When you read a lot of finance books & blogs, you come across a ton of different personal finance tips and tricks. This can make personal finance seem like a massive, overwhelming, and complicated topic, but it's really not.
It's so simple that I've broken down the personal finance basics into just 12 quick points. If you live by these 12 pieces of financial advice, you'll have more control over your money, and you'll live a much better life financially.
Keep in mind:
This won't be easy.
Although there are only 12 tips, if you're not already doing these things it's going to take time to build up these new habits. Simply reading these 12 personal finance tips and then closing this page is not going to help you. You need to put in some more effort than that.
If it helps, bookmark this post or pin it on Pinterest, and then re-visit it every day. Or, write these tips down and stick them somewhere you'll see them.
1. Spend Less Than You Earn
Yeah, yeah, I know, it sounds obvious, right? Well, it must not be because according to CNBC, 78% of Americans working full-time are living paycheck to paycheck.
Here's the thing:
It's easy to KNOW that you should be spending less than you earn, it's a lot harder to actually do it.
However, if you want to escape the paycheck-to-paycheck lifestyle that so many others live, you need to spend less than you earn. This is one of the most crucial but basic personal finance tips ever.
In order to do this, you need to track your spending. You can do this by either writing your purchases down or by using a free personal finance app.
2. Learn to Budget
You might hear the word “budget” and cringe a little, but you shouldn't. Budgeting is not hard, and it doesn't mean you have to stop doing things you enjoy.
Budgeting is simply creating a plan for your money so you have a better idea of where it's going every month.
A popular and effective way to budget is with the 50/30/20 rule. How it works is 50% of your income goes towards the necessities (bills, food, housing, etc.), 20% of your income goes towards savings and the remaining 30% you can use for whatever you please.
This is a nice and easy way to break down your paycheck, but you might need to adjust it a bit to fit your lifestyle.
3. Break Down Your Income & Expenses
Credit for this one goes to user GeekLimit on Reddit – one of my favorite personal finance tips!
This is an odd little trick that can change the perspective you have about your money, and help you budget better.
It's all about breaking your income and expenses down into daily values, like this:
- You make $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.
Want to save $1,000 for a nice vacation? You'll have to save about 42 days worth of your spending money. That means 42 days of not spending a dime.
Want to buy a new $10,000 car? That's about 416 days worth of your spending money.
This will help you see how far purchases are going to set you back and affect your spending ability.
4. Pay Yourself First
This personal finance tip — supposedly coined by George S. Clason, author of The Richest Man In Babylon — is another common one that can have a huge impact on your finances. When you pay yourself first, you're investing in your financial future; you're investing in future you, and future you will thank present you for doing so.
So, why not just pay yourself at the end of the month? That's a lot easier, right?
Well, the reason why paying yourself first works so well is that once that money is sent to a savings account, you're a lot less likely to spend it. If you wait until the end of the month to pay yourself, you might not have any money left!
Future you will be very sad with no money. Make future you happy by investing in yourself!
PS. The best way to pay yourself first is to do it automatically. Set up an auto-deposit with WealthSimple and you'll never have to think about saving money again – it will just happen.
5. Have Financial Goals
If you want to accomplish financial goals, you need to figure out what goals are important to you first. Having a clear goal can keep you motivated and help you come up with a plan to reach that goal even faster.
Now, don't think that you need to set outrageous goals. If this is your first time thinking about personal financial goals, start off small and work your way up from there.
I'd suggest coming up with a few different goals in each of these categories:
- What you want to achieve in the next 3-months
- In the next year
- In the next five years
This way you'll have some short-term goals to look forward too, and some long-term goals to work towards as well. Your short-term goals may even be small stepping stones towards your bigger goals.
Here are some examples of good financial goals:
- Save $1,000
- Buy a house
- Start investing
So, remember to set long-term and short-term goals, and keep track of them too! Write them down somewhere and set a day each month to track your progress.
6. A Credit Card is Not Free Money
A credit card is a useful tool in your finance toolkit, but it's not free money.
When you purchase something with your credit card, you are borrowing money from the bank. If you don't give that money back in time, the bank is going to start charging interest on your balance.
This debt can build up and become a monster if you don't pay off your balance every month.
However, if you use a credit card responsibly and pay off the balance every month, it's a good way to start building credit. Most credit cards also have other benefits such as rewards points, cash back, or travel points.
So, should you have a credit card? Well, it depends.
If you're capable of paying off the balance in full every month, then you should have no problem managing a credit card and staying out of debt.
One last tip: Treat your credit card like a debit card. Pay it off in full every day if you have to. I try to pay off my balance every couple of weeks so that I don't forget. I also use Trim to remind me when payment is due.
If you want to take it further, use a prepaid reloadable card instead of a credit card. These cards work just like debit cards, but they have the perks of credit cards. For example, read my Koho Review – Koho is a prepaid card with cashback, budgeting, savings goals, and more. Note that prepaid reloadable cards won't help you build credit though.
7. Stay Out of Bad Debt
Debt means you owe someone money, and if I've learned anything from gangster movies, you NEVER want to owe someone money.
However, not all debt is necessarily bad debt.
So, what is bad debt?
Bad debt is any debt that's acquired through purchasing something that's going to lose value and generate zero revenue.
Some examples of bad debt would be credit card debt or an auto loan.
What is good debt?
Some people will say there's no such thing as good debt, and while I mostly agree, I also can't deny that some debt can be beneficial in the right circumstances.
For example, if you are going to take out a loan to purchase something that will benefit you financially in the future, I'd say that debt is a lot more beneficial than credit card debt.
Good debt usually has lower interest rates as well. Here are a few examples:
Since student loans typically have a very low-interest rate and going to school can increase your pay as an employee in the future, student loans can be considered good debt.
However, if you're going to college just because you don't know what else to do after high school, that's probably the wrong move. You could end up wasting a lot of money studying a field that you don't even enjoy. Then you'll be stuck working a job you hate to pay off your student loans. Not fun.
This one's a tricky one, but mortgages are generally considered good debt. They are usually long-term loans with low interest rates, so you'll still have money freed up for investments and such. The interest from mortgages is also tax deductible, so that's a bonus.
In the end, it's up to you to decide whether purchasing a home is the right move, as the value of a house will not always rise as some people think. You'll also have to add in the expenses of property tax, utilities, and home insurance.
There are a lot of online business ideas you can start on the cheap these days, but a small investment can also go a long way in certain endeavors. Business loans are considered good debt because they are put towards something with the goal of increasing your net worth.
8. Have an Emergency Fund
If you lost your job tomorrow would you have enough money to live off while you look for a new one? If not then you're not alone.
This study found that although Americans are doing a better job at saving, around 24 percent of them (57 million people) don't have an emergency fund.
Now I don't want to be a negative Nancy or a Debbie downer, but emergencies happen all the time. They may not happen to you, but it's always good to be prepared.
You can't predict an emergency, but you can prepare for one.
The best way to do so is to set up an emergency fund of 3-6 months living expenses. That means if you lost your job tomorrow, you'd be able to live off your emergency fund for 3-6 months while you look for a new one.
Here are some common financial emergencies:
- Job loss
- Car problems
- House repairs
- Natural disaster
- Medical or dental expenses
Still not convinced that you need an emergency fund? I wrote a story to show you how important having an emergency fund is:
The Story of Jimmy
Jimmy is an optimistic guy who makes $2,000/month and pays $1,500/month in expenses. The leftover $500 he uses as pleasure money.
Jimmy doesn't think anything bad will ever happen to him, so he doesn't think he needs an emergency fund. He's done fine all these years without one, right?
Jimmy goes into work one day and is told he's being let go because the company has gone bankrupt. Sorry, Jimmy.
Jimmy is shocked, but he's still optimistic. He'll just put his expenses on his credit card while he looks for a new job. He'll have to live without his $500 pleasure money for a bit, but he's okay with that.
Jimmy works hard to find a new job and 2-months later he's hired. It pays a bit less at $1,750 a month, but it's better than nothing.
He's now racked up $3,000 in credit card debt. Since his new job pays less than his old one, he'll only have $250 left each month after paying for the necessities.
With $3,000 on his 15% APR credit card, it will take him 14-months to become debt free, and he'll pay about $270 in interest. Keep in mind Jimmy would have to live without any pleasure money for over a year to pay off his debt at this rate.
If Jimmy had just set up a 3-month emergency fund, he wouldn't have had any debt at all, and he would still be able to do fun stuff.
Moral of the story:
Don't be like Jimmy. Set up an emergency fund. You probably didn't need that silly story to convince you, but it was fun to write.
9. Know Your Net Worth
Net worth can seem like a tricky topic, but it's quite simple. Your net worth is how much money you are worth. If you were to sell everything you own, then pay off everything you owe, how much money would be left?
That's your net worth.
Here's what that looks like in equation form:
Net worth = Assets (what you own) – Liabilities (what you owe)
Ready to calculate your net worth? Here's how:
First, create a list of all your assets (what you own) and their estimated value. Here are some examples of assets:
- Real estate
At the bottom of the list, add up the total value of all your assets.
Next, create another list of all your liabilities (what you owe). Here are some examples of liabilities:
- Credit card debt
- Student loan
- Auto loan
At the bottom of the list, add up the total value of all your liabilities.
Now that you have the total value of your assets and liabilities, plug the numbers into the equation above, and you'll get your net worth.
If you have a positive net worth that's good. Continue working to increase your net worth even more.
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. If you're young and you have a big student loan, you shouldn't worry too much as you haven't even started working yet.
Make sure to re-calculate your net worth every month or so to keep up to date with your finances. I use a free tool called Mint to track my net worth but many people recommend Personal Capital as well.
10. Start Investing
Investing is one of the best ways to increase your net worth, but a lot of people stay away from it because they're scared of losing money. So instead of investing, they keep their money in a savings account. That's great, and you should have some money in a savings account for emergencies, but the truth is:
Money in a savings account loses value over time.
See, the average savings account has a very tiny 0.06% APY (annual percentage yield), while inflation is around 1.7%. That means that each year, the money you have in a savings account is going to have less and less buying power.
So, what can you invest in to stay ahead of inflation? Here are some options:
- Real estate
- Peer-to-peer lending
- Exchange traded funds (ETFs)
- Cryptocurrency (crypto can be volatile, so invest at your own risk)
11. Communicate With Your Significant Other
Notice how I wrote significant other; this financial tip doesn't just apply to married couples. Money fights can affect any relationship.
The best way to avoid fighting about money with your S/O is to talk to them about it. Remember that you're a team! You should be talking to each other about your financial goals, and you should set a date once a month to go over your finances together.
I recently started doing a monthly money meeting with my girlfriend and it's actually been pretty fun. We get to see where each other are at with our financial goals and we keep ourselves motivated to accomplish those goals.
The bottom line?
Don't let money ruin a great relationship.
12. Side Hustle to Make More Money
Are you happy with the amount of money you're taking home each year? If you're like most of us, a little bit of extra cash each month could go a long way.
So, why not start a side hustle to supplement your income?
Don't worry. You don't have to sacrifice all of your free time to start a successful side hustle. One of the big advantages of side hustling is that you can do it when you want and as much (or as little) as you want.
The best advice I can give you is to start. Use any extra time you can find and make a little bit of progress every day. Soon you'll be addicted to the side hustle lifestyle.
So, how much money can you really make with a side hustle?
Well, that's the other awesome thing about side hustling, the income is virtually limitless. Since you're not getting paid by the hour or a set salary, it's really up to you to decide how much you want to earn. The more you feed your side hustle, the more it grows.
There you have it, the personal finance basics laid out in 12 simple points. Now I've got a question for you:
Did you learn anything new from these personal finance tips and tricks?
If you did:
Take action. Start working on improving your finances today, not tomorrow.
It's easy to read these tips and think, “Oh, I can calculate my net worth tomorrow” or “Ehh, I'll set up that auto-deposit next month.”
But if you say that stuff, you're just coming up with excuses. Take action today, and you'll be one step closer towards financial success.
Finally, I want to hear from you:
What's one personal finance tip you wish someone had told you earlier?