10 Basics of Personal Finance That Everyone Should Follow

When it comes to building wealth and being in control of your money, there's really not a ton that you need to know in order to be successful. Seriously.

You don't need to read a bunch of books; you don't need to study complicated financial concepts; heck, you don't even need to spend that much time thinking about your money.

As long as you master the basics of personal finance, you'll be well on your way to reaching your financial goals. And while that may sound easier than it really is, with a bit of determination and self-discipline, it's possible for anyone to accomplish.

To ease into things, let's start off with the most basic of basics:

1. Track Your Net Worth

Your net worth is essentially the amount of money you'd have left over if you sold all your stuff, took all the cash out of your accounts, and then paid off all your debts.

In more technical terms, it's the difference between your assets (what you own) and your liabilities (what you owe).

Assets = things like stocks, money in the bank, a house, a car, rare Pokemon cards, cryptocurrency, etc.Liabilities = things like credit card debt, a mortgage, the $10 you borrowed from your friend 5 years ago, etc.

By calculating your own net worth, you'll be able to easily see where you currently sit financially. And with that, you can start figuring out which steps to take next.

For example, if your net worth is in the red, that means you owe more than you own. But hey, look on the bright side! By going through the process of calculating your net worth, you've already listed out all your liabilities, which is the first step to creating a debt payoff plan.

If your net worth is in the green, that means you've already started to accumulate some wealth. Good job! Depending on your age, income level, and personal goals, you may be happy with where your net worth currently stands, or you may want to start thinking of ways to grow it further.

In the end, it's a good idea to recalculate and write down your net worth every single month. This will help you feel more involved with your finances, and it'll give you a record to look back on.

2. Set Financial Goals

Just like with anything in life, goal setting is an important part of personal finance.

Think about it:

The best bodybuilders don't just go into the gym and wing it. They plan everything meticulously; their meals, workouts, supplements, all of it.

If you want to buff up your finances, it all starts with figuring out what you want to achieve. And that doesn't mean writing down "save $1,000,000" on a piece of paper and calling it a day. That's a start, but you can do much better.

As a simple rule of thumb, remember to always follow the SMART framework; that means your goals should be specific, measurable, achievable, relevant, and time bound.

With that in mind, follow these steps:

Step 1:Write out any and every goal you can think of

Be realistic but don't be afraid to go big!

Examples:

Save $1,000,000 for retirementPay off all credit card debt Pay off all student loansSave $20,000 for a down payment on a house Have $100,000 invested Increase your credit score to 800Earn an extra $500/month with a side hustleSave $5,000 for an emergency fund

Step 2:Organize and define your goals

Give all your goals a time frame. You can group them into 3 baskets:short-term (1 year or less), mid-term (up to 5 years), and long-term (over 5 years).

If you're having trouble coming up with short and medium term goals, take a look at your long term goals and break them down.

Examples:

Save $1,000,000 for retirement by age 65 (long term)

This could be further broken down into a simpler, shorter term goal, like "save and invest $500/month" Pay off all credit card debt in 2 years (mid term).

This could be further broken down by looking at all your credit card debts and coming up with a month-by-month debt payoff planEarn an extra $500/month with a side hustle by the end of the year (short term)

Step 3:Monitor and update your goals EVERY month

This is key to staying on track. I'd recommend reviewing and updating your goals on the same day that you review and recalculate your net worth.

3. Open the Right Accounts

You should have, at minimum, four different accounts in your personal finance system:

Checking account - This will be your hub. It'll be used to receive money, pay bills, and funnel money into other accounts.Savings account - This is where you'll put money for short term savings goals like birthday gifts and vacation funds.High-yield savings account or money market account - This will be for your emergency fund (more on this later). It's good to keep your emergency money separate from your regular savings account so you don't accidentally spend it. Find account options here.Retirement account - This is a tax-advantaged account that can hold cash and a variety of investments. To get started, first check if your employer offers a 401k plan with matching. If they do, max that out before opening an individual retirement account.

Note that you shouldn't be paying any monthly fees to keep your accounts open. If your bank is charging you, find a new bank. Many will be more than happy to accept your business.

Also, keep in mind that this is a starting point. If more bank accounts help you feel more organized and in control of your money, feel free to add them on to your system!

4. Understand Budgeting

Budgeting has a negative connotation but it really shouldn't be something that stresses you out or makes you feel constrained.

As John Maxwell said, "A budget is telling your money where to go, instead of wondering where it went."

Once you start thinking about it like that, creating a budget gets a bit more exciting. YOU get to decide where your money goes. And now that you've (hopefully) written down some financial goals, you should have a good idea of where you need to put your money to achieve them.

Keep in mind, you don't need to get super fancy or complicated with your budget. Simply knowing how much money you bring in and how much you typically spend in a given month is a great start. From there, you can work on seeing which expenses you might be able to cut or reduce in order to meet your goals.

Speaking of cutting expenses...

5. Embrace Frugality

There's a classic personal finance book called The Millionaire Next Door that details the habits and lifestyles of American's typical millionaires...and the results might surprise you.

The general finding in the book is that most millionaires don't look wealthy. They don't drive fancy cars or wear expensive suits or even live in mansions. Instead, a large majority of the most successful accumulators of wealth are quite frugal. They shop at discount stores, buy used cars, and live in modest neighborhoods.

On the other hand, many of the people with flashy cars, expensive watches, and big homes -- while looking rich -- are often living paycheck to paycheck without much wealth to their name.

Moral of the story? Don't consume just to consume. Learn to find joy in deal hunting. That way, you can save the majority of your money for the things that really matter to you.

6. Always Pay Yourself First

The term "pay yourself first" is said to have been coined by George S. Clason (author of The Richest Man in Babylon), and it's pretty much the epitome of personal finance basics.

In fact, if there's ONE concept you take away from this article, it should be this one.

But, what exactly does it mean to pay yourself first?

Simple:

As soon as you get paid for work you've done, take a portion of your earnings (10% is a good starting point) and set them aside for yourself and no one else. Then, use the remaining money as you usually would for bills and such.

If you can consistently do this over the years (without spending the money), you'll build up a nice stockpile of savings. And after a while, you'll get so used to setting the money aside that you won't even notice it missing.

7. Don't Carry Credit Card Debt

Credit cards carry some of, if not THE highest interest rates compared to any other debt out there. As of 2021, the average credit card interest rate, according to WalletHub, is anywhere from 14.75%-18.24%.

That means if you carry a $1,000 balance on your card, you'll pay anywhere from $147.50-$182.40 per year in interest. (In most cases, you'll actually pay even more than that since most credit cards compound interest daily.)

On top of that, carrying a high balance on your credit card can actually decrease your credit score. This is due to something called the credit utilization rate. How this basically works is, if you're consistently using 30% or more of your overall available credit (e.g. you have a $1,000 balance on a credit card with a $3,000 limit), your credit score might take a hit.

For these reasons, you should always pay off your credit card bill in full every single month. In other words, if you can't buy something with the cash in your account, don't buy it at all.

8. Keep an Emergency Fund

Speaking of credit card debt, a big cause of it is due to emergencies. That's why it's a good idea to always have an emergency fund on hand.

Your emergency fund will exist to cover things like:

Medical billsCar repairsHome repairsPet emergenciesJob loss; etc.

To get started, build your fund to $1,000, and then continue to add to it from there. Most experts recommend saving at least 3-6 months worth of expenses depending on your financial situation. You can use this calculator to figure out how much that is for you.

9. Put Your Money to Work

Most bank accounts -- even high-interest ones -- don't beat inflation. In other words, $1,000 in your account today may only get you $985 worth of groceries next year. It's a small difference, but over time, it adds up.

For that reason, there are really only two situations where you should have money sitting idly in a savings account:

For your emergency fundFor short term goals and payments

Any other extra money you have lying around should be put to work in more productive ways, like, for example, by investing it in the stock market.

While investing in stocks may seem overwhelming and confusing at first, these days, it's really easy to get started.

If you're a complete beginner and you're looking for something hands off, try a robo-advisor. It's like having a human financial advisor, except much cheaper and you can set things up from your couch.

Or, if you'd prefer to pick your own stocks, try something like Robinhood or WeBull. These are commission-free brokerages that you can use directly from your smartphone to invest in companies like Tesla, Facebook, Google, and many more. Just be sure to do your research first, and remember that most active investors actually perform worse than passive index fund investors!

Besides stocks, there are other ways to put your savings to work as well, even if you only have a little bit of money to invest. For example, after getting comfortable investing in stocks, you may want to look into things like crypto, crowdfunded real estate, art, and other alternative investments.

10. Learn How to Automate

A list of personal finance basics wouldn't be complete without talking about automation.

Nowadays, there are a bunch of different areas of your finances that you can automate to not only save time, but also make achieving your financial goals 10x easier.

For example, instead of having to think about paying yourself first, you could simply set up your checking account so that after you receive a paycheck, 10% of it is automatically sent to your investment account.

As another example, you could set up an automatic credit card payment to save yourself time and avoid any potential late fees or interest charges.

Of course, you may still need or want to track certain things manually (like your net worth), but in the right situations, a bit of automation magic can save you time transferring funds, paying bills, and more.

Bonus:Earn Money on the Side

This isn't exactly a key to financial success, but it sure can speed things up! By earning extra money outside of your 9-5, you'll not only be able to accomplish your financial goals more quickly, but you'll also learn new skills and/or improve your current skills, which can pay dividends later on in life.

If you're looking for something easy to get started with, check out these ways to make money with your phone!