Personal finance is about more than just spending less than you earn and staying out of debt. You need a balance of insurance to protect your assets, investments to prepare for retirement, and a plan to take care of your loved ones when you pass away. What follows are 10 personal finance essentials that everyone needs as part of his financial plan.
1. Make a Will or Estate Plan
What happens when you die? Who will take care of your children, pets, bills, property, etc.? Unless you have an estate plan, there will be a lot of guesswork and frustration on the part of your survivors. You should decide how your assets are distributed after you die, not the state. Creating a will makes life easier for your survivors. You can create an estate plan with the assistance of an attorney, or with an online legal document preparation service such as Legal Zoom.
2. Obtain Sufficient Insurance
Insurance is there to protect you in case you can’t afford to pay for certain expenses as they arise. Generally you get insurance for items that are expensive. You will need many types of insurance. Here are a few of the essentials:
- Health Insurance.
- Life Insurance – Term, Whole, Universal, or Variable Life Insurance.
- Disability Insurance.
- Long Term Care insurance.
- Auto Insurance.
- Homeowners/Renters Insurance.
- Umbrella Insurance.
Make sure you buy enough life insurance and other kinds of insurance.
3. Set up a High Yield Savings Account
One of the most important financial accounts you can have is a high yield savings account. With it you can manage your money while it grows through the power of compound interest. I link my high yield savings account to my checking account and have my paycheck direct deposited for easy access. I recommend Ally Bank or FNBO Direct, which both offer free high interest savings accounts with easy access and high reliability.
4. Track Your Money
Everyone should have a very good idea of where his money is going. You can subscribe to a rigid zero based budget, or you can be a little more fluid with your money. But you still need to know where it goes.
There are many great tools available to help you out – including free online tools from Mint.com and Personal Capital, and tools you pay for, including You Need A Budget and the full desktop version of Quicken.
I used to be a Quicken user, but have since migrated to a different solution.
5. Build an Emergency Fund
Life comes at you fast. Instead of living paycheck to paycheck, put some money away every month for unexpected expenses. When you create an emergency fund you are giving yourself insurance against emergencies which could cause you to go into debt. Your rainy day fund can help you avoid many expensive problems, which are often compounded by causing you to get into, or further into, debt.
6. Get Out of Debt
The powers of compound interest are amazing. When you understand how truly powerful compound interest can be, you will realize just how important it is to have compound interest working for you instead of against you. Debt is a killer. Pay it off and start investing your money so you can rest easy in retirement.
There are many ways to get out of debt, including the debt snowball and the debt avalanche. I recommend finding what works best for you, and sticking to it. The faster you get out of debt, the faster you will be able to get your money working for you, instead of having it work for someone else.
Related Post: How We Manage Our Money on a Daily Basis
7. Improve Your Credit Score
Your credit score is very valuable. Your credit score affects your ability to get a loan, the interest rate you receive, your ability to get a cell phone contract, and possibly even your ability to get a job or security clearance. Here are tips on how to understand your credit score and how to improve your credit score.
I recommend starting the process by getting up to date on all your loan payments. Late payments have a massive negative impact on your credit score. The next thing to do is work on your credit utilization, which is the amount of available credit you are using. For example if you have a credit card with a $10,000 balance and you have a $1,000 balance, you are using 10% of your available credit on that card. Your credit utilization applies across all your credit accounts, and the lower, the better.
8. Start Investing for Retirement
I have no desire to work because I have to when I am 70. If I work when I am 70, I want to do it because it energizes me, not because I need the money to pay rent or put food on the table. Investing money in my 401k plan, Roth IRA, and solo 401k plan is part of my long term financial goal to avoid having to work into old age. Remember, the more you invest now, the easier it will be later.
9. Increase Your Income
Your ability to create income is your greatest asset. It’s not your house, or car, or bank account. Your greatest asset is you and your ability to generate more income and you need to nurture it and grow it. In the long run, increasing your income is better than saving money. There is only so much that you can cut back on before you can’t cut any more. One of my long term plans is growing my alternative income streams.
10. Negotiate to Save Money
There is an old saying, “only fools pay sticker price.” While that may not always be the case (try negotiating at Wal-Mart!), there is some truth to that statement. You wouldn’t go into a car dealership and offer to pay full sticker price on a car, especially in this economy. Instead, you would negotiate a better deal. Other examples where it may be worthwhile to negotiate include your cable bill or your property taxes.
Master these personal finance essentials. If you have these essential personal finance topics covered then you can rest easy at night knowing that your financial house is in order and you are well on your way to financial success.
Miranda says
As always, useful information. I think the will/estate plan is especially important, since so many of us are reluctant to plan for the unpleasant prospect of death.
Ryan says
Good point, Bryan. My wife and I don’t have children yet, but when we do, we will need to update our wills.
Bryan White says
It was good to read through the above to check off what I’m currently doing with my finances.
In relation to a Will, it’s also important to keep it up-to-date. It’s easy to forget about it once you have done one. It’s particularly important to update it when you have kids.
Steve @ brip blap says
The will, the will, the will. You really can’t hammer away at points like this too much, because even people who like to think they have their finances in order don’t, if they don’t have a will (or any of the other 9 points).
And oops, I don’t have an updated will *cringe*…
John Hunter says
Here is a great video on the power of compounding. You need some patience but the first two segments are just 15 minutes and it really helps you comprehend compounding.
Ryan says
Curious Cat: Thanks for sharing that video. It’s very interesting.
Andy @ Retire at 40 says
It amazes me to think that many people don’t have anything you have on that list. I mean, there are quite a few things on there that are common (not-so-common) sense.
I think it’s a great list.
Dan says
Hello,
Great tips and advice on Personal Finance in this list! The only thing I would add is another important preliminary step:
– Defining your Life, Financial, and Investment Goals
Not defining or planning what you want out of life is like building a house without a map. Saving is good. But what are you saving for? College, to buy a house, early retirement?
All investors should clearly write down their goals on paper. This will put them in a better position to devise a plan or map about what to do to reach those goals and how much money (and time) it will require. For instance, if you wish to buy a house in 5 years, how much do you need to save and invest each month to be able to pay the down payment later? If you want to retire early, then you will also have to make the necessary calculations about how much you should save and invest each month, year considering the rate of return on your investments and how much post-tax income you will get when you retire.
Here are a few questions you can write down and answer in a notebook to help you out:
1) Setting Goals:
Here state what you want (house, go to college, start a family, travel, early retirement, whatever…)
a. In the next year I want to __________
b. In five years _______________________
c. In ten or twenty years ______________
2) Now write down WHAT you will do to achieve these broad goals:
a. My plan is to _______________________
(This could include taking courses, getting skills or training, more education, learning more about investing, etc.)
3) Now look at realistic ways to help you achieve your goals (which will surely require a substantial amount of money).
a. My financial goals include____________
(This can include things like putting $XX aside each week from your work pay, and finding other ways to add cash to help you finance your life’s projects).
b. My investment objectives include_______
(Here you want to set realistic objectives about how much money – returns – you can get from your investments).
Writing down one’s goals and savings/investment objectives is just as important as defining one’s investment strategy. It is an essential starting point that all people should do, but often neglect to do.
Hope this helps!
Tristan says
All good sound advice if you want to spend thirty years working and saving for retirement, but what if you want to retire five years from now?
Elias @ FinancePuzzle says
Great list…Hopefully I am on the right track by finalizing my emergency fund with the ING CD ladder
Ryan says
Andy: Thanks for the compliments. My wife and I have most of these, but need to remake our wills and up our insurance. Sometimes the basics are the things people let slide because they just don’t think about them often.
Investment Basics: Very true. Thanks for the nice goal setting form.
Tristan: Each item in this list is applicable to retirees with the exception of #8. Instead of starting to invest for retirement, the focus should be on growing or preserving your current investments.
These tips are good for everybody – whether you want to retire in five years or thirty years from now. However, if you want to retire 5 years from now, you will need to take many other factors into consideration, such as how much money you have saved/invested, expected life span, current and expected financial obligations during retirement and more.
Elias: Way to get started on your emergency fund! 🙂
FFB says
Great list. Add me to the group without an updated will. My wife and I were talking about this the other day too! It has to be on our short list of things to do.
Pete says
Great list of things to get done and check off the list. I’m working on a couple of these right now, and others I hadn’t even thought about. Voting for you in the March Madness!
Ryan says
Thanks, Pete! It’s still a work in progress for me as well. 🙂