How well do you understand personal finances? How prepared are you to handle your own money?
Not everyone can answer those two questions with confidence. If there was ever one great flaw of the American school system (and we know there are many) it is that we aren’t prepared to handle our finances.
The moment we all reach 18 (or 21, depending on where you live) we are all considered adults — never mind the fact that most of us don’t even know how to file taxes or budget and save properly. To say nothing of loans, credit ratings, and other financial topics in between.
We simply learn everything as we go through life and amass countless Google search pages. There’s no shame in googling even the most basic financial topics.
It shows you are willing to learn, take charge, and be responsible for your financial education.
To help you in your earnest efforts to improve, we prepared this list of five essential financial topics to help you get through the many years of adulting ahead.
1. Budgeting
We’re sure you all have an idea of what budgeting entails. It is one of the most basic financial topics we can discuss. However, at the same time, it is one of the most challenging to get right.
Just because you know what it is or even how you should do it, doesn’t make it any easier to stick to!
Budgeting is estimating and balancing your expenses and cash inflow or revenue to help stretch your money over time.
Budgeting is closely tied to savings — after all, it’s hard to save up when you don’t have anything left in your budget.
You can plan your budget yearly, quarterly, monthly, or even weekly. What’s important is finding what works for you and your financial goals.
Large expenses might be better off budgeted long in advance, while regular expenditure can be done weekly. Countless mobile and online budgeting apps are now available to help you allocate your funds fairly and keep track of your expenses.
There are several ways you can budget your money. Here are some of the most popular or most recommended budgeting methods:
50-30-20
This method is pretty straightforward. You simply portion your income into three categories and allot a certain percentage to each.
Here's how it works:
- 50% of your income will be spent on needs, such as utilities, rent, insurance, transportation,
- 30% to your wants — this is your fun money for shopping, dining out, and more.
- 20% of your cash will be for savings and paying off debt.
Zero-Based Budget
This budgeting method is fairly similar to the 50-30-20 method. However, instead of assigning a percentage of your money to a whole group of expenses, you allocate it individually.
When you get your salary, you budget the money until you reach $0. Write down all the possible expenses for the month, including savings and debt payments, and allocate the money accordingly.
Pay Yourself First
In this method, you prioritize your needs, savings goals, and debt payments. You immediately put away whatever amount you need for yourself and your savings so you aren’t tempted to dip into those when things get rough.
The amount left will be all that’s budgeted towards your necessary expenses. Since you leave the necessities as your last consideration, this method is also called reverse budgeting.
2. Credit
We’ve mentioned student loans and debt. Before you can successfully apply for loans or any other debt though, you need to understand your credit rating or credit score and credit report.
Credit is your ability to borrow money. This is public information — a potential employer or landlord can run your credit to check whether you are financially responsible and trustworthy.
A credit report is an in-depth look into your finances. It includes details of all your outstanding debt, payments made, bankruptcies, etc.
Meanwhile, your credit score is a numerical equivalent of your credit report. It’s like the grades we used to get in school.
The higher the credit score you have, the better chances you get of getting a good loan interest rate or even an apartment. You can check your credit reports for free at AnnualCreditReport.com.
A good credit score ranges from 670 to 739 while an exceptional credit score is in the 800s and up. You will want to avoid very poor credit scores, which range from 300 to 579.
How do you get a good credit rating?
Ironically, or maybe not, you can get a good credit rating by getting a credit card and taking on debt. Having a credit card means you get a payment history record.
As long as you take on small amounts of debt and can pay it off, ideally in full, each month, then you can slowly raise your credit score. Aim for 30% credit utilization or use less than 30% of your total credit limit to payments easier.
If you have several student loans, consolidating them through a bank or credit union like 121 Financial Credit Union can also help improve your credit rating.
3. Debt
Among all financial topics, debt is one we are all closely familiar with. If you’ve survived college or university, you’re probably saddled with some (fairly alarming) amount of student debt.
Don’t worry, you’re not the only one.
Debt has become so prevalent today. The average person has around $92,727 worth of debt but not everyone has a solid repayment plan (or even fully understands their debt).
To understand your debt, there are four terms you need to take note of. These are:
- Total debt balance: The total amount of money you borrowed
- Interest rate: The percentage by which your debt increases or the cost of your debt
- Minimum monthly payment: The amount you need to pay off to avoid penalties
- Estimated payoff debt: The predicted date you fully pay off the amount you borrowed
There are a lot of debts or loans you can take on. Aside from student loans, there are mortgages or housing loans, auto or car loans, personal loans, and more.
Try to pay off debt sooner rather than later since that can help you save money. A few ways you can do this is by making sure you pay more than the minimum amount suggested.
It also pays (pun not intended) to put in money towards debt payments more than once a month. If you have outstanding student loans or any other expensive loan with high-interest rates, concentrate on paying that off first.
This helps lower your overall interest and bring down your total debt. Still, going for the snowball method can be helpful, too.
With this method, instead of concentrating on your largest loans, you start with your smallest debt. Pay off the little debts one by one to build up momentum and confidence that you can pay off your largest debt.
4. Saving
We’ve touched upon the topic of saving briefly in budgeting. Still, among financial topics, this truly deserves its own section — that’s how important it is.
Saving money is a crucial part of building up your financial independence. With enough savings, you can slowly pay off debt, improve your credit score, get better housing, and more.
Sadly, though, not a lot of people are saving up. While it is understandable, considering how hard budgeting can be when you have high expenses and low income, setting aside even a small amount of money can help in the long run.
Two types of personal savings funds that you need to build are sinking funds and emergency funds.
- Sinking Fund - A sinking fund is generally for specific financial goals. The amount you set aside for sinking funds is for planned expenses, such as a new car, roof replacement, or specific medical needs (a wisdom tooth extraction, perhaps?).
- Emergency Funds - As its name suggests, an emergency fund is purely for emergencies. This isn’t a savings fund you can or should dip into when the monthly budget grows thin. If you have any unexpected expenses, maybe a car accident you need to pay off, then that’s the only time you should use your emergency fund.
Here are some tips you can try to help you save money:
- Use the envelope savings method. Here, you use envelopes to ensure your cash on hand is properly allocated. Just make sure your envelope for emergency funds is well and truly hidden away for emergencies.
- Use a budgeting app or a spreadsheet to keep track of your cash in and outflow.
- Consider putting your savings into a savings account or time deposit account instead of stashing cash somewhere in your home. Try to look for high-yield savings accounts so you can earn a little more each month.
- If you receive your salary directly into your bank account, set up an automatic savings deduction and transfer each month.
- Start looking into retirement plans. Take full advantage of employer matching for 401(k) and Medicare to help you save more.
5. Investment
Investing is one of the heaviest but most important financial topics you’ll encounter. Although closely related to savings, it does have its differences.
When you save money, you are parking your money somewhere for future use — planned or otherwise. With investing, however, you are essentially betting your money would increase over the long term.
Investing means taking on risks in exchange for a larger payoff. When you invest, your money grows at a much faster rate and compounds over the years.
The caveat is that you can’t touch that money until a specific time unless you want the interest rate to go down or stop altogether.
There are different ways you can invest your money. Real estate is a popular form of investment.
One investment option that we’ve already mentioned is by setting up a 401(k) retirement savings and investment plan. A 401(k) is only one type of individual retirement account — there are many others you can explore.
Perhaps the most common and riskiest way to invest is through the stock market. Investing in exchange-traded funds or mutual funds offers high payoffs for high risks.
Here are the differences for each:
- Mutual funds: This is an investment vehicle that allows you to buy shares of an already diverse portfolio, instead of individual stocks. Mutual funds have less fluctuating values.
- Exchange-Traded Funds (ETF): This allows you to buy several stocks or bonds from specific markets all at once. ETFs are actively traded and have continuously fluctuating prices.
If you’re looking for tax efficiency, active trading, and broker-transferable investments, then consider going for ETFs.
If you want your investment to be always priced at net asset value and have the potential to outperform the market, then consider going for mutual funds.
Trading stock, ETFs, and mutual funds is much easier now, thanks to online brokers and applications. You can either build up your portfolio by yourself through careful planning or research or by seeking help from an investment or financial adviser.
Financial Responsibility Recap
These five topics are among the most important, need-to-know financial topics. However, these are only the tip of the financial iceberg.
Still, we hope this primer on crucial financial topics will make navigating the rocky waters of adulting a little easier. There is no shame in starting your financial literacy journey late. It’s not your fault — and the important part is that you are still willing to learn and to improve.
If you have any questions, clarifications, or business inquiries, don’t be shy to hit us up. We’re here to help you learn and ensure your financial independence.