is Personal Finance? The Basics Everyone Should Know

Olivia De Santos
March 26, 2023

It was a painful day when I opened my wallet and heard it sigh. My overdraft glared in bright red font. Money management seemed ominous and scary. This was when I first Googled “how to improve my finances” and my personal finance journey began.


Being an adult in the 2020s requires ironclad financial acumen that not all of us are taught in childhood. The good news is, there’s no time like the present to get your financial house in order.



This article is all about the basics of personal finance. What personal finance truly means, the key steps to improving your money management, and how to make personal improvements to maximize your chances for success.


Are you ready? Let’s dive in!


What does personal finance actually refer to?


Personal finance is the term that encompasses all aspects of an individual person’s financial affairs. In short, it’s how you make money, how you spend it, how you save it and what happens to it after you die. Many folks trudge through life never getting a full portrait of their finances, which leads to trouble down the line. If you can master the basics, you can save yourself potential headaches.


10 Personal Finance Strategies Everyone Should Master


1. Financial goal setting


Everything starts with a direction. It’s all good and well knowing that you want your finances to improve. But generally stating “I want to be richer” isn’t going to help you identify your best financial strategy and stick to it.


What specifically do you want to work on in the next 3-6 months? Is it paying down debt? Saving for a holiday? Earning 10% more than you do today?


common financial goals list


Getting clear on your financial goals helps steer the ship and motivate you to succeed, so this is an important first step.



2. Budgeting & cutting expenses


Possibly the most unsavory part of the personal finance pie. Unfortunately, budgeting is a necessary evil and can be much tastier than you might expect. To budget effectively, you simply need to record your actual expenses and project limits on each category of your spending. That means taking note of your essential bills as well as making allowances for leisure.


I avoided budgeting for years because I wasn’t ready to confront the areas where I was overspending or failing to save. Once you know your financial pitfalls, it’s hard to ignore them. Be gentle with yourself as you approach budgeting. I recommend making it more fun with a budgeting app to support your goals and trying novel ways to save.


mint main

Mint is a popular budgeting app.



3. Boosting your income


The core principle of personal finance is to spend less or earn more. If you can do both, you’re well on your way to a more stable bank account. Earning more could be asking for a raise, starting a side hustle, or learning to price your services fairly if you’re a freelancer.


Depending on your work circumstances, earning more could be more accessible to you than lowering your expenses. That said, it’s important to recognize that adding more work to your plate can make you feel mentally exhausted. Mental exhaustion can impact your budget through impulse spending, forgetting bills, and lowering your productive output. I recommend starting with lowering expenses before adding more streams of income to your life.



4. Paying down debt


The four-letter word that we all fear! Debt can come in many different forms; credit card debt, student loans, car loans, mortgages, personal loans, and so on. There are certain financial gurus out there that claim you shouldn’t put a cent toward savings until your debt is fully repaid. I don’t necessarily agree, but I do believe that paying down debt is a crucial part of your financial wellness.


There are two main techniques for debt repayment: the Avalanche method and the Snowball method.


debt repayment list


The avalanche method is when you tackle the debt with the highest interest rate first. The snowball method is when you tackle the debt with the lowest balance first. Whichever suits you best, devising a plan to tackle your debt will make you feel more in control of your money.



5. Nurturing savings & funds


Getting started with your savings is pretty simple. Most savings accounts are similar but it’s still worth comparing the best ones. The best savings accounts will allow you access when you need it and a decent interest rate. Interest rates have been historically low for the past few years. Anything above 1% is excellent! As someone who’s in the savings game right now, it helps to have several savings accounts with different motives (funds).


It starts with your emergency fund. An emergency fund is defined as a large amount of saved money to cover your expenses in an emergency. It’s the pot you crack open if you lose your job or your car breaks down. The advice is to have 3-6months of expenses saved as an emergency fund. It can take years to build that up so starting with $1000 is a huge achievement in itself.


After you have a basic emergency fund, you can tackle your larger savings goals. House deposits. Travel funds. Gift funds. Pet and car emergency funds. These all help you feel more financially whole.



6. Getting clear on taxes


As founding father, Benjamin Franklin expressed, “nothing is certain except death and taxes”.


Understanding your taxes can be complex. However – not understanding your taxes is a condemnation of insanity. You’ll be constantly unprepared when tax time rolls around and it’ll feel painful every time. Nobody wants that!


Doing some degree of tax planning is important. For example, you might want to look into ways to minimize your tax liability, so that you’re able to hold on to more of your hard-earned cash. Taxes are also an important consideration to keep in mind for your savings and retirement strategies, so it helps to educate yourself. For example, if you’re in the US, you might want to look into accounts that offer special tax benefits, such as a 401(k), or a health savings account (HSA).


If you’re a freelancer, my advice is to sit down with an accountant to understand your tax bracket. Create a tax fund so that you’re never caught out again.



7. Understanding credit score


Credit is a slippery aspect of your money management. It’s both a blessing and a curse in equal measure. My introduction to credit was an interest-free credit card before college that I swiftly maxed out, and couldn’t pay back for several years.


Understanding your credit score and how to manage credit effectively is crucial to growing your wealth. While you can survive without using credit, it pays to understand how you can use credit to your advantage.



8. Mastering insurance


In American life, it’s impossible to escape the realities of insurance. It’s a key part of the well-being of American families and can affect your employment choices. If your job offers health insurance, this is the most cost-effective way to be protected. If you’re a freelancer and need to source your own health insurance, it’s good practice to use comparison websites to help find a policy that can work for you.



9. Learning about investing


Now we move beyond the fundamentals and into the intermediate stages of personal finance. The reason I list this as a basic addition is that I think people should be educated about investing well before they start. It seems daunting – sometimes it can be – but there are so many tools out there to help you make safe investing decisions for your extra wealth.


Common investment ideas include:


  • Certificates Of Deposit (CDs)
  • Money-market funds
  • Corporate and government bonds
  • Unit Trust funds
  • Exchange Traded Funds (ETFs)
  • Index funds
  • Dividend stocks


For more details, check our write-up on the best investment routes – even for beginners.


That said, make sure that you have an emergency fund before opting to invest. Investing money is committing to locking away your funds for as long as possible to watch them grow. Don’t start until your expenses are covered and you feel safe to build more wealth.



10. Legacy planning


We don’t like thinking about our finances after we’ve passed… but do you have a will? What about a family trust? Do you know the difference? I consider legacy planning to be the final slice of the financial pie because it’s important to feed yourself first.


Getting your finances in order is a blessing to you and those around you. The next step is making sure that you have a plan for your affairs should anything happen to you. It feels macabre but it’s one of the best things you can do to care for your family.



What personal qualities are useful for managing your money?


Getting good with money is a personal endeavor on all levels. To master the basics, it helps to evolve your personal skills to match the financial freedom you want to have. Here are some qualities that will help you succeed:


1. Discipline


I used to associate discipline with strict rules and deprivation. Instead, I like the Will Smith school of thought that discipline is self care. You aren’t stopping your spending to punish yourself, you’re doing it because you love yourself. Once you can instill discipline around your finances, it’ll be much easier to resist those unhelpful impulses around money.


2. Creativity


Whether it’s devising a new side hustle or adapting common money management techniques to suit you, personal finance requires a level of creativity. You don’t have to be a creative person to make this work either. All humans are problem solvers, therefore all humans are creative. Nurture your creative side and you’ll find it easy to conjure up new ideas.


3. Open-mindedness


There are so many financial gurus out there with conflicting opinions. It takes a level of discernment and open-mindedness to find the tips and tricks that work for your lifestyle. My general rule of thumb is “don’t knock it until you’ve tried it”. If you come across a technique that is free and simple, give it a try. Sometimes the simplest things are the most transformative.


4. Flexibility & Compassion


Cleaning up your finances is mentally exhausting at times. Gentility and flexibility will make it much easier. So what if you went over budget on your groceries this month? You can get back on track next month. Allow yourself some wiggle room to make mistakes and move forward.



Wrap Up – How Can You Get Better at Personal Finance?


Though the core principles are always the same, your personal finance journey is unique to you. The direction you take and the techniques you employ depend on your personality and your financial circumstances.


To get started with bettering your personal finances, here’s the key: Get to know yourself and your money intimately. How much do you make? What are your goals? What are your weaknesses when it comes to money?


Knowing the answer to those questions will determine the best path for you and the tools that can help. Why not start by checking out our shortlist of the best personal finance books worth checking out?



About The Author

Olivia De Santos is a freelance writer, wedding planner and entrepreneur from London, UK. She's a world traveller, wordsmith, film buff, mental health advocate and shea butter enthusiast.