Very few people have comprehensive personal financial plans that cover all of the personal finance basics. Fortunately there is no shortage of financial tips, advice, and help available to you in this day and age. Below are some of your options:
1. Financial Advisors
There are many financial advisors who for a fee are willing to create a comprehensive personal financial plan for you or give advice in a specific personal finance area. You probably won’t need professional help for everything but may need it from time to time.
2. Personal Finance Books
There are also a number of great personal finance books that contain a wealth of useful advice and tips about a number of different personal finance topics. Many are available for only a few dollars on Amazon.
3. Personal Finance Blogs and Websites
There is also a lot of free personal finance advice and help available online. Some of these personal finance websites are wonderful and share high quality and useful tips and advice. Others appear to be written by people without any sort of applicable credentials or experience or who are willing to recommend anything for an affiliate commission.
While I think it is wonderful that so many people are excited to write and blog about about personal finance, personally I would be cautious about religiously following the advice of a college freshman who just finished reading Rich Dad Poor Dad and now believes himself to be a personal finance expert and wants to make a buck blogging about it.
Personal Finance Basics
Whether you manage your own finances or hire a professional, there are a number of personal finance basics that need addressed. I discuss many of these below.
While I don’t claim to know everything about personal finance, I am a CPA and CFP by profession and have tried my very best to provide accurate and useful personal finance information based on my professional experience and education.
If you find the below personal finance information useful, you might consider subscribing to Personal Finance Insider. By doing so you will receive access to my free personal finance e-lessons that cover all of these topics and more in much more depth.
1. Financial Recordkeeping
Financial recordkeeping is crucial to achieving your personal finance goals. A solid recordkeeping system will help ensure that all of your of your important financial documents are located in a single, organized, and secure location.
Setting up and maintaining a good recordkeeping system will help you to locate your financial documents quickly, avoid becoming a victim of identity theft, and help reduce the financial stress in your life.
You may have the best personal financial plan in the world, but if you are not organized, it will be difficult to stick to it.
2. Budgeting, Cutting Expenses, Increasing Income
Budgeting may have a negative connotation to many people, but it is one of the best ways of ensuring that our financial resources are used how we want them to be.
Billcutterz can be an invaluable service when budgeting and a great way to cut expenses. It is a free service where trained professionals negotiate on your behalf to reduce your bills and then split the savings with you.
One of the key components of risk management and personal finance is having proper types and amounts of insurance. Insurance is generally most appropriate for dealing with risks that are not very likely to occur, but could be catastrophic if they did occur.
Many people have life insurance, auto insurance, homeowners insurance, disability, and health insurance. Far fewer people have long term care insurance, umbrella insurance, or travel insurance.
Additionally, in my experience, few people have the appropriate coverage. For example, in an effort to save on premiums, many people skimp on their auto insurance coverage and only purchase the minimum amount legally required by their state, which may only be $25,000 or so.
Would your assets be fully protected if you crashed your car into a Ferrari driven by the CEO of a Fortune 100 company and he was seriously injured? The cost of the Ferrari might be nothing compared to his medical bills and lost wages that you could be liable for.
There are many different types of insurance. Below are some you might consider purchasing if appropriate for you:
- Life Insurance
- Auto Insurance
- Homeowners Insurance
- Health Insurance, including Medicare Insurance
- Disability Insurance
- Long Term Care Insurance
- Personal Liability/Umbrella Insurance
- Dental Insurance
- Travel Insurance
- Maternity Insurance
Obtain quotes from multiple insurance companies to ensure you are getting the best deal possible.
4. Estate Planning
In my experience, estate planning is one of the most important, yet neglected, areas of personal finance. Estate planning is the process of setting up legally effective arrangements whereby a person can accomplish their goals during periods of incapacity and at death.
Such goals might include avoiding intestacy and avoiding probate and may involve the creation of certain legal documents, such as wills and trusts. An estate planning attorney, software such as Quicken WillMaker, or an online service provider such as Nolo are all ways to create such documents.
Just about everyone should have at least a basic estate plan in place, since we will all die some day. Many people have their affairs in order while they are alive, but sadly, throw everything to the wind when they die.
5. Emergency Fund
An emergency fund, or rainy day fund, is simply an account that holds money you have saved for a financial emergency.
Rainy day funds should not be used for discretionary spending. They should be held in highly liquid and risk free accounts, yet earn a competitive rate of return.
Good options might include an FDIC insured online savings account or money market account. Many financial advisors suggest saving at least 3-6 months worth of living expenses, but this is only a general rule of thumb and will vary based on a person’s unique circumstances.
6. Emergency Preparedness
Many of the components of a good personal financial plan are geared towards protecting you in the event of an emergency. These might include an estate plan, insurance, and an emergency fund.
Other less common ways of preparing for an emergency might include obtaining the following:
7. Managing Credit and Credit Cards
The responsible use of credit and credit cards could easily help you save tens of thousands of dollars over your lifetime. It could also help you earn tens of thousands of dollars over your lifetime in the form of credit card rewards.
The way you manage your credit will determine how high or low your credit score is. Your credit score will then determine the rates at which you can obtain credit, which may be favourable or unfavourable (i.e. more expensive). People with good credit can easily save tens of thousands of dollars on borrowing costs over their lifetime.
Many different sources offer credit scores. However, FICO scores are the ones used most commonly by lenders and are the ones I recommend you check (available for a small fee). You can also request a free copy of your credit report at AnnualCreditReport.com. This won’t contain your FICO scores but it can help you detect any errors that may need to be fixed.
Most people would be wise to create a proper, long term investment plan and stick to it regardless of what the market is doing. An investment plan should list out your investment goals and how you are going to achieve them.
Investors generally want to buy low and sell high, but many accidentally end up doing the opposite. Creating and sticking to a solid investment plan can help you avoid these errors.
Learning how to invest is one of the best things you can do for your personal finances. If you don’t know much about investing, read some good personal finance books about investing. Investing is really not that complicated and most people are probably capable of doing it on their own. However if you would like professional assistance, find an appropriate financial advisor to help you.
Also remember that the earlier you start investing, the better off you will likely be. If you don’t already have one, consider opening up an appropriate investment account such (such as a brokerage account or IRA) and start putting money away today.
9. Retirement Planning
Retirement planning is now more important than ever. With rising healthcare costs, worries about Social Security and Medicare, fewer and fewer employer provided benefits during retirement, and increasing life expectancy, there are a lot of reasons to begin preparing now for retirement.
Try and figure out how much money you will need to last you through retirement and then figure out how much you will need to start saving now in order to achieve that goal. If appropriate, use an appropriate tax advantaged savings vehicle, such as an IRA to start saving today.
10. Tax Planning
Taxes are the single largest annual expense for many people. They have a significant impact on almost every area of personal finance, and much of the planning we do is intended to reduce our tax burden. Learning a few tax planning strategies, such as bunching your deductions or planning for AMT can go a long way in lowering your tax bill and keeping more of your hard earned money available to accomplish your other goals.
There are some great personal finance books out there that can teach you the basics. However, taxes can be quite complicated. If necessary, seek out the advice of a qualified advisor to help you.
Software, such as TurboTax, is very good at helping people prepare their own tax returns correctly without having to hire an expensive professional. However, if your tax affairs are highly complicated, it may be better to seek out the assistance of an appropriate tax professional.
Financial advisors can also assist greatly in helping people reduce their tax liabilities through legal tax planning. Even if you prepare your own tax return, it may make sense to pay for some tax planning advice. In my experience, the money people save on taxes tends to easily pay for the advice.
11. Getting out of Debt
A wise man once said that we should strive to have a year supply of food and no debt. Many of us have done the opposite—we have a year supply of debt and no food.
Getting in to debt is quick and easy; getting out of debt is much slower and more painful. However, with proper planning, getting out of debt can be done in an orderly and efficient manner. I personally am a big fan of the Snowball Debt Repayment Method.
12. Real Estate, Mortgages, Refinancing, & Home Equity Loans
There are a lot of benefits of investing in real estate. Whether you are interested in purchasing a primary residence or hope to make money as a landlord, it’s important to understand the pros and cons of investing in real estate.
An important step in the home buying process for most people is taking out a mortgage to finance the purchase of the property. Understanding a few mortgage loan basics can help ensure you find the best mortgage for your unique circumstances, save you thousands of dollars, and make the process as efficient and painless as possible.
Refinancing is the process of replacing an older home loan with a new mortgage that has different terms. People refinance for a number of reasons, including to take advantage of lower rates or to reduce the term of a mortgage.
A home equity loan is a second mortgage that is secured by the equity in your home. Many people choose home equity loans over other common borrowing alternatives since the interest rate may be lower and may also be tax deductible.
LendingTree is a site were you can quickly and easily compare quotes from multiple lenders to ensure you are getting the best deal possible on your mortgage, refinance loan, or home equity loan.
13. Auto Loans, Auto Loan Refinancing
If you must finance the purchase of a vehicle, it’s important to understand your options and how you can get the best deal possible on your auto loan.
Dealers are generally the most convenient place to obtain an auto loan but they rarely are the least expensive option. In most cases, an auto loan from an online lender such as MyAutoLoan will offer more attractive rates.
An auto loan refinance is simply the replacement of an older loan with a new auto loan that has different terms. Many people refinance their auto loan when rates drop or their credit improves since they may qualify for better rates. An auto loan refinance is much quicker, cheaper, and easier to do than a mortgage refinance. Online lenders such as RateGenius can also provide you with quotes for an auto loan refinance.
14. Saving for Education, 529 Plans, & Student Loans
College costs are increasing at an alarming rate. Fortunately, there are a number of ways to prepare for future education expenses including the following:
- Start saving as early as possible
- Get free cash back using Upromise and cash back credit cards
- Use tax efficient savings vehicles, such as 529 plans
- Learn basic principles of how to invest
- Choose your college wisely
- Take advantage of free resources such as grants and scholarships
A 529 plan is a tax advantaged savings plan that you can use to save for higher education expenses. It is not the only education savings option out there but it is one of the best and most popular choices available.
Despite your best efforts, you may not have enough money saved up to pay all of your (or your children’s) education expenses with cash and may need to take out a student loan.
It is important to understand some student loan basics in order to ensure you understand what your options are and that you take out an appropriate loan for you. Student loans are generally classified as Federal Student Loans or Private Student Loans and have very different terms and conditions.
15. Consumer Loans & Debt
Consumer goods are generally products that are consumable and tend to decrease rather than increase in value over time. Consumer debt is simply a loan used to purchase consumer goods. Consumer loans include the following:
The unwise use of consumer loans and debt can cost you thousands of dollars in interest and destroy your credit. Understanding the various sources of consumer debt and how to reduce your overall borrowing costs can put you in a much better financial position. Additionally, creating an appropriate plan to get out of debt can help you get back on your feet.
16. Using an Appropriate Financial Advisor
With a little bit of effort on your part, you will likely be able to manage most aspects of your personal finances on your own if you choose to do so. However, there may be some areas where you require professional assistance. Finding a financial advisor can be a daunting task for many people but it doesn’t need to be.
Start by asking for referrals from friends, family, and other professionals. You can also use a free service such as WiserAdvisor, which pre-screens financial advisors and helps you find local advisors with the expertise you need.
Most financial advisors will give you a free initial consultation. Use this meeting to get to know the advisor and ask appropriate questions about the following:
- Services provided
Additionally, you might ask about his or her credentials and experience. For example, is the advisor a CPA, CFP, or CFA? Are the advisor’s credentials and experience consistent with the services you need?
Remember that you can interview multiple advisors and you are never under any obligation to use any particular advisor. Take the time to find one that you are comfortable with and that will be able to meet your needs.
17. Preventing Identity Theft & Fraud
You may have a great personal financial plan and be very disciplined in following it. Sadly, there are people out there who would love to take advantage of you and make a mess of your credit and personal finances.
Identity theft is the illegal use of another person’s personal information without permission to commit a crime. Make sure you monitor your credit on your own or pay a few dollars a month for an identity theft monitoring service, such as TrustedID to do it for you. There are many other effective ways to prevent identity theft as well. If you are a victim of identity theft, make sure you take appropriate action to rectify the situation.
Besides identity theft, there are many other types of fraud out there that you should be aware of. One of the most popular and successful cons of all time is the Ponzi Scheme, a classic “rob Peter to pay Paul” scam.
You can protect yourself from scams by using your common sense, never giving in to pressure, thoroughly investing any investment opportunity, and asking for the opinion of a trusted advisor.
18. Managing Family Finances
It’s important to teach children about money and personal finance from a young age. Learning basic personal finance principles will help prevent costly errors, will provide a solid financial foundation for them, and will likely improve the quality of their lives.
The world is a cruel place. In my opinion, it’s much better to teach children and let them make small financial mistakes while growing up than not teach them and allow them to make big and expensive financial mistakes later on in life.
One of the best ways to teach children about personal finance and money is through your own example. Managing marital finances in a smart and responsible way will give your children a great example to follow and will likely bring additional harmony, happiness, and financial security to your home and family.
19. Charitable Giving
Helping others who are less fortunate than ourselves is an important part of any good personal financial plan. Charitable giving helps us to think of others, be less selfish, and remember what is truly important in life.
Money won’t bring you happiness (although the unwise use of it will surely bring sorrow and misery), but what you do to help others will.
At the end of our lives, most people probably won’t remember or care about how much money we had in our bank account or investment portfolio. What they will remember are the selfless acts of service and giving.
20. Understanding the Role of Money in Life
Although money will not provide happiness by itself (I’ve met a lot of really happy people in third world countries as well as unhappy wealthy individuals), it can help us to provide financial security for ourselves and our families, help others in need, support worthwhile causes, and provide us with enriching opportunities.
In my opinion, money should not be sought after at all costs. However, we should use wisely the resources we are blessed with in this life. Understanding the role of money in life helps us stay true to our values regardless of the wealth we attain in this life.
Additional Financial Tips, Advice & Help
For additional information on any of these personal finance topics, consider doing the following:
- Follow the links above to articles on the applicable personal finance topics
- Sign up for my personal finance e-course, which covers all of these topics and more
- Read some of the best personal finance books available
What are your thoughts about the above mentioned personal finance basics? Did I leave anything out? Do you have any other financial tips, advice, or sources of help to share? Leave a comment below!