Personal Finance 101: How to Manage Your Money Effectively

Personal finance 101

Over the past few years, managing your money effectively has become more important than ever. Recently, increases in the cost of living have made stricter financial management a must for many households.

It’s also prudent to be responsible with money, so you can save for big purchases, emergency funds, or your eventual retirement. 

In this guide, we have explained the core principles of personal finance management, given a dozen valuable tips for saving money, and listed the benefits of following those tips.

We also have an FAQ section at the bottom of this page that should answer any burning questions that you have. We’re talking about money and financial advice here, so we have linked supporting references where appropriate.

That way, you know you’re getting good advice and that your financial decisions are well-informed. You can also use them to read even deeper into financial management and other related topics that haven’t been covered here.

To start, let’s tackle what personal finance means and how you should set your personal finance goals.

Personal Finance Definition

Everybody has seen the phrase personal finance before, though not everybody knows exactly what it means. It’s more specific than just the money you have, it also encompasses many assets and accounts that we gather throughout our lives.

To put it simply, personal finance is more than what’s in your checking account – it’s also daily budgeting practices, your investment portfolio, and tax planning.

As one of the foremost sources of finance and investment knowledge online, Investopedia describes personal finance as the following:

A term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning."

They also note that the term personal finance is used for the entire industry that maintains and manages all of the financial services mentioned above.

This includes guidance on them too, hence how certain schools and mentors teach personal finance as if it were any other subject.  So, that’s the widely accepted definition of personal finance.

With that understanding, we can now start thinking about your personal finance strategy.

Create and Meet Your Own Personal Financial Goals

When trying to manage your money more effectively, you should set out realistic goals that you can meet without causing too much discomfort or disturbance in your everyday life.

You do this by using the three principles we have explained below when forming your financial goals.  It’s important to remember that many small goals are more manageable than a single, lofty goal.

This is a constant that you’ll find whenever setting goals for yourself. By setting checkpoints and celebrating them, you’ll have more stamina when tackling lifestyle changes.

Just like dieting, where you celebrate every pound lost, you should also celebrate saving money even if you’re not at your final goal yet. 

It's a process and, if you’re going to get to the end, you need to treat it like a process.  Here are five steps that should make setting any financial goal much easier:

  1. Make your financial goals specific.
  2. Make your financial goals measurable.
  3. Write your financial goals down.
  4. Give yourself a deadline.
  5. Don’t compare to others, make your goals your own.

Personal Finance 101: Principles

Before we drill down into specifics regarding financial management, let’s cover those principles that we mentioned above. These are general attitudes and concerns that you should have when managing money, which will make it easier to change your spending and save more of your hard-earned cash.

There are three to speak of – prioritization, assessment, and restraint.

Prioritization

If you want to manage your money effectively, there’s no use in cutting down on small purchases while leaving larger unnecessary purchases alone.

To be effective, you need to prioritize your saving efforts by looking at your spending habits to see where most of your money is going.

Once you have done that, you can discern which streams are necessary and which ones are unnecessary. The necessary ones are kept, naturally.

Those would be things like bills and other outgoings that you can’t stop paying.  For the others, order them based on how much you’re spending.

You now have a list of purchases and expenses that you need to cut down. Start from the top, so you can save money even faster. Then you can make your way down the list and save the rest of the spare change.

Keep this in mind when new expenses and financial obligations enter your life, too. Always focus on the most effective spending cuts that save you the most money.

Assessment

Part of prioritization, and personal finance management in general, is decision making. If you don’t make good decisions, you won’t be as effective when trying to save money.

You also won’t be as effective in making money or benefiting from savvy decision-making in other aspects of life. Every time you make a financial decision, you’re making an assessment and then making decisions from them.

Prioritization helps when budgeting, but as we’ve alluded to already, personal finance is much more than just budgeting.  This becomes much more important when your finances are wrapped up in investments and other material assets too.

Decisions made in the management of those assets can affect their value, positively or negatively, saving or costing you money.

Restraint

This one probably sounds self-explanatory, though it’s one of the hardest principles to follow. That’s because it’s tied to so many things that are hard to learn from just reading a page online, like impulse control and other behaviors.

You can work on those, of course, it’s just harder to learn if you’re later in life and have a set way of life.  If you find yourself practicing retail therapy often, where you make unnecessary purchases when stressed and get emotional gratification from doing so, then you may need to dig deeper to solve the problem.

Like overeating and other bad habits, it can sometimes be very simple, or it can sometimes be very complex and a sign of trauma or an addictive personality.

So, practicing restraint is a lot easier said than done. Many of our tips will help but, if you still have trouble, remember that there are always deeper lifestyle factors that could be affecting your spending.

12 Tips to Improve Your Finances

We have a dozen tips right here that will help you get your finances in order. We have arranged them chronologically, so you can track them step-by-step and make changes as they become relevant.

After putting these twelve tips into practice, your financial situation should be drastically improved.

1. Understand Your Financial Situation

The first one may be the hardest, which is understanding your financial situation to such a degree that you make the right decisions and practice the right lifestyle that saves money.

In short, this is the part where you live by those principles that we’ve just described, and that’s why it can be difficult. Your financial situation says much more than your salary or how much you spend monthly, it’s a reflection of yourself, your productivity, your competency, and your state of mind.

While many financial circumstances are beyond our control, how we manage the finances that we do acquire says a lot about us.

Once you’ve understood your financial situation, you can move on to the other tips, though it doesn’t stop there. You need to keep understanding your financial situation every step of the way.

2. Create A Sustainable Monthly Budget

To start, you shouldn’t worry about bureaucratic things like taxes or insurance. Start small by creating a simple monthly budget for yourself.

This reins in your personal spending habits and is the most immediate way to start saving money for a rainy day. When it comes to spending less money, your dietary decisions are one of the most consistent and malleable parts of your life.

Maybe you get takeout often, in which case you should limit that. However, for most people, cutting it out of your life completely won’t work.

Limiting takeout, but still treating yourself occasionally, should work much better in the long term.  This also brings up another great strategy to make monthly budget changes – the enforcement of good habits.

Eating fewer takeout meals means that you cook for yourself more often, which is generally healthier. Don’t reach for fresh, top-shelf ingredients, however, as they can be more expensive.

Many money-saving habits establish and enforce other positive habits in your life that will help your physical health, mental health, and make you a happier, more productive person.

Remember that you should be realistic when setting and progressing towards goals for yourself.  A recent and popular budgeting strategy is the 50/30/20 rule – where 50% of after-tax income is spent on needs, 30% on wants, and 20% on savings.

It is sometimes the 50/20/30 rule, where an individual wants to save a little more.

3. Track Your Spending

There’s no use in having a budget if it isn’t enforced, which is where our next tip becomes important. You do this by tracking your spending, so you can let the necessary expenses pass and shoot down the ones that you can live, or will even thrive, without.

No matter who you are, reading this, there’s always some form of spending that can be tightened up. Consider temporarily ceasing some spending too and resuming them once you’ve saved up money and are in a more comfortable position to take on optional spending.

If you’re following the always-relevant tip #1, you’re probably aware of your spending already. If you haven’t already, bring your awareness into the real world by writing your spending down or using the notepad app on your phone.

There are also money management apps that allow you to program your spending habits and then track them and make improvements as necessary.

4. Pay Your Bills On Time

As for those necessary expenses, you’ll want to keep those running smoothly. They are necessary for a reason, usually to keep access to services and assets that help you earn and continue to save money.

If you want your money-saving efforts to be sustainable, you’ll need to safeguard those necessary expenses. Missing out on bill payments, debt repayments, and other similar costs will accrue late fees, harm your credit score and interest rates, and further damage your savings.

5. Build Up Your Savings

Having mentioned savings, it’s time to pay attention to those. Responsible savings aren’t just a pile of cash that you can use for any vague reason that may come up in the future.

Instead, you should separate your saved money across neatly organized funds.  You should aim to get an emergency fund, a savings account, a retirement account, and/or an investment account.

The savings account will gather interest more than other accounts, so it’s a great way to make a little extra cash over a long period, and they often dis-incentivize you to tamper with saved funds.

A retirement account functions similarly, though you won’t access it until you’re at your golden years.  Investing shouldn’t be thought of as saving, since that money gets exposed to the market or other industries that you may have a stake in.

That said, many prefer to divert a small portion of their funds to try and grow them through casual, long-term investment.

6. Cut Back On Unnecessary Charges

In today’s age, limiting your spending is harder than ever. Sure, you’ve already made a list of outgoings, but you may have missed a few expenses here and there.

There are just two words to blame – subscription models.  Subscription models are the big new thing, especially with streaming services, mobile apps, and privileged access to other services like Amazon.

They’re everywhere nowadays and, assuming the service is great, they can be a cost-effective way of doing business for both the brand and the consumer.

With that said, people also tend to forget about them. If you have multiple streaming service subscriptions but you’re not watching them often – stop.

Don’t keep Netflix around if you’re not watching it regularly, it may be more frugal to dip in and out when something interesting to you hits the service.

Be ruthless. If you don’t use it often, get rid of it, and you’ll save more money.

7. Save Up Cash

It may sound counterintuitive but, to save money in a digital age, hoarding cash can be a great strategy. You need to embrace your inner Luddite and limit sending money electronically, which is often convenient and easy to do without thinking of the ramifications that come later.

If you’ve ever met a savvy gambler, or maybe you are one, then you’ll know all about bankrolls. This is where the gambler leaves their bank cards at home and takes a set budget to spend, in cash.

Convenience is a very, very powerful thing. By the convenience of electronic payments alone, consumers can spend up to 100% more than they would if they had a bouquet of cash in their pockets instead.

Dealing in cash makes giving away money more obvious, so save up cash and use it wherever it’s appropriate.

8. Invest Your Money Strategically

Time to tackle investing in more detail. Investing is a powerful tool that can help the average person make more money and even realize financial goals that may have once seemed out of reach.

You’re probably daunted by the idea of investing. That’s good – you should be – because people have lost the shirts off their back doing it.

However, now that you are approaching the topic with some trepidation, you should know that you’re only exposed to as much risk as you accept.

Most people aren’t going to make it as smooth-operating stock or options traders, so forget about that for now. If you do go that route, you need to know exactly what you’re doing.

This means getting an education. Also, only invest as much as you’re willing and able to lose.  For most, you’ll get a 401(k) instead, typically through your employer.

See if your employer matches 401(k) contributions and take advantage of what is essentially free money that will gain compound interest over time.

Another slow, risk-averse form of long-term investing is through index funds.

9. Create An Emergency Fund

Now you need to build your emergency fund. Everybody, no matter who they are and where they are in life, should have an emergency fund.

General wisdom holds that this should be three to six months of salary, though you can save more if you have concerns specific to your situation or the place in which you live.

Maybe you live in an area that’s prone to violent storms like tornadoes, so you want a little extra money to repair heavy damages.

You’ll also need an emergency fund for:

  • Car repairs and maintenance
  • Day-to-day expenses if you lose your income
  • Medical bills and medically necessary purchases

The best way to build an emergency fund, and other savings funds, is to pay yourself first. This means that your money is sent to savings before you even get it, so you’re not tempted to spend it and have locked in your savings beforehand.

Aim to do this with 20% of your paycheck each month, as per the 50/30/20 budgeting rule.

10. Limit Your Debt As Much As Possible

The messaging on debt is often confused and fraught with misconceptions. Many say not to take on any debt whatsoever, others argue that it is necessary to make the big purchases in today’s world, and that gaming the credit system is more lucrative than avoiding it entirely.

As always, the answer lies somewhere in between. First, do not spend more than you earn. That pretty much keeps any unnecessary debts at the door.

If you do take on debt, make sure you know how you’re going to pay that debt before a single cent ever hits your accounts.  Second, know that debt can be advantageous but only if you are acquiring an asset.

That’s why mortgages are so popular, after all. It’s unreasonable to tell somebody they should save for a decade before acquiring a home, especially with how housing markets and inflation have acted in the past and are acting right now.

That’s why taking on debt to get the asset now, and profiting from that asset in other ways, can be a positive.  If you are debt-avoidant no matter what, then there are options to rent or lease assets instead of taking on debt.

Rent can be damaging to long-term financial health when compared to homeownership, however.

11. Be Sensible With Credit Cards

Speaking of debt, let’s clear up all the confusion around credit cards too. Once again, it’s unreasonable and unrealistic to tell people to stay away from credit cards, full stop.

However, they open the average person up to many pitfalls, so you need to know what you are doing when you get them.  First, understand one thing – credit cards exist to trick people into taking on debt in the form of outstanding credit.

Banks or credit unions aren’t your friends, they’re hoping that you’ll take on that debt, so they can pocket the interest. With that covered, you should get a credit card because it’s the best way to improve your credit rating.

This opens you up to larger loans and more favorable interest rates in the future, if and when you need them.  To own a credit card and not fall into the system, try these tips:

  • Pay any outstanding balance at the end of every month.
  • Keep your credit utilization ratio at a minimum.
  • Avoid maxing out the credit card, no matter what.
  • Take full advantage of any rewards and incentives (but read the first point again).

If you don’t want to tempt fate by using credit cards, use a debit card instead. This uses your own money from your accounts, so there’s no worry about interest rates and outstanding debt.

12. Monitor Your Credit Score Accordingly

To finish our tips, let’s talk more about credit scores and why it’s important for the average person.  The credit score is a figure that’s assigned to everybody who takes on debt, specifically through credit cards.

This is part of your credit report, which is something that gets pulled by banks and other financial institutions whenever you’re trying to get a lease, a mortgage, a business loan, and other forms of financing.

Several standards are used when drafting these reports, with the biggest one being FICO. A FICO score is determined by looking at the following aspects of your finances:

  • Payment history (35%)
  • Owed money (30%)
  • Credit history length (15%)
  • Credit mix (10%)
  • New credit (10%)

FICO scores start at 300 and end at 850. Yes, it’s a confusing way to structure the score, but all you need to know is that anything over 800 is great, over 740 is good, over 670 is also good, but you don’t want to be beneath 580.

That’s where you’ll start measuring poorly against most borrowers out there.  If you want to keep track of your score, you can sign up with agencies and services that will send you periodic updates about your credit report.

This also allows you to detect fraud and other mishaps.

Money Management Benefits

So, that’s how you can manage your money more effectively. You should find success if you follow the twelve tips outlined above, though your degree of success will vary based on your circumstances and how closely you can follow personal finance principles.

There are many benefits to managing your money. In fact, the benefits are so much that it’s difficult to split them into individual points.

Your life, by pretty much every metric, will be more enjoyable if you’re good at managing your money.  We have identified five benefits, however, so check them out below.

Manage Cash Flow

First, managing your money is largely all about managing your cash flow. Some benefits come from doing this. You don’t just know more about where your money comes from and where it’s going, which is prudent, but you also know your finances like the back of your hand now.

This makes it easier to make other buying and saving decisions in the future, leading to even more benefits.

Less Financial Stress

Assuming that you aren’t burning yourself out reading credit reports every night, you should experience considerably less stress.

You won’t feel the financial strain if you had been feeling it before and you can now sleep soundly with the knowledge that you’re covered in future emergencies.

Less Worry About Yours And Your Family’s Future

Speaking of stress, you’ll also worry less about your future if you’re saving money. The cynics among us say that life is a race to make as much as you can, so you can be comfortable when you meet the finish line.

With the retirement ages creeping up in many places, it can be hard to argue with them. By saving better, both you and your close family will be more comfortable during their golden years.

Security

This is something briefly mentioned earlier but, by paying closer attention to your finances, you can better detect fraud and other suspicious activity.

You’re simply looking more at your money, so you’re more likely to catch somebody trying to pilfer it. Through fraud or brute-force hacking, your money can become compromised, but you’ll notice it a lot sooner if you’re following our twelve tips.

Improves Organization

Everything covered in this guide can be described as just being organized. Some people take solace in the organization, others reject it and find it mentally exhausting.

Even if you’re the latter, you can put these tips into practice and reap the rewards because they don’t take too much time or effort on your part.

Being organized in all aspects of your life relieves stress and frees up your mind to focus on other things. This can make you more productive in other aspects of life.

Quick Recap

That ends our guide on managing your personal finances more effectively. Stick around for our personal finance FAQ if you have any burning questions that haven’t been answered yet.

If you’re satisfied with what you’ve found here, remember to take our tips with you and apply them wherever you can. Since they are organized chronologically, you can run through them periodically to see if you’re still following the plan or there are things you can improve upon.

Also, remember that the power is in your hands and that success often comes from deferring short-term pleasure for long-term contentment.

This is a stoic principle that applies to finance more than it does to other areas of our life. People have saved themselves into millionaire status, so don’t underestimate what the right money-saving techniques can do for you!

Personal Finance FAQ's

Welcome to the FAQ section of our personal finance guide. Here we have several questions that are often asked or may get asked after reading the guide in full, so we have answered them before you had the opportunity to ask!

What is the 50/20/30 budget rule?

We mentioned the 50/30/20 budget rule in our guide but, in some cases, it’s called the 50/20/30 budget rule. What’s the difference?

Ignoring the 50, which always means money for things that you need, the difference lies in how much you’re spending on wants and savings.

Popularized by US Senator Elizabeth Warren, the 50/30/20 rule dictates that you spend 30% on things you want and send 20% to savings.

However, if you’re limiting spending, embracing the ascetic lifestyle, and trying to save more, then maybe you want to scrape 10% from wants and move it to your savings. So, the 50/30/20 rule becomes the 50/20/30 rule.

What does paying yourself first mean?

This is something we cover in the guide but perhaps some elaboration is in order. Paying yourself first is a pithy way of saying that you’re diverting money to your savings before your checking account.

When a paycheck comes in, some of it will be scraped away in dreaded taxes and other state deductions. You should arrange another deduction, this time to your savings account.

This means that money is being saved before you even can spend it.

Why does saving cash make you poorer?

This is something that we need to reckon with at some point or another. Cash savings can and will lose money over time as the value of currencies becomes diluted.

You’re probably asking this right now because we’re currently experiencing a crazy inflation rate, not to mention an increased cost of living in many areas of our lives.

This means that your money isn’t going as far as did before and inflation is outpacing savings account interest rates. At nearly 8%, inflation dwarfs the 4% you may get from a generous savings account.

If you’re an older reader who was around in the ‘70s, try not to think about how the inflation calculations were changed in the ‘80s, and so the inflation figures are much higher by older metrics.

So, what’s the solution? Well, inflation comes and goes in waves, though usually those waves end in crashes and have other impacts on your life and the wider economy.

To protect against this and hedge against the steady march of inflation, many save through buying physical assets. Gold and silver are popular, though they come with their own price fluctuations that you’ll need to contend with.

Why should a beginner budget?

Everybody should budget! However, if you’re new to personal finance management, you’ll need to improve your financial health as fast as possible.

The most immediate and noticeable way to do this is to budget your expenses.  Once you’ve lived like this for some time, and practiced many of our other tips, then you can maybe lax your budget if you’re comfortable.

So, with that logic, budgeting may be more important for beginners, but it’s still important for everybody.

What is the Rule of 72 in finance?

While the 50/30/20 rule (or 50/20/30 rule) informs budgeting decisions, the Rule of 72 can be used to inform your investment strategy.

We stayed away from specific investing strategies, there are many out there for you to choose from and we haven’t the time here to teach you TA or other methodologies.

That said, the Rule of 72 is a way to determine how long an investment will take to double in value if it has a fixed annual interest rate.

You divide a number – guess which one – by the annual rate of return. So, if the rate of return is 10%, then it’ll be 72 divided by 10%, and so 7.2 years before your investment doubles.

That’s a simplified case, of course, but the rule is handy for figuring out messier, less-rounded-off numbers.


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