Are you wondering where to start when it comes to personal financial planning? Here is an article that outlines the five foundations you should establish if you want to achieve financial freedom or at least improve your finances.
We all know that personal finance is a critical part of our lives. It's the basis of our ability to buy houses, cars, and other things we'd like to own.
It also dictates our ability to save for retirement and meet our financial goals. It's probably something you think about from time to time, but have you ever really thought about how you can ensure that you're setting yourself up for financial success?
According to Yahoo Finance, nearly 29% of Americans say they’re in worse financial shape now than they were last year.
This may be because of the current economic crises and financial instability or high loan interests. However, it all boils down to a general lack of financial knowledge and poor spending habits.
As a result, we want to educate people about personal financial management. We aim to help you handle money in a way that makes sense for you and your circumstances.
After reading this, we hope that you’re equipped with the tools and resources you need to achieve your financial goals.
What Are the 5 Foundations of Personal Finance & Why Are They Important?
These basic steps will help you grow with more financial confidence:
- Save a $500 emergency fund
- Get out of debt/loans
- Pay cash for your car
- Pay cash for college
- Build wealth and give
The importance of managing finances is often overlooked in today's society. That said, we want to send a message that gives off a sense of empowerment and success.
At its core, understanding the five foundations of personal finance can help you plan your finances and achieve financial freedom. In other words, it will help you find the right path and make positive decisions that lead to financial success.
We don’t know how you define financial freedom. But for us, it means having enough cash flow to meet your goals and enjoy life, just the way you want.
Think about things you could do in the event of an emergency. You’ll have some extra cash to pay for medical bills, car repairs, or other emergencies.
The more effectively you manage your money, the more you can be sure it’s there when you need it.
The 5 Foundations of Personal Finance
According to finance expert Dave Ramsey, there are five foundations of personal finance. These are easy-to-follow, expert-approved recommendations to help every person live healthy financial lives.
Let’s dive into each of them!
#1 Save a $500 Emergency Fund
Due to recent factors, the economy has been on a roller coaster ride that shows no signs of slowing down. Most Americans live paycheck to paycheck, struggling to make ends meet.
In addition to that, the Census Bureau revealed that almost 37.9 million Americans live below the poverty line. This is due to a lack of employment opportunities and unequal distribution of resources.
The most worrying thing is that many employed individuals don’t have enough savings to cover unexpected expenses, despite earning a regular income. A new study from Bank Rate reports that 56% of Americans don’t have enough cash on hand to cover an emergency expense of $1,000.
The first step in personal finance is to save at least $500 for emergencies. Your emergency account is your first line of defense against any unforeseen financial challenges.
Having an emergency fund of at least $500 will protect your credit rating and eliminate the need to use credit cards as a buffer between you and major expenses.
Moreover, maintaining this habit can improve your wealth-building behaviors, allowing you to achieve financial stability. This amount should be kept in a separate account, so it doesn't get mixed up with your regular savings.
Finally, take a moment to consider what is worth paying for and what you can live without. Be frugal, while also including some fun in your daily life. A modest lifestyle doesn't mean you'll never have any fun — think about which expenses you can cut back on while still being happy.
For example:
- Eating at home instead of eating out.
- Taking public transportation rather than an Uber.
- Cancel any club membership or subscriptions that you aren’t using.
#2 Get Out of Debt
In America, debt is the norm. Everyone gets into their share of the debt.
For example, many students rely on funding or student loans to help them get through college. This often takes a few decades to pay off and is deducted from their salaries as soon as they start working.
Beyond that, many students might also have credit card debts, car financing debts, and mortgages. Some people believe that it’s a good idea to begin home payments early.
Although you may not realize it, debt can negatively impact your personal finance and financial stability. It will wear you down, no matter how hard you work to repay the loans.
That’s why it’s of the utmost importance to understand how debts will impact your net income since you’ll always pay in installments.
The bottom line is that being debt-free allows you to give more, and takes the burden off your shoulders. The result is that your life opens up to more possibilities.
However, if you can’t avoid taking a loan, stick to one debt at a time. The more debt you have, the more interest you must pay, which will drag you down in the long run.
Pay off a loan first before taking another, and, if possible, make it a priority to pay your existing debt.
The sooner you clear all of your debt, the less interest you'll have to pay. That means you’ll be able to keep more of your money over the long term.
#3 Pay Cash for Your Car
Instead of financing your car, pay for it in full upfront.
With interest rates on the rise, many Americans still take out loans to finance their car purchases. Americans now carry around $1.52 trillion in auto loan debt, comprising 9% of all household debts, according to Investopedia.
For many people, buying a car is a rite of passage. However, most don't consider the long-term implications of their actions and the fiscal impact of these decisions.
It’s now easier than ever to get a car loan in the U.S. However, many young adults have ended up in financial trouble because of unpredictable circumstances.
This is because they don’t analyze or organize their repayment solutions before entering into such a commitment.
While nothing can beat the freedom of driving your car, it is often a liability. It takes money out of your pocket, yet its value is depreciating over time.
Maintenance costs and repairs can also add up to your monthly expenses.
To understand more about this step, here are the three ways you can lose money when purchasing a new car:
- Interest: Interest is included in the payment but this makes the car more expensive than the advertised price.
- Payment: You may have to stop saving for a while to pay off your car loan.
- Depreciation: Unlike a house, vehicles lose their value over time. If you plan to sell it later, it will leave you with less value than what you originally paid.
In the end, paying cash frees you from the pressure of credit. This can help you focus your attention on other issues, such as financial development and economic security.
#4 Pay Cash for College
Socioeconomic inequalities are a concern for many Americans. This issue influences the basis of our educational system which is not always fair.
There are many government subsidies and loans to help people pay for their education. However, there is still a great deal of inequality among different races and classes in the educational system.
For that reason, many students are forced to take student loans to finance their college. As a result, many young people graduate with thousands of dollars in debt.
This can complicate their financial management and future income.
College can be expensive. There’s no arguing that fact. However, avoiding student loans is entirely possible when students pick the right school and make the right choices.
For example:
- You can apply for scholarships or student financial aid.
- You can also find a part-time job to pay your tuition fees.
- While you can use your funds, you can also ask for help from parents or family members.
- Choose schools with lower fees and tuition costs.
The ability to pay cash for your college education can provide you with a stress-free life and allow you to financially advance immediately after graduation. Most of all, you’ll graduate debt-free!
#5 Build Wealth & Give
Finally, the last of the five foundations of personal finance is to build your wealth and be generous. Wealth should be utilized for a meaningful purpose.
It's not enough to enjoy all the luxuries for ourselves. We should also learn to share it with the less fortunate.
This is why the last foundation has two elements:
Build Wealth
Building wealth is the key to ensuring you have enough money in your life. It empowers you to have more control over your life and allows you to make better life decisions.
You should have enough savings and emergency funds to support your lifestyle.
To build wealth, we also advise accumulating a few financial resources. Besides savings, you can explore investing and acquiring retirement insurance.
Investing can help you build wealth by growing your capital. Insurance, on the other hand, may help you support yourself and/or your family after retirement.
Share Your Wealth
Now that you reached your financial goals, you can spend it on yourself, or your family, or donate it to charity.
Giving to others is a powerful way to enhance your personal development. This is because knowing that you have made a positive impact on someone else's life can bring you peace of mind.
So, go ahead and share your wealth, then get back to enjoying what you've got!
Wrapping Up
There are many reasons for the financial instability of individuals. Some attribute it to ineffective government policies and a lack of accountability.
However, the true reason lies in our unawareness and destructive financial behaviors. To make wise financial decisions, you need to know how to create and organize income resources and manage debts.
To learn more about personal finance, get in touch with our experts at 121 Financial Credit Union. We can help you get started on the right financial track, providing clear advice on topics ranging from saving to credit and smart investing.
As the premier credit union for Jacksonville, we offer personalized financial services that benefit our members and community. Our goal is to support the community of Jacksonville by ensuring organizational stability, financial solvency, and accountability.