If you’re interested in learning about personal finance and how to manage your money correctly, you’ve come to the right place.

In this article, we’ll walk you through the five foundations of personal finance and a five-step plan to assist you in navigating your financial path, the fundamentals of managing money, and a bonus of a few solutions to keep things running smoothly and efficiently.

What is personal finance? 

Personal finance, in short, is how you manage all of the income you earn. Personal finance usually entails devising a strategy for allocating funds. You could divide your earnings into categories such as: 

1. Income

All of the money you make or receive. Compensation and rewards, retirement, profits, and money received as gifts are all examples of income. 

2. Spending

Where did your money go? This category includes needs like rent or mortgage payments, food, and non-essentials such as entertainment, activities, and whatever else you buy just because you want to. 

3. Saving

Do you have a large sum of money in your shoebox? You can also save money by putting your funds in a primary savings bank or investing in index stocks. 

4. Investing

This includes equities, shares, and unit trusts or joint holdings, like investments in real estate holdings or private enterprises.

5. Protection

You need to prepare for emergencies and unplanned situations. Preparation entails obtaining different types of insurance, such as health or insurance products. It could also entail planning for the future.

Five foundations of personal finance 

A financial knowledge strategy is as individual as the person who creates it. There is no one-size-fits-all approach, but the five foundations of personal finance are a popular set of principles that are helpful to follow. 

1. Determine goals and priorities

To create a budget and begin your plan, you first need to understand what you truly want from the near and distant future. 

Ask yourself the “big” questions like:

  • What other financial goals do I desire? 
  • What kinds of things do I want to own? 
  • What kinds of experiences do I want to have? 
  • What is the state of my career and personal life? 
  • What would I like to change about my present situation?

By answering these questions, you’ll be able to determine your spending limit and even adopt a long-term perspective of your finances rather than just focusing on covering this year’s budget expenses. 

Don’t worry too much if these questions are challenging or if you don’t know how to respond with certainty. The goal isn’t to schedule your entire life. Instead, it’s to get you to start thinking about it so you can eventually build your roadmap. 

Remember that your financial planning blueprint should be as adaptable as your life. Maintain fluency and try to prevent “analysis paralysis,” which prevents you from ever initiating!

Watch “5 Steps to Setting Achievable Financial Goals” from Brian Tracy for more goal-setting advice!

2. Assess your current financial situation 

Before creating a personal finance strategy that works well with your daily life, needs, and wants, you must first understand yourself. The analysis begins by examining your income stream, which is the amount you earn and spend each month. Then you look at your net worth, which is the value of your assets minus your liabilities.

A simple — yet useful — practice that will help you understand and control your financial situation is to keep track of your spending. For example, you can hold onto the receipts from your purchases to see how much you’ve spent each month. By collecting the receipts you receive, storing them, and reviewing them regularly, you’ll be aware of your spending habits and can adjust if needed. 

There are many ways to store receipts. However, we suggest digitizing your paper receipts with a receipt scanning app. Consider using Shoeboxed to help with that.

Shoeboxed is a receipt-tracking and expense-managing service for freelancers, sole proprietors, and small business owners. Use your camera to capture your receipts, and the app will automatically extract the key data, categorize and organize them, and even generate expense reports for you. You can clear your wallet, desk, and drawers from bunches of paper receipts while storing them safely for years. 

What’s more, Shoeboxed offers an OCR (Optical Character Recognition) engine and human data verification features, ensuring that the digital versions of your receipts are scanned in precise format, well-categorized, and contain human-verified information that is approved by both the Internal Revenue Service and the Canada Revenue Agency. And last but not least, you can even track mileage for business and store business cards with the Shoeboxed app.

Check out Shoeboxed’s quick user-demo video right here:

Turn receipts into data and deductibles!

3. Pay-off debt 

If you already have debts (college tuition, credit card bills, etc.), make it a priority to pay them off as soon as possible. The faster you can pay off your debt, the less interest you’ll have to pay. That means you’ll be able to keep much more of your money over the long term.

It may be painful to look at the figures, but it is necessary for personal finance management. The earlier you can create and implement your strategy, the sooner you’ll be able to live your dream life. 

4. Set a budget

Creating and estimating costs are the most exciting ways to improve financial health. It ensures that you are working toward your objectives, and having a specific limit to your spending will help keep you in check. Your spending plan should represent your income and unfunded liabilities. To achieve that, you can start by asking yourself the following questions: 

  • Do your outgoings usually outweigh your inflows? If so, by how much? 
  • Where can you start cutting back on your spending? 
  • Are there opportunities to increase your savings or earnings?
  • How much money do you want to pay towards your loans each month? 

Calculating your monthly spending limit will help you connect your income and expenditures– or widen the numbers to save even more money. You can create an Excel spreadsheet, note-taking app, or use a personal finance app/software to keep track of your assumed responsibility for each month.

5. Save money monthly 

Every financial advisor will advise you to save for an urgent situation. This fund should cover around 4 to 6 months of your regular expenses in case you lose your job, etc.

But, if you have significant debt, saving money may seem impossible.

However, we still recommend trying to save even a tiny amount. Begin by putting $5 in your piggy bank, or savings account, each week. To make it even easier, if you choose to use your savings account, you can do it through your banking app to save you a trip to the bank. Add “Savings” as a cost to your liquidity worksheet to keep a record of it. You can increase your savings to $10, then $20, as your financial situation improves.

If this sounds too difficult, try re-evaluating your current lifestyle by considering what you need to live comfortably and what you can do without. Don’t hold back on spending on essentials – your quality of life should always come first. Instead, think about which expenses you can reduce while avoiding becoming unhappy. For example: 

  • Eat at home. A home-cooked meal is less expensive than eating out. 
  • End any club membership or subscriptions that you don’t need.
  • Take public transportation or ride a bicycle rather than getting an Uber or driving your car. You’ll also benefit from some light exercise. 
  • Sell your secondhand and unused belongings. One person’s trash is another one’s treasure!

What are other financial rules that you’re not aware of? Check out this fun video on 10 Personal Finance Rules School Doesn’t Teach You for more insights!

Seven steps to financial success in Dave Ramsey’s “7 Baby Steps” Program

Dave Ramsey rose to fame due to his baby budgeting 7-step financial health program.

Keep reading below as we dive into his financial planning program details. 

Step 1. Open an emergency fund. 

The first step in Dave Ramsey’s 7-step plan is “Save $1,000 for Your Starter Emergency Fund.” Preparing for unexpected expenses (like medical bills, car bills, or home repairs) will not hurt your finances. On the contrary, setting up an emergency fund is a crucial first step toward financial success. Save money in a separate account until you have at least $1,000. This separate account will be your emergency fund, which will help you avoid borrowing money to cover sudden expenses.

Step 2. Pay off your debts. 

The second step is to settle all of your debt, excluding any large debts you owe, such as your mortgage, using the debt snowball method. The snowball method is a strategy for paying off debts that starts with smaller amounts and gradually increases as you can afford it. Debts include paying off your car, credit card debts, and student loans. Start by listing all your debts, except for your mortgage, from the smallest debt amount to the largest. To get your debts under control, you should start by eliminating the smallest debts first. Then you can work your way up to the larger debts.

Step 3. Work on your emergency fund. 

The third step is to have at least 3 to 6 months’ worth of expenses in your emergency fund. If you have good control of your debt, next you’ll need to save money in case of an emergency. You can split your paycheck into paying off your monthly debt and building your emergency fund until it’s enough to cover 3 to 6 months of expenses and bills.

According to Ramsey, there are three reasons to have an emergency fund:

  1. If you lose your job, you will still have enough money to last several months. Your savings amount will give you a ballpark estimate of how long you have to find a new job. 
  2. If you need to upgrade your car, you will be able to pay for the necessary repairs, or put money toward purchasing a new one.
  3. If you need to go for a health check-up, you will be able to pay your medical bills. 

Step 4. Put aside for retirement. 

The fourth step is to spend 15% of your household income on retirement. Once all your debts are paid and your emergency fund is secure, it’s time to start saving for retirement. Ramsey recommends saving 15% of your monthly income to help fund your retirement. Multiply your monthly income by 0.15 to determine how much you should save each month.  

Step 5. Set aside money for college funds. 

The fifth step is to prepare money for your children’s education. Avoiding student loan debt can be one of the best ways to stay out of debt as a young adult. If you can help pay your child’s college tuition, you’ll be ensuring their financial security in the future. Preparation will help your children avoid debt and lead to a more prosperous future. Ramsey suggests using either a 529 college savings plan or an education savings account (ESA) to save for college expenses and hiring a financial consultant or scheduling a meeting with your banker to set up a college-saving account.

Step 6. Pay off your mortgage.

The sixth step is to pay off your house loan. Put all your extra monthly income into your mortgage to pay it off early. After completing this step, you will have no outstanding debts. Your income will go to you instead of being used to pay off large debts and expenses.

Step 7. Establish wealth. 

The last step is to build wealth for yourself and give back to the community. Once you have reached the 7th step in Dave Ramsey’s Baby Steps, you can start focusing on building your wealth. Don’t forget to maintain a healthy financial safety net, including a good emergency fund, retirement account, savings account, and college funds. Once you are able to manage your money and let money work for you, you can enjoy financial freedom. 

Listen to Ramsey’s talk on “Follow The 7 Steps To Success!” 

Frequently asked questions

What is financial literacy?

Financial literacy is understanding and effectively using financial skills, such as personal finance management, budgeting, and investing. Financial literacy is the cornerstone of your relationship with money and a lifelong learning journey. The earlier you start, the better off you will be because education is the key to success when it comes to money.

Watch this informational video on the four important rules of being financially literate: Financial Education | The 4 Rules Of Being Financially Literate

How do I get out of debt, and where do I start?

Getting out of debt can feel overwhelming. However, according to Lauren Lyons Cole, a certified financial planner and senior editor at Business Insider, if you can do the first step, everything else will fall into place. 

The first step is to know all your debts. Create a detailed record of all the debts you need to handle.  In other words, list exactly how much you owe to each different account. 

For example, if you have a credit debt of $1000, put it on the list. Then check (1) your interest rate, (2) the minimum payment, and (3) the due date for that debt. 

Keep making a similar list for everything you need to pay off. Doing this lets you prioritize which debt needs to be dealt with first.

Once you have a list of everything you owe, you can create a plan. But before you make a plan, make sure you are aware of the following: 

  1. Be realistic when you create a plan, as you don’t want to set yourself up for failure. Paying off debt takes a long time, so avoid trying to get it all done overnight. 
  2. It’s good to remember that any current change is temporary. Any lifestyle adjustments you make to pay off your debt will eventually end. And you absolutely can pay it off. 
  3. To pay off your debt, at the bare minimum, you must make all your minimum payments on time to avoid your credit score taking a major hit. One way to ensure all those payments will always go out on time and in full is to set up automatic payments.
  4. How much you need to pay off your monthly debt differs for everyone. However, this shouldn’t be a problem if you are able to pay double the minimum payment of any of your debts.
  5. Whichever debt you decide to settle first, ensure that you gain momentum so that you begin to see your debt balance decrease. 
  6. You may need to experiment with different payment plans to determine which works best. 
  7. The challenge you’ll face in this process is a lifestyle change. Even though it’s temporary, you still have to cut out several expenses if you want to set aside money to pay off your debt. 
  8. Don’t change the plan once you’ve set your mind on it. Whenever, you have extra cash in your bank account, such as when you get a tax refund. You can put this money towards paying off debts to speed up the process.

How can I manage my finances? 

Check out the following 7 management tips to improve your finances and manage your money.

Tip 1. Track your spending to improve your finances. 

Your spending habits will likely improve if you know what and where you spend each month. Better money management starts with spending awareness. Use a receipt management app like Shoeboxed to track spending by category and see how much you spend on non-essential expenses like food, entertainment, and even your daily routine. Once you know these bad habits, you can start planning to change them.

Tip 2. Create a realistic monthly budget. 

Use your past spending habits and current income to create a budget you can live with. It’s not worth making radical changes to your budget based on the assumption that you’ll never eat out again. Have a budget that matches your lifestyle and spending habits. You should see a budget as a tool to help you develop good habits, like cooking at home more often, but know that it’s not always easy to stick to. 

Tip 3. Be patient in building your savings.

Create an emergency fund that you can use when unexpected things happen. The fund helps you avoid risky situations such as being unable to pay your bills on time or needing to borrow money at high-interest rates. You should also contribute to your savings account to ensure your financial security in case of job loss. Make automatic contributions to your fund using FSCB’s pocket change, and make it a habit to save money.

Tip 4. Make sure your bills get paid every month.

Paying bills on time is an effortless way to keep your finances in order and avoid late fees and missed payments. It helps you prioritize spending and ensures that important bills are paid before less important ones. Having a good payment history boosts your credit score and interest rates.

Tip 5. Cut back on recurring charges. 

Are you subscribed to services that you don’t use? It is easy to forget monthly subscriptions to streaming services and mobile apps that charge your bank account. Review and try to cancel unnecessary subscriptions to save money each month.

Tip 6. Save up cash to afford big purchases. 

Some loans and debts can be useful when making major purchases, such as a house or car. When it comes to big purchases, cash is the safest and cheapest option. When you buy with cash, you avoid earning interest and creating a debt that can take months, or often years, to pay off. 

Tip 7. Start an investment strategy.

Even if you don’t have much money to invest, investing a small amount in your investment account can help you get more out of your earnings. Find out if your employer can match your contribution to a 401(k) retirement plan to have a safety net. If you’re considering investing in your future, you may want to open an account with a financial institution.

What are the best books on investing and finance? 

1. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

The Little Book of Common Sense Investing is a classic guide to getting smart about the stock market. Legendary mutual fund pioneer John C. Bogle recommends investing in low-cost index funds to achieve long-term wealth growth. He believes this strategy is the simplest and most effective way to build wealth over time.

The Little Book of Common Sense Investing by John C. Bogle. 

The Little Book of Common Sense Investing is a classic guide to getting smart about the stock market. Legendary mutual fund pioneer John C. Bogle recommends investing in low-cost index funds to achieve long-term wealth growth. He believes this strategy is the simplest and most effective way to build wealth over time.
The Little Book of Common Sense Investing by John C. Bogle

2. Broke Millennial: Stop Scraping By and Get Your Financial Life Together

Financial expert Erin Lowry’s Broke Millennial teaches you how to become financially independent and break free from your flat-lining finances. The book differs from most personal finance books because it tackles credit card debt, investing, and budgeting. It goes beyond the basics to help you manage your money in difficult situations.

Financial expert Erin Lowry’s Broke Millennial teaches you how to become financially independent and break free from your flat-lining finances. The book differs from most personal finance books because it tackles more interesting topics, like credit card debt, investing, and budgeting. It goes beyond the basics to help you manage your money in difficult situations.
Broke Millennial by Erin Lowry

3. Thinking, Fast and Slow

Emotional decision-making can lead to bad decisions because we don’t always consider all the information. Daniel Kahneman, a psychologist and economist discusses how our instinctive and intuitive decisions can impact our lives, including our financial future. He provides tips on how to make more sound decisions based on data and logic. In Thinking, Fast and Slow, he teaches readers how to make smart investment decisions by removing emotions from the equation. Beginner investors will learn more about the psychology behind how prominent investors choose stocks most likely to outperform others. In the book, Kahneman demonstrates how to make sound, logical decisions even if they’re not always comfortable.

Emotional decision-making can lead to bad decisions because we don't always consider all the information. Daniel Kahneman, a psychologist and economist discusses how our instinctive and intuitive decisions can impact our lives, including our financial future. He provides tips on how to make more sound decisions based on data and logic. In Thinking, Fast and Slow, he teaches readers how to make smart investment decisions by removing emotions from the equation.
Thinking, fast and slow by Daniel Kahneman.

What personal finance tips do I need to know?

Tip 1. Practice self-control: pay with cash, not credit.
Tip 2. Beware of bad advice: educate yourself.
Tip 3. Learn how to oversee your financial resources can stick to a budget.
Tip 4. Pay yourself first: start an emergency fund.
Tip 5. Start saving for retirement now.
Tip 6. Get a grip on taxes by ensuring your tax-related documents stay organized.
Tip 7. Guard your health.
Tip 8. Protect your wealth.

What are some of the key items to know about personal finance?

1. Find a job that pays you a monthly salary.
2. Watch your expenses and ensure they don’t match or go over your income. 
3. Educate yourself on the foundations of personal finance and money 
4. Begin investing based on what you’ve learned about investment.
5. Consult with financial professionals if you can.
6. Be aware that managing your finances can be confusing, and studying daily to improve your financial knowledge is always a good idea.
7. Find a way to balance your happiness and financial success.

Bonus infographic: 5 steps to setting achievable financial goals

Title: 5 Steps to Setting Achievable Financial Goals 

Sub-title: Discover how to set achievable financial goals and become wealthy - Best advice from Brian Tracy. 

Step 1. Realize your core values.
Step 2. Align your goals with your values. 
Step 3. Think big but start small. 
Step 4. Take time to plan and be prepared to commit to it for a long period. Recognize that your financial goals are long-term endeavors.
Step 5. Expect the best
Infographic: 5 steps to setting achievable financial goals.

In closing

The more you understand about your current financial situation, the more straightforward the path forward will become. Start by applying the five foundations of personal finance—and soon you’ll have a solid financial plan that will work for your unique situation. 

Originally published April 4, 2022. Updated on August 19, 2022.

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