Many Americans started taking added interest in their personal finances when the recession started in 2007. That recession served as a wakeup call for many people and helped them start doing the right things with their personal finances. I have learned several valuable lessons in the past several years and used 2010 to hone my personal finance knowledge and to continue improving my own finances. The following three lessons are the ones I found to be most important to improving personal finances.
Budgets are Essential
The biggest personal finance lesson learned is that it is absolutely essential to have a budget. Without one, you’ll have no idea how much money you have coming in or where it’s going. Budgets are important because they allow you to tell your money where to go rather than letting it slip through your fingers every month.
Keep in mind that having a budget is just one half of formula. It is also critical that once you’ve developed a budget, you must stick to that budget. If you’re married, develop the budget with your spouse and make sure both of you agree to stick to it.
For information on budgeting, check out Dave Ramsey’s “The Truth About Budgeting” article. Dave Ramsey also has helpful budgeting forms available on his website.
Live Within Your Means
Another great personal finance lesson is that people must learn to live within their means. In other words, we must spend less than we make. You’ll know whether or not you’re doing this because your budget will either have money left over, or there will be a negative balance. Your goal should be to have money left over every month. That money can be used to save for retirement or pay down debt.
People who spend more than their income provides tend to use debt to fill the gap. Using debt adds additional expenses to your monthly budget, in the form of fees and interest, as well as adding additional risk to your life. By risk, I mean that debt limits your options. What happens if you are deeply in debt and lose your job? What happens if you hate your job, but can’t quit because you owe so much on credit cards that you can’t risk being unemployed for a short period of time? The answer is limited options and added stress.
Here’s what you can do. If you are in debt, stop using credit immediately and start paying back your debt as quickly as possible. Get rid of credit cards and learn to save for things you want. If you are already debt-free, stay out of debt. Being debt-free brings with it a sense of peace you may have never felt in your entire life.
Maintain an Emergency Fund
Having an emergency fund is essential for proper personal financial planning. An emergency fund is money that you have aside money for emergencies, such asan illness, loss of a job, or any other unforeseen event that absolutely must be paid for.
A good rule of thumb for an emergency fund is to determine your monthly expenses and then save 3-6 months of those expenses. If your monthly expenses are $5,000, then you’ll want to save $15,000-$30,000 in your emergency fund. That should be enough to handle any major emergency in your life.
Emergency funds should be kept in an easily accessible account for quick withdrawal. A high-interest savings account or money market account is a good place to keep an emergency fund.