Personal finance is not something commonly taught in school. It’s seems like an obvious subject that would be useful to just about everyone, but for some strange reason, it’s not in the curriculum. In lieu of learning the basics of finance from our schools or even from our parents, it is inevitably learned on your own.
The good news is that with the advent of the internet, it is incredibly easy to find good financial education. Here are some basic categories of topics that you’ll encounter as you delve into this all-important subject. This is the big picture view that you can drill down on once you get the basics.
Personal Budgeting
Businesses run on budgets. Non-profit organizations run on budgets. The government runs on budgets (or at least they’re supposed to). Our personal lives should run on budgets as well.
There are a lot of budgeting tools out there as well as experts to teach you how to make one. These tools can give you a guide on how to create a budget, which should be one of the first steps taken toward financial independence.
The most popular expert on budgeting is Dave Ramsey. He has a ton of free content and material available to consume. You should start there before buying any of his courses.
The idea behind budgeting is really simple. It’s basically spending less than you make. Although it’s a simple and straightforward idea, it can be super difficult to execute on.
Dave Ramsey’s big messages are to live on a budget and get out of debt. He’s not about being poor. In fact, he’s very rich and he encourages others to get rich by following his example. However, he believes you do that through discipline and good financial management rather than flashy and often risky investment strategies advocated by others.
Debt Management
Managing consumer debt is one of the biggest factors of personal finance. Most people have some sort of credit card, mortgage, student loan or car loan. According to the Federal Reserve, the amount of outstanding consumer debt in the US is around $4 trillion.
That’s just consumer debt. That means non-mortgage debts. If you include mortgages, the total outstanding household debt in America is over $13 trillion. That’s a lot of zeros!
Knowing how to manage debt is critical to healthy personal finance. The main objective is to limit how much debt you go into in the first place. Then it’s all about not increasing your debt over time.
Eventually, you want to get to a point where you can start paying down your debts. That goes back to budgeting. You have to budget how you’re going to pay down your debts over time.
Most financial planners recommend paying down your high interest credit cards first. On paper, that seems obvious. But in reality, it may be a better strategy to simply pay off your smallest debt first.
The reason is purely psychological. Personal finance is much more than just numbers and logic. It’s actually deeply psychological and emotional. By paying off your smallest loan first, you create a quick win that will fuel your overall strategy.
You can also look at debt consolidation companies like Lance Advisors that will refinance all of your consumer debt into a single low-interest loan. That can be one good strategy to reduce your interest payments. It’s almost always helpful to have just one debt payment you’re making every month instead of juggling between several.
Investment Planning
Successful long-term investment planning starts when you’re young. Warren Buffett once said, “my wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Buffett believes compound interest is an almost magical way to grow your money over time. The key to taking advantage of compounding interest in investments is time. That means the earlier you start your investment strategy, the more this concept will work for you.
Here are some examples of how time affects investments over different periods of time. You’ll see that funding an investment fund even at small levels early on will make a huge impact over 30-40 years of compounding interest.
One of the main problems with getting started in investing early is that most young people are tied down by debt. From a numbers perspective, it doesn’t make sense to invest in a fund where you hope to make a 8-10% return when you’re paying a credit card company 20% APR.
That’s where it may help to work with debt consolidation company like Lance Advisors to bring your interest rates down to a level where it would make sense to start investing. That way, you can get the power of compounding interest working for you as soon as possible.
These are the big buckets of thinking when it comes to personal finance. If you home in and master these concepts and execute them in your life, you will thrive in life.