The Do’s & Don'ts of Personal Finance

Importance of Personal Finance + How to Reach your Goals and Avoid Mistakes

By

Matt Lyons

on

Jan 21, 2021

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Personal finance entails the management of both individual and family finances, along with taking responsibility for future finances and setting goals. It’s important to stay in control of our personal finances for a number of reasons, especially when the unexpected occurs. Through factors like potential Illness, job loss, and deaths in the family, personal finances can help us to continue moving forward. Global issues in recent years, such as the COVID-19 pandemic, have shown many families the importance of personal financing when it comes to planning for emergencies. 

The Do’s & Don'ts of Personal Financing 

Knowing how to stay in control of personal finance is necessary for all of us. This includes understanding how to reach financial goals, managing emergencies, and making ends meet each and every day. It can be rather complex to understand the different aspects of personal finance, so check out some tips as well as some things to avoid!

DO #1: Form a Habit of Saving

No matter how small you start off, saving even just a little bit of money each week could benefit you in the long run. Some employers will allow you to split your paycheck between different accounts, such as 75% in the checking and 25% in the savings. You can also set a recurring transfer from your checking account to the savings account, the same day as your paycheck! Other automatic features you can consider include:

  • Auto escalate your 401k contributions: Some employers with a 401k offer the option to automatically increase your retirement savings by a certain percentage on a regular basis.
  • Keep the change features in checking accounts: Some checking accounts will round up the purchases you make, leaving the change in your savings account. It is similar to the e-version of a piggy bank, and if you purchase an item for $5.60 as an example, it will round up to $6.00 and $0.40 will be put into your savings account.

DO #2: Use Credit Cards and Pay Off Balances

Depending on the credit cards you use, some may offer rewards for travel or retail shopping, and even cash back. It’s recommended for many to use a credit card that gives cash back on purchases to generate extra money towards savings. 

When using a credit card, it’s important to spend wisely and primarily charge things that you know you’ll be able to pay off. A high balance on your credit cards will have a negative impact on your overall score because the credit utilization ratio is increased. Besides making payments each month and keeping track of the spending, other ways to improve your credit can include:

  • Bring past-due accounts current: If you have past-due accounts on your credit report, bringing them current can help to rebuild your credit history. This will also include paying off any collection accounts.
  • Apply for credit only in necessary circumstances: When you apply for credit, the lender will check your credit through an inquiry. Although these credit report inquiries have a small impact on scores, it's best to apply for credit as little as possible. 
  • Order your free credit score: When you order your free credit score from Experian you will get a list of the top factors affecting your credit. Improving on these factors, and you will see an improvement in your credit score!

DO #3: Control Impulse Buys

Have a problem with buying things you don’t need when you go out? You’re not the only one guilty of this issue, and there are ways to create a plan and help manage your impulse buys. A popular thing to try is the 48-hour rule. If you’re at the store or out shopping for example, give items that you “want” but aren’t actually on your list at least 48 hours to consider a second thought. If the item is still on your mind, budget and work to purchase it!

DON’T #1: Ignore Potential Benefits at Work

Do you receive any employee benefits where you work? Not sure? It might be time to check out some HR benefits you may be eligible to receive. There are benefits at companies that often go underutilized, which can save employees up to hundreds if not thousands of dollars!

Many companies offer rebates on health insurance premiums for wellness activities, like physicals and wearing fitness trackers. This means that many companies are basically paying their employees to be healthier. A 401k match is another major benefit, where you can invest as much to maximize the match because it is a 100% return on investment. 

DON’T #2: Invest Without Being Prepared

It’s easier than ever for people to find ways of investing these days, but it’s much less worth it if you’re not aware of all the potential risks. Your investments will lose value at some point, and there’s no way of controlling the rises and falls of the stock prices. You should take the time to research and educate yourself about investing, and keep close attention to interest rates and investment minimums.

A guideline set in place for the percentage of stock you should own is 110 minus your age. If you wanted to apply this guideline at age 45 for example, your portfolio would be 65% stocks and 35% bonds and cash. This kind of strategy will allow for maximum growth without too much risk.

DON’T #3: Restrict Your Budget

Budgets are so miserable for the majority of us because they are just too restrictive! When we restrict ourselves too much, it can lead to the opposite intended effect which could involve overspending or buying unnecessary items. 

Follow the 50/20/30 method for a manageable budget:

  • 50% of your income covers your required or fixed expenses/bills.
  • 30% of your income can go to discretionary spending.
  • 20% of your income should go towards debt payoff and savings.

When you pick up some of these financial habits and avoid some of these common mistakes, you’re more likely to enjoy financial peace and worry about one less stressful aspect of life. Good luck!

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