This blog post is a crash course in personal finance basics.
Do you feel like you’re constantly playing catch-up when it comes to your finances? You’re not alone. Many people don’t understand basic financial concepts and terminology, which can lead to a lot of confusion and stress.
I was in the exact same position until I decided to become informed about my financial health. Here are the concepts that I learned along the way. By understanding these personal finance basics, you’ll be able to make more informed financial decisions and take control of your money.
Keep reading to learn more about personal finance basics.
7 Easy Personal Finance Basics
1) Assets
Assets are the first basic finance concept you should be aware of and they are probably a lot of people’s favorite part of personal finance. An asset is anything that has value and can be used to generate income. This can include your home, your car, investments, savings accounts, and anything else that has monetary worth. It’s important to understand assets because they can be used to secure loans, grow your wealth, and provide financial stability in times of need. These are just a few examples – there are many more assets that you may own. For instance, are you an avid record collector? What about purses? Those all have value, and it’s important to take inventory of your assets and understand their worth.
Some examples of assets include:
- Your car
- Savings accounts
- Investments
- Your home
- Hobby collections
2) Liabilities
Your liabilities are everything you owe, such as credit card debt or student loans. It’s important to understand your liabilities so that you can create a plan to pay them off. Liabilities can have a negative impact on your finance. However, if you’re aware of them and have a plan to tackle them, you can minimize their damage.
Some examples of liabilities include:
- Credit card debt
- Student loans
- Mortgage
- Taxes owed
These are just a few examples of common liabilities. It’s important to understand your unique financial situation and create a plan to pay off high-interest liabilities quickly.
It’s also important to understand that having liabilities isn’t always bad. In fact, some liabilities can be used to build your wealth! For instance, having a mortgage is indeed a liability, however, it is also a vehicle to building your wealth (owning your house!)
3) Credit
Credit is another basic finance concept that everyone should understand. Credit is essentially a loan that you can use to make purchases. When you borrow money, you’ll be required to pay it back with interest. Since it’s a loan, credit is a type of liability.
It’s important to understand credit because it can be a useful tool, but it can also lead to financial problems if not used carefully. You’re probably are already familiar with one of the most common forms of credit, which is credit cards! Credit cards can either be your best friend or your worst enemy, it really depends on the type of relationship you have with money.
First the pros of credit cards:
- You can earn rewards, such as cash back or airline miles
- help build your credit score
- offer purchase protection, which can protect you if something you buy with the card is damaged or stolen
Some of the drawbacks of credit cards are:
- They can be easy to misuse and lead to debt
- Charged interest on your balance if you don’t pay it off in full each month
- Credit card companies can raise your interest rate without notice
It’s important to know what kind of person you are before starting to establish your credit because this can actually have huge impacts down the line. The biggest one is your credit score.
A good credit history shows lenders they’re more likely to be repaid when lending their money out – so maintaining a healthy score will help you in many ways! This includes securing favorable terms for mortgages or car loans.
Make sure all your bills are paid on time so that they don’t negatively impact what lenders see when they pull up this information
If you’re curious about your current credit score you can learn it from Equifax or TransUnion.
4) Budgeting
The next basic finance concept is budgeting. When it comes to your finances, you need to be proactive and create a budget that outlines your income and expenses. This will help you stay on top of your finances and make sure you’re not spending more than you can afford.
There are a number of different budgeting methods out there, so find one that works best for you.
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Some people prefer to track their spending manually, while others use online budgeting tools. No matter what method you choose, the key is to be consistent and update your budget regularly.
If you’re struggling to create a budget, try downloading an app that will help you track your spending and create a basic plan for managing your finances.
Some budgeting apps are:
5) Savings
Saving money is the next basic finance concept that everyone should be familiar with. By setting aside money each month, you’ll create a financial cushion in case of an emergency or unexpected expense. And the earlier you start saving, the more time your money will have to grow!
There are a number of different ways to save money, so find one that works best for you. Some people prefer setting up automatic transfers into savings accounts while others use cash envelopes or even just put aside any spare change they come across throughout the day.
There are a ton of different apps that can help with saving.
Digitwill help automate this process by making small transfers into your account when it thinks you have enough cash left over after paying bills and other expenses.
Goodbudget will help track how much money has been set aside so that nothing gets overlooked! This way everything will be in one place when it comes time to make those big decisions about what your next steps should be.
WealthSimple, allows you to enroll in the WealthSimple roundup which rounds up all your purchases to the nearest dollar and saves the difference.
If you’re looking for even more ways to save, start by looking at your budget and finding areas where you can cut back on spending. For example, if you’re a coffee lover who spends $100 per month at the local cafe, consider brewing your own brews instead to save money while still getting that morning fix. It may sound ironic but buying an espresso machine was a huge money saver for me!
No matter how you do it, it’s important to make sure you always have enough saved for an emergency. If something unexpected happens like a job loss or illness, then having cash set aside will give you peace of mind knowing that basic needs can still be met. A good rule of thumb is to have 3-6 months of your expenses saved in an emergency fund.
6) Investing
Investing is a basic finance concept that can seem a little daunting, but it’s actually not as complicated as it seems. The essential idea is to put your money into something that will grow over time – and there are many different options for doing this!
You can invest in stocks, which give you a share of ownership in a particular company, or in bonds which are essentially loans given to governments or companies.
There are also a number of different ways to invest your money, so it’s important to find one that aligns with your goals and risk tolerance. For example, some people prefer to invest in mutual funds which give you exposure to a variety of stocks or bonds, while others might prefer individual stocks because they want more control over where their money goes.
Some great platforms for investing are:
7) Net Worth
The last of the personal finance basics that everyone should know is the concept of net worth. Net worth is simply a measure of your financial health. It’s how much money you’d have leftover when all debts are paid off and assets are liquidated at current market value. Using all the concepts outlined above a simple way to calculate your net worth is:
Net Worth= Assets-Liabilities
Net worth gives a perfect snapshot of your current financial situation. So, keeping track of it over time is a great way to see if you’re making progress in your financial goals.
The basic finance concepts of savings, investing, net worth, and more can seem daunting at first, but they’re actually not as complicated as they seem! By familiarizing yourself with these basic concepts, you’ll be able to start taking control of your own finances in no time.
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