Personal Finance 101: Back to the Basics

Personal Finance 101

Photo Credit: Suphakit73

If you’ve found yourself in a lot of debt there’s probably more than one reason why. You might have some bad habits, you might have a ton of student loans, or maybe you just weren’t aware of the repercussions of debt.

I’ll admit; when I got my first credit card I didn’t even think about the fact that I had to pay it off. All I thought about was a bunch of money that I could now spend.

Regardless of the reason you’re in debt you’re now ready to get out of it. Or, at least I am assuming you are. ;)

Let’s look at some personal finance basics so that you can build a strong financial foundation for yourself now and in the future.

Emergency Funds 101

An emergency fund is a saving accounts that is earmarked for life’s little (and big) inconveniences. Your car breaks down, you have an unexpected medical bill, you lose your job etc. Those are all reasons you would use money out of your emergency fund.

And, no matter how secure your job is you do need an emergency fund. You just can’t predict life and you don’t want an unexpected expense to catapult you back into debt.

I am going to use Dave Ramey’s advice on the topic of emergency funds. If you’re in debt start paying all the minimum payments and throw everything else at saving for an emergency. Do this until you hit the $1,000 mark and then return to putting all of your money towards debt.

That $1,000 will cover most of the inconvenience’s that pop up and prevent you from derailing on your debt pay off plan or accumulating more debt to cover the said inconvenience.

Once you get out of debt concentrate on building an emergency fund that holds, at the bare minimum, three months’ worth of your expenses. Ideally you should have more than this and if you’re self-employed or single. I think one years’ worth of expenses would suffice.

Budgeting 101

You need a budget. I know, know – no fun, right? But luckily budgeting doesn’t haven’t to be hard. Simply take an hour of your time calculate your average monthly income and expenses from the past year and see where you’re at.

Take a good look at all your expenses. Are you wasting money? Anything you could cut back on? If so, get to cuttin’!

Now take those averages and create a monthly budget. Be realistic! If you normally spend $500 a month on food don’t try to cut that in half. Slowly cut back, this will work best in the long run.

If you have any leftover money in your budget throw it at debt repayment or savings goals. And remember, you can tweak your budget as you go. It’s going to take a few months before you get it right. The important things is that you start one.

Debt Repayment 101

As far as debt payment there’s a couple of ways you can go: pay off the smallest debts first and work your way up to the big ones or pay off the balances with the high interest rates first. There’s no right or wrong answer. Do what works best for you.

If you want to pay off those small balances first, also known as the debt snowball method, make a list of all your debts from smallest balance to highest balances. Now throw everything you have toward your smallest balance while making minimum payments on the rest. This way you’ll eliminate balances quickly and in theory build up momentum and stay motivated to pay off debt.

If you don’t like the snowball method you could pay those balances with the highest interest rates first. To do this make a list of all of your debts from highest interest rate to lowest interest rate. Now start throwing everything you have toward that balance with the highest interest rate while making minimum payments on the rest. By doing this you’ll save a lot of money in interest payments.

Conclusion

Ok that’s the main stuff you need to know. Later on we’ll get into subjects like saving goals, retirement accounts, and types of budgets, but really personal finance is pretty simple. If you take the time and effort to lay out a solid foundation for yourself now you’ll save yourself a whole lot of headaches later.

Thanks to the following carnivals for including my submissions this week Carnival of Financial Planning hosted by The Money Principal Carnival of MoneyPros hosted by The Frugal Toad, Yakezie Carnival hosted by Money Life & More, Carnival of Money hosted by Evolving PF, Carnival of Personal Finance hosted by Start Freelancing Now, Carnival of Financial Independence hosted by Your PF Pro, Carnival of Financial Camaraderie hosted by Digital Personal Finance

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