Personal Finance Basics
Key Concepts and Habits

Learning personal finance basics can go a long way towards helping you live a life free from financial stress. Some people mistakenly think that personal money management is extremely complex and takes years of study to truly understand. This is simply not the case.

A few fundamental concepts are all you need to make big changes in your financial situation. Personal finance management can be broken down into two key areas. The first is understanding the concepts and nomenclature and the other is building the habits you need to form to make those concepts and ideas work for you and not against you.

Basic Money Management

Growing your assets is really not all that complicated. It comes down to making sure you spend less than you earn—simple, but very important. Of course, in practice you will need some specific techniques and tactics to get things done. But before you get caught up in specifics, let's get a basic understanding of managing money down first.

Here are some of the most basic concepts you will want to learn and understand, all will have both short- and long-term positive consequences on your personal financial situation.

• Make sure your income consistently exceeds your expenses.
• Know how much you earn and what your fixed and variable expenses each month and year.
• Know that some assets produce income to offset expenses ie a rental property with tenants.
• While other assets like an automobile lose value everyday and have operating expenses.
• Understand the time value of money by making the most of compounding interest in a savings account or investment plan.
• Understand that with increased return on investment comes increased risk, learning to balance the two is important.

Once you've got your head wrapped around these concepts you can look at the practical tools used to put these principles into practice. The first concept on the list is so important it is worth repeating, you must spend less than you make. Since most of us can't just go get a raise when we'd like we must control our expenses. If you have just taken a cut in pay you must make appropriate cuts in expenses, no matter how painful they may be, or the equation will get out of balance very quickly and you will feel the financial pain anyway.

Personal Finance Basics—Creating a Budget

The budget is the financial planner's best friend. It’s almost impossible to get a handle on your financial situation without plotting your income and expenses. Some people will need to do this on paper or on a computer while others will be able to keep track in their head. Do whatever works for you. A budget doesn't have to be complex, but it should have enough detail to be realistic.

Personal Finance Basics—Goal Setting

A budget plan is the "how" of saving money—your goals are the "why". Without strong motivation in the form of long term financial goals, it can be very difficult to resist the temptation of spending money for instant gratification. This all gets back to the concept that to be successful you must spend less than you make.

A good goal should be an experience or possession, not a number on a bank statement. There’s no emotional reason to get excited about having a hundred thousand dollars in the bank. Rather, think in terms of your reasons for having more money.

It might simply be freedom from harassing debt collectors, or it may be your aspiration to retire early, or it might be the goal of paying for college without taking a loan. Whatever your goals may be, set them down in writing with a plan of how you will achieve them, then stick to the plan.