Personal Finance

What is 'Personal Finance'

Personal finance is the science of handling money. It involves all financial decisions and activities of an individual or household – the practices of earning, saving, investing and spending.

Matters of personal finance include the purchasing of financial products, like credit cards, life and home insurance, mortgages and of course various investments and investment vehicles. Banking is also considered a part of personal finance, including checking and savings accounts and 21st century online or mobile payment services like PayPal and Venmo.

BREAKING DOWN 'Personal Finance'

All individual financial activities fall under the purview of personal finance; personal financial planning generally involves analyzing your current financial position, predicting short-term and long-term needs and executing a plan to fulfill those need within individual financial constraints. It depends on one's expenses, income, living requirements and individual goals and desires.

Among the most important aspects of personal finance are:

As a specialized field, personal finance is a fairly recent development, though colleges and schools have taught aspects of it as "home economics" or "consumer economics" since the early 1900s. The field was initially disregarded by male economists, as "home economics" appeared to be the purview of home-making women. However, more recently economists have repeatedly stressed widespread education in matters of personal finance as integral to microeconomics and the overall economy.

Market theory and practice is largely guided by assuming the presence of the invisible hand: the idea that all consumers in a market economy will act rationally, or in their own self-interest. In theory, this makes market fluctuations predictable and provides assurance that their movements have been in the interest of the consumer. However, scholars and behavioral economists in the late 20th and 21st centuries began to question that assumption, arguing that consumers actually act irrationally as a result of under-education in a more complicated and less comprehensible economy.  Many consumers simply do not have the information to make the most rational financial decisions for themselves, or they are manipulated by circumstance or misinformation to perceive a decision as being more rational than it actually is. 

Personal Finance Planning Tips

Whether you’ve been in the workforce for years, or are a recent graduate just starting out, it's never too late to create financial goals, security and freedom – both now, and for the future.

Here are the best practices and tips for personal finance.

1. Devise a Budget

Seriously. Having a budget is the first mandatory step from which savvy money management will evolve. A budget is essentially a financial roadmap allows you to live within your means, while having enough left over to save for long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

  • 50% of your take-home pay or net income (after taxes, that is) goes towards living essentials, such as rent, utilities, groceries and transport
  • 30% is allocated to lifestyle expenses, such as dining out and shopping for clothes, etc. 
  • 20% goes towards the future: paying down debt and saving both for retirement and for emergencies

It’s never been easier to manage money, thanks to a growing number of personal budgeting apps for smartphones that put day-to-day finances in the palm of your hand. Level Money automatically updates spendable cash as you make purchases each day, providing you with a simple, real-time financial snapshot. Meanwhile, Mint streamlines cash flow, budgets, credit cards, bills and investment tracking – all from one place. It automatically updates and 
categorizes your financial data as info comes in, so you always know where your money is at. The app will even dish out custom tips and advice.

2. Create an Emergency Fund

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses--medical bills, rent if you get laid off, etc.

Between three to six months' worth of living expenses is the ideal safety net. Financial experts generally recommend putting away 20% of each paycheck every month (which of course, you’ve already budgeted for!). Once you’ve filled up your “rainy day” fund (for emergencies or sudden unemployment), don’t stop. Continue funneling the monthly 20% towards other financial goals such as a retirement fund.

3. Limit Debt

This sounds simple enough – to avoid debt getting out of hand, don’t spend more than you earn. Of course, most people do have to borrow from time to time – and sometimes going into debt can be advantageous, if it leads to accumulating an asset. Taking out a mortgage to buy a house is one good example.

There can be other times when leasing is sometimes the better financial move to buying outright, be it in renting a place to live, leasing a car, or even getting a subscription to computer software.

4. Use Credit Cards Wisely

Credit cards get dinged for being major debt traps. But it's unrealistic not to own any in the contemporary world, and they have uses other than as a tool to buy things. Not only are they crucial to establishing your credit rating, they’re a great way to track spending – a big budgeting aid.

Credit just needs to be managed correctly, which means the balance should ideally be paid off every month, or at least be kept at a credit utilization rate minimum (that is, keep your account balances below 30% of your total available credit). Given the extraordinary rewards incentives on offer (such as cash back) these days, it makes sense to charge as many purchases as possible; still, avoid maxing out credit cards at all costs, and pay bills strictly on time. One of the fastest ways to ruin your credit score is to constantly pay bills late – or even worse, miss payments. (See the Fifth Commandment.)

Using a debit card is another way to ensure you will not be paying for accumulated small purchases over an extended period – with interest

5. Monitor Your Credit Score

Credit cards are the main vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage or any other type of financing for that matter, you’ll need a solid credit history behind you. Factors that determine your score include: how long you've had credit, payment history and your credit-to-debt ratio. 

Credit scores are calculated between 300 and 850. Here's one rough way to look at it:

  • 720 = good credit
  • 650 = average credit
  • 600 or less = poor

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. By monitoring your report, you will be able to detect and address mistakes or fraudulent activity. Federal law allows you to obtain free credit reports from the three major credit bureaus: EquifaxExperian and TransUnion. Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport, a site sponsored by the Big Three; you can also get a free credit score from sites such as Credit KarmaCredit Sesame or Wallet Hub. Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates too.

6. Consider Your Family

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will or trust. You also need to look into insurance: not just on your major possessions (auto, homeowners), but on your life. And be sure to periodically review your policy, to make sure it meets your family's needs though life's major milestones.

Other critical documents include a living will and healthcare power of attorney. While not all these documents directly affect you, all of them can save your next-of-kin considerable time and expense when you fall ill or become otherwise incapacitated.

And while they're young, take the time to teach your children about the value of money and how to save, invest and spend wisely.

7. Pay Off Student Loans

There are myriad loan-repayment plans and payment reduction strategies available to graduates. If you’re stuck with a high interest rate, paying off the principal faster can make sense. On the other hand, minimizing repayments (to interest only, for instance), can free up other income to invest elsewhere. Some federal and private loans are even eligible for a rate reduction if the borrower enrolls in auto pay. Flexible federal repayment programs worth checking out include:

  • Graduated repayment – progressively increases the monthly payment over 10 years
  • Extended repayment – stretches the loan out over a 25-year period

8. Plan (and Save) For Retirement

Retirement may seem like another lifetime away, but trust us: It arrives much faster than you’d expect. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors like to call the magic of compounding interest – how small amounts grow over time. Setting aside money now for your retirement not only allows it to grow over the long term, it can reduce your current income taxes, if funds are placed in a tax-advantaged plan fund like an Individual Retirement Account (IRA), a 401(k) or a 403(b). If your employer offers one of the latter two, you should start directing a portion of your paycheck towards it. Some companies will match your contribution – essentially free money. Start contributing pronto. Failing to do so can equate to tossing out tens of thousands of dollars along the way. Take time to learn the difference between a Roth and a traditional 401(k), if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people), and converting a term life insurance policy to a permanent life one.

9. Maximize Tax Breaks

Due to an overly complex tax code, many individuals leave hundreds or even thousands of dollars sitting on the table every year. By becoming deliberate about maximizing your tax savings, you'll free up money that can be invested in the reduction of past debts, your enjoyment of the present and your plans for the future.

You need to start each year saving receipts and tracking expenditures for all possible tax deductions and tax credits. Many business supply stores sell helpful "tax organizers" that have the main categories already pre-labeled. After you're organized, you'll then want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income you are taxed on, whereas a tax credit actually reduces the amount of tax you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself A Break

Budgeting and planning can seem full of deprivations. Make sure you allow yourself some reasonable rewards now. Whether it's a vacation, purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you're working so hard for.

Last but not least, don't forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn't mean you should. Setting up an account at a brokerage, spending a few hundred dollars on a certified public accountant (CPA) or a financial planner – at least once – might be a good way to jump-start your planning.

Personal Finance Strategies

Once you've established some fundamental procedures, you can start thinking about philosophy. The key to helping adults get their personal finances on the right track isn't about teaching them a new set of skills. Rather, it's teaching them that the principles that contribute to success in business and their careers work just as well in personal money management. Three key ones are: prioritizing, assessing and restraining.

Prioritizing means that you're able to look at your finances, discern what keeps the money flowing in, and make sure you stay focused on those efforts.

Assessment is the key skill that keeps professionals from spreading themselves too thin. Ambitious individuals who always have a list of ideas about other ways they can hit it big, whether it is a side business or an investment idea. While there is absolutely a place and time for taking a flyer, running your finances like a business means stepping back and truly assessing the potential costs and benefits of any new venture.

Restraint is that final big-picture skill of successful business management that must be applied to personal finances. Time and time again, financial planners sit down with successful people who somehow still manage to spend more than they make. Earning $250,000 per year won't do you much good if you spend $275,000 per year. Learning to restrain spending on non-wealth-building assets until after you've met your monthly savings or debt-reduction goals is crucial in building net worth.

Learning About Personal Finance

Few schools offer courses in managing your money, which means most of us have to get our personal finance education from our parents (if we’re lucky) or pick it up ourselves. Fortunately, you don’t have to spend much money to find out how to better manage it. You can learn everything you need to know for free online and in library books. Almost all media publications regularly dole out personal finance advice, too.

Personal Finance Education Online

A great way to start learning about personal finance is to read personal finance blogs. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly what challenges real people are facing and how they are addressing those challenges.

"Mr. Money Mustache" offers hundreds of posts full of irreverent insights on how to escape the rat race and retire extremely early by making unconventional lifestyle choices. "Making Sense of Cents" by Michelle Schroeder-Gardner offers advice and personal stories about paying off $38,000 of student loan debt in seven months, how to save 50% or more of your income and how she makes tens of thousands of dollars a month by blogging. And "The Points Guy" and "Million Mile Secrets" will teach you how to travel for a fraction of the retail price by using credit card rewards.

These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help but toot our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our tutorials on Budgeting Basics and How to Buy Your First Home – or the thousands of articles in our personal finance section.

Personal Finance Education Through the Library

You may need to visit your library in person to get a library card, but after that, you can check out personal finance audiobooks and eBooks online without leaving home. Some of these bestsellers may be available from your local library: "I Will Teach You to Be Rich," "The Millionaire Next Door," "Your Money or Your Life" and "Rich Dad Poor Dad."  Personal finance classics like Personal Finance for Dummies, Dave Ramsey’s Total Money Makeover, The Little Book of Common Sense Investing, and Think and Grow Rich, along with many others, are also available in audio book form and may be available to borrow for free from your library.

Free Online Personal Finance Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses.

Open2Study from Open Universities Australia offers a financial literacy course that will teach you how to set and achieve savings goals and how to manage your money (subjects that aren’t Australia-specific). Topics include how compound interest works and the basic steps to starting to invest. There are four modules, each with about 10 video lessons, nine quizzes and one assessment. The complete course takes about 8 to 16 hours to complete.

Morningstar’s Investing Classroom offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds and portfolios. Some of the courses you’ll find there include “Stocks versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix” and “Introduction to Government Bonds.” Each course takes about 10 minutes and is followed by a quiz to help you make sure you understood the lesson.

EdX, an online learning platform created by Harvard University and MIT, offers at least three courses that cover personal finance: How to Save Money: Making Smart Financial Decisions from the University of California at Berkeley; Finance for Everyone from the University of Michigan; and Personal Finance from Purdue University. These courses will teach you things like how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report and the time value of money.

Purdue also has an online course on Planning for a Secure Retirement. It’s broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans and IRAs. You’ll learn about your risk tolerance, think about what kind of retirement lifestyle you want and estimate your retirement expenses.

Missouri State University presents a free online video course on personal finance through iTunes. This basic course is good for beginners who want to learn about personal financial statements and budgets, how to use consumer credit wisely, and how to make decisions about cars and housing.

Personal Finance Podcasts

Personal finance podcasts are a great way to learn how to manage your money if you’re short on free time. While you’re getting ready in the morning, exercising, driving to work, running errands or getting ready for bed, you can hear what the experts have to say about becoming more financially secure.

The Dave Ramsey Show is a call-in program that you can listen to anytime through your favorite podcast app. You’ll learn about the financial problems real people are facing and how a multimillionaire who was once broke himself recommends solving them. NPR’s Planet Money and Freakonomics Radio make economics interesting by using it to explain real-world phenomena such as “how we got from mealy, nasty apples to apples that actually taste delicious,” the recent Wells Fargo faux-accounts scandal and whether we should still be using cash. American Public Media’s Marketplace helps make sense of what’s going on in the business world and the economy. And So Money with Farnoosh Torabi consists of a combination of interviews with successful business people, expert advice and listeners’ personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Things a Personal Finance Class Can't Teach You

Personal finance education is a great idea for consumers, especially youthful ones, who need to understand investing basics or credit management. However, the grasp of basic concepts that revolve around dollars and cents is not necessarily a guaranteed path to fiscal sense. Human nature can often derail the best of intentions aimed at achieving a perfect credit score or building a substantial retirement nest egg. Three key character traits include:


One of the most important tenets of personal finance is systematic saving. Say your net earnings are $60,000 per year and your monthly living expenses, such as housing, food and transportation, amount to $3,200 per month. There are choices to make surrounding the remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund, or perhaps a high-deductible health plan (HDHP) to meet out-of-pocket medical expenses. However, you’ve developed a penchant for designer clothes, and weekends at the beach beckon. The discipline required to save rather than spend is lacking, and so is the 10 to 15% of gross income that could have been stashed in a money market for short-term needs.

Discipline is reserved not only for the thick-skinned institutional money managers who make their living from knowing when to buy and sell stocks. The average investor would do well to set a target on profit-taking and abide by it. As an example, imagine that you bought Apple Inc. stock in February 2016 at $93 and vowed to sell when it crossed $110, as it did two months later. Instead, you exited the position in July 2016, at $97, giving up gains of $13 per share and the possible opportunity for profit in another issue.

Sense of Timing

Three years out of college, the emergency fund has been established and it is time to reward yourself. A jet ski costs $3,000. Investing in growth stocks can wait another year, you think; there is plenty of time to launch an investment portfolio, right? Putting off investing for one year, however, can have significant consequences. The opportunity cost of buying the watercraft can be illustrated through the time value of money. The $3,000 used to buy the jet ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to retire at age 62, as you would like.

Doing tomorrow what you could do today also extends to debt payment. A $3,000 credit card balance takes 222 months to retire if the minimum payment of $75 is made each month. And don't forget the interest you're paying: at an 18% APR, it comes to $3,923 over those months. Plunking down $3,000 to erase the balance in the current month offers substantial savings – about the same as the cost of the jet ski!

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult, but necessary, facet of sound financial decision-making involves removing the emotion from a transaction. Making impulsive purchases or loans to family members feels good but can greatly impact long-term investment goals. Your cousin who has burned your brother and sister will likely not pay you back either – so the smart answer is to decline his requests for help. Sure, sympathy is hard to turn back, but the key to prudent personal financial management is to separate feelings from reason.

When To Break Personal Finance Rules

The personal finance realm may have more guidelines and "smart tips" to follow than any other. Although these rules of thumb are good to know about, everyone has individual circumstances. Here are some rules that young adults are never supposed to break, but should consider breaking, anyway.

Saving or Investing a Set Portion of Your Income
An ideal budget includes saving a small amount of your paycheck every month for retirement – usually around 10%-20%. While being fiscally responsible at a young age is important, and thinking about your future is crucial, the general rule of saving a given amount each period for your retirement may not be the best choice for young people just getting started in the real world. For one, many young adults and students need to think about paying for the biggest expenses of their lifetime, such as a new car, home or post-secondary education. Taking away potentially 10 to 20% of available funds would be a definite setback in making said purchases. Additionally, saving for retirement doesn't make a whole lot of sense if you have credit cards or interest bearing loans that need to be paid off. The 19% interest rate on your Visa would probably negate the returns you get from your balanced mutual fund retirement portfolio, five times over.

Also, saving your money to travel and experience new places and cultures can be an extremely rewarding experience for a young person who's still not sure about his or her path in life.

Long-Term Investing / Investing in Riskier Assets
The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy and hold philosophy. This rule is one of the easier ones to justify breaking. Being able to adapt to changing markets can be the difference between making money, or limiting your losses, compared to sitting idly by and watching as your hard-earned savings shrink. Short-term investing has its advantages at any age.

Now, if you're no longer married to the idea of long-term investing, you can stick to safer investments, as well. The logic was, since young investors have such a long investment time horizon, they should be investing in higher risk ventures, since they have the rest of their lives to recover from any losses they may suffer. However, if you don't want to take on undue risk in your short to medium-term investments, you don't have to. The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon.