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. You can also get a free credit score from sites such as Credit Karma or Credit Sesame. 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 advisers 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.