personal finance for beginners, personal finance definition and principles

there is so much confusion and emotion around money for so many people but learning about investing or how to grow your money can seem very overwhelming so where do you start confidently asking questions about money is step one towards financial empowerment and investing don’t be afraid to channel your inner five-year-old the simplest questions can often be the hardest repeat why what how how much until you really understand what’s being discussed and if the person you’re working with is not helping you understand that it’s time to work with the new person once you’re on the road to understanding how to start investing the focus needs to turn to you you may want to invest but should you understanding your financial position and risk profile will help you determine how to get started if you’re very risk-averse starting with lower risk assets like bonds or CDs could help build your confidence or if you’re looking to build your knowledge about how investing works sometimes buying stocks or funds in things you already know and care about can help to contextualize investing there’s three ways to get yourself set up you can work with an advisor who will invest on your behalf you can set up a trading account and do it yourself or you can work with the hybrid solution so open an account fund the account and go I’m a big believer in investing what you know and learn as you go investing is a lifelong journey and the earlier you start the better even if it’s with virtual dollars virtually buying and selling stocks and funds is a great way to build your money muscles what your balances go up and down because they do go up and down and history has shown that you’re better off in the market than not in the market and then when you’re comfortable go in maybe start with a smaller portion of what you are invest just to get a feel for it if someone is investing on your behalf make sure they’re following a strategy that you’re comfortable with ask lots of questions and don’t ever assume that that money that you work so hard to earn is doing just fine without your attention last remember the great opportunities exist in downturns if you can buy when everyone else is panicking ask this question of the expert to come across if prices went down significantly what would you do get familiar with how investing works and be ready for when the new york stock exchange goes on sale like many things in life the simplest things are often the best asking simple questions can yield powerful learning opportunities ideas and ensure accountability so take a deep breath and us so you want to get better with money but you don’t have money right now to invest there’s a great way to get you started with no risk to you and no money down and that’s by building a virtual portfolio a virtual portfolio or sometimes called a practice portfolio is a collection of investments that you can buy and sell and watch over time the big difference is that you don’t use real money so why would you do this a few reasons first virtual portfolios are a great way to try investing without actually investing it’s a super easy way to learn second I truly believe this such a thing as money muscles like regular muscles the more you work them the stronger they get third and most importantly the best time to learn about investing is before you put your money in virtual portfolios are risk free it’s easy to set up a virtual portfolio online at places like investopedia or see if your online bank has that capability once you’ve got yourself set up then the important part begins the market goes up and down all day every day so there’s no point crying or celebrating in the short-term the goal of your weekly check-in is first to track how you’re doing and second to gauge your reaction to how you’re doing do you get super anxious if your portfolio has gone down 2% are you already mentally spending your gains when your portfolio is up 10% over time you’ll learn to manage the ups and downs and learn how to take the emotion out of investment decisions the single biggest thing to learn is that you don’t panic when things are down and don’t jump on bandwagons after things have gone up but if you do feel terrible when your portfolio is down you should think about moving away from stocks and look at more conservative investments like bonds your investment strategy should reflect your risk tolerance also a giant benefit to virtual portfolios is that when you’re ready to invest you’ll have already built a wish list of exchange-traded funds and stocks that you believe in finally I recommend you bring friends or family members along for the ride learning is always more funding groups and maybe you can encourage each other to spend lists save some money and get going for real how do I make the most of my fixed income while this is a common question from retirees there’s some great lessons for everyone now fixed income can mean

many things from payments from an annuity to living on Social Security or a pension the key is that every month you have a finite level of income here’s three ways to optimize your fixed income life it goes without saying that you need a budget and that your expenses should be less than your income not breakeven you should not spend every dime that you get this may mean some adjustments to the way you live and change is never easy but on a fixed income with the assumptions that things get easier over time the sooner you make the necessary adjustments the better life is full of surprises good and bad so include a buffer each month and if you don’t have any surprises great put that money aside as savings and put it to work which leads to the second point contrary to popular opinion that retirees especially should be risk averse if you have money that you’ve put aside you can still put it to work and earn money on it now I’m not suggesting risky or speculative investments but you can now put smaller amounts into lower risk balanced portfolios that could earn you more than what a savings account can but remember all investing involves risk so only put in what you can afford to potentially lose also regardless of how you earned your living or currently get your fixed income there’s ways to make more money for ideas look at the next generation of workers we’re having a side hustle or multiple sources of income is increasingly becoming the norm start with a sharing economy what do you have that you can rent a car that sits in your garage 99% of the time put it to work and maybe you have a home with a room to spare or access to our vacation property check out Airbnb remember that there’s always work to be done from proofreading to serving coffees to teaching it probably won’t make you rich to do side hustles like these but there’s an upside the time that you spend working and earning money isn’t time you spend spending your money lastly a warning with all the answers in technology there’s increasingly creative ways of getting scammed be suspicious of anyone offering easy money or demanding upfront payments for future income if you’re younger and work in a profession with the pension or you have an annuity that will pay you a set amount for the rest of your life start planning now for ways that you can maximize or subsidize your income and keep your cost of living in check I’ll leave you with this thought living on a fixed income doesn’t have to be an exercise in restriction and deprivation but it should be your starting point from which to build on focusing on your paycheck is great and making sure you get paid a fair wage for your work is super important but if you’re trying to maximize your earning potential it’s always good to look further than your paycheck there’s three main areas where you can look your skills the things you own and your liquid assets first your knowledge and experience is always worth something but as a person with finite hours in the day it’s hard to exponentially grow income based on your job but don’t let that stop you from exploring side hustles from teaching to participating in focus groups to making things to sell on Etsy doing something with your time that can convert to cash is a great way to create multiple income streams next look at the things you own especially the things of value that can be turned into cash and with the advent of the sharing economy it’s much easier to unlock the potential of any asset look at listing your car or lawnmower or even your house on sharing sites look for platforms like peer buyer that are available in your area and don’t forget if you’re willing to put in the time there’s always a market for selling your secondhand goods and clothes the third way to generate a different income stream is to put the money you have to work through investing this is a side hustle that you can do while you’re working hard at your other job or jobs growing your money in real estate your investment portfolio or businesses should be a part of everyone’s money mindset regardless of how much money you have right now you work hard for your money make it work hard for you in the US and in many countries investment income is taxed at a much lower percentage than salary which is why the one percent aka the rich probably pay a lower tax rate than you so investing can be a second income stream if that’s your goal but the key thought is that longer-term multiple income streams buy you options in life investing your time attention and money in more avenues than just your primary career is a great way to ensure that your net worth can grow the thing about loans is this if you need to borrow money you generally will find a way obtaining a loan can be easy but paying it back is not borrowing

money has become the default way to pay for the big things in life like education and housing but for many people it’s also the default way to pay for things that they can’t afford right now and buying things that way means that they will cost you more in the future sometimes a lot more let’s consider the many types of loans they include student loans mortgages car loans home equity loans credit cards yes they are considered loans cash advances and payday loans the most important thing to know is that interest rates and terms matter enormous Li and they vary a great deal depending on the loan let’s talk about this in terms of good debt and not-so-good debt let’s start with good debt good debt is debt that is manageable predictable and buys you something of value that means interest rates are low terms along and rates don’t fluctuate drastically the most obvious example is mortgages low interest student loans can also fall into the good debt category especially when the rates are fixed for the term of the loan in the US and other countries there’s programs that type payments to your income level thereby keeping the loans manageable not so good debt Alone’s that you cannot predict how much they’re going to cost you in the future or take a considerable percentage of your income or have high interest many variable loans fall into this realm some mortgages private student loans and personal loans are often variable because they’re not secured against an asset whose future value is predictable these loans are higher risk to the lender hence the higher interest rate and higher risk to you if you can’t plan your budget accurately let’s say you have a $10,000 personal loan with a 5-year term if the interest rate goes from 5% to 7% you’ll have to find an extra $600 for interest payments so it’s in your best interest to pay down as much as you can when rates are low if you have multiple sources of debt car loans credit card debt personal loans it’s we’re seeing if you can consolidate into a single loan which has a more predictable payment term consolidating your debt only works if you’re committed to not going back into debt so hide those credit cards and be careful where you consolidate your debt the first thing not to do is to go to predatory lenders like payday loan providers solving a temporary problem through a payday loan becomes a rolling process of taking on more debt to pay for all debt online lending options like so far for student loans and Lending Club for access to crowd source capital also make it easy to get a loan but if you’re consolidating federal student loans you’ll lose the benefit that comes with them so do the math on what that will really cost you also don’t overlook your bank as a source for consolidation they’re more interested in keeping you as a customer than seeing you’d go to a competitor so they can usually work something out so let’s do a quick dive into interest rates the key thing to look for is APR specifically how much does the interest rate being offered to you deviate from APR if the cost of money is 1% from the central bank as it is now and the lender is asking for more than 6 or 7% that means they’re making quite a profit on your loan so look for better alternatives the last and most important thing is that loaning money in any form means that you’re taking on an obligation in the future to pay it back you must understand the agreement and the implications especially if the loan is secured to any of your assets do the math on your repayment terms and understand the consequences of what happens if you miss a payment and if you ever feel pressured to sign something that you don’t understand do not sign it ask questions seek advice and do the math until you fully understand what you’re signing your future self will thank you paying fees is a part of life there are convenience fees fuel surcharges extra baggage fees account maintenance fees ATM fees fees and surcharges are everywhere and avoiding them can be something of a competitive spot one of the biggest offenders in this annoying fee game are financial institutions their fees are not only high but they also target those least able to pay them first of all you should know that banks make a ton of money off fees overdraft fees alone generate 27 billion in revenues for banks and it isn’t getting any better free checking accounts have dropped from 76% of all accounts in 2009 to 37% today and fees themselves have risen 21% over the past five years by calling something a fee instead of a loan lenders can avoid regulators and charge whatever they want for example if you buy a $20 lunch but don’t have the funds in your account to pay for it your bank can lend you the money to pay for

the lunch for that loan you’ll get charged a twenty seven dollar overdraft fee for the sake of argument instead of calling a fee let’s call this a loan which really it is your twenty seven dollar fee would be equal to a loan with a three thousand five hundred and twenty percent interest rate payday lenders are the champions of this fee game they have been restricted from charging exorbitant interest rates so now they play with fees and if you convert their fees into interest rates many payday loans bear interests of over a hundred percent another fun game that banks play is to reorder transactions to maximize overdraft fees some banks will process transactions from largest to smallest so if the big purchase puts you into debt the smaller transactions will each trigger an overdraft fee even if you think you’ve done the right thing and waited to make the big purchase until the last minute the reordering can cause a cascade of fees that can be shocking it’s in everyone’s best interest to minimize fees so here’s a few ideas how to help number one never set foot in a payday lender and if you have pay off the loan and never go back Bank fees may be heavy but payday lenders are terrible overdraft protection may sound like a great idea but the fees you pay can be astronomical many banks automatically opt you into the programs you can opt out facing the embarrassment of a rejected payment is often better than being charged overdraft fees it can also help to find out your bank’s fee policy if you can make sure you keep a buffer of cash in your checking account well debit cards are great they’re the main reason people get dinged with overdraft fees if you’re running out of funds in your checking account consider using your credit card for a few days until your paycheck clears if you have room on your credit card interest on a few extra charges will almost always be lower than overdraft fees if you need overdraft protection consider an overdraft transfer it’s a form of overdraft but uses one of your secondary accounts to fund your overdraft the fees are still high but lower than a standard overdraft to avoid other account fees try to find a no fee checking account they still exist but they are harder to find they all have limits on what you can do but try to find one that has no account balance minimums in the u.s. new players like Bank mobile work well for fee free banking and use cash remember cash try this for a month take out what you need at the start of each week and only spend that amount you’ll never overspend because you only have what you have and your limit transaction fees and ATM fees because you only need to go to the bank four times a month and no overdraft or insufficient fun fees it’s not easy to avoid fees but it is possible and there’s increased pressure on banks and lenders to at least be clear about the fees that they charge and remember the more you save on fees the more money you have to pay down debts or invest let’s just all assume that at some point in your life you’ll receive some money that you didn’t earn in your day-to-day job it could be an inheritance a bonus a legal settlement or if the odds are truly in your favor a lottery win which just so you know you’re just as likely to be struck by lightning as when big in a lottery still what happens so here’s three things that you need to do when a windfall comes your way first check if the money is taxable and if you will owe tax on it take that amount and don’t touch it until your tax bill comes an unexpected tax bill can be a nightmare then consider this question how can this money improve my long-term financial situation for the 50% of American households that are carrying credit card debt the number one best thing to do is pay it off the interest rate you pay on credit card debt is higher than what you can earn on most investments so don’t even think of trying to make money off the investment to pay off your debt if there’s still money left over after high interest debt is paid off great now you can make a plan for that money a tool called the reverse budget can really help when managing a windfall or any other lump sum basically the rule is before you spend the first penny figure out where every cent will go park the money temporarily in savings account so you’re not tempted to fritter it away then step back and do a self-assessment to figure out where the money should go you can do it in a storytelling format like I just received 5,000 dollars that I don’t have to pay tax on I’ve stopped tinkering you dead but I still have a balance of $2,000 on my credit card my goals are to get out of debt establish a financial cushion for emergencies and invest for the future I’m going to allocate $2,000 towards a dead $1,000 towards my cushion and contribute $2,000 to my IRA of course you can change those numbers but the idea is you figure out a plan for your whole amount before you spend anything so you can end the story with some sort of result I’m moving forward debt-free I’ve protected my

financial stability by establishing a cushion and I’m making progress towards my future goals make sure that plan is one from which your future self also gets to benefit that means investing versus just saving the money the more you invest now the more your future self will be able to cash out later I’d recommend at least 50% of the money after tax and debt reduction to be put aside for investing if it makes you more comfortable get professional help someone who you pay a flat fee for an unbiased opinion then and only then do you start thinking about spending the money on yourself or helping out family or friends or giving to charity here’s a thought that flies in the face of most people’s understanding of their money you don’t save what’s left over from spending you spend what’s left over from saving and when you receive a windfall this is sage advice indeed if you don’t know where you are how can you determine where you’re going it’s a thought that applies brilliantly to your financial life whether you like it or not there’s a lot of data out in the world about you and your financial life banks credit agencies companies even your trustee ups know more about you than what you might think it’s important for you to know what they know for a few reasons specifically accuracy privacy and planning the first thing to focus on with your financial data is accuracy make sure you check your credit rating at least once per year check accuracy of all the data and also look at the data being measured you’ll find that credit agencies measure how much of your credit you actually use what your high balance is how many different types of credit you have and how often you miss payments poor ratings in any of these measures will lower your credit score now privacy be very careful when you sign up for account aggregation services to understand where your data goes remember when you get a product or service for free what’s really being sold is your data bottom line with privacy understand where your data is going last make a plan there’s amazing tools available for budgeting investing and broader financial planning what used to take a lot of research and paper shuffling to get a picture of where you are can now be done through tools like level spendy and you need a budget another business concept to borrow is KPIs key performance indicators what are your financial KPIs I recommend building a set that makes sense of your progress against your goals it could be saving a set percentage of your income setting a monthly debt reduction plan or deciding on a monthly transfer to an investment account what you want to have at the end of this is a snapshot of what you own and what you owe plus a personal or household view of your cash flow now none of this may seem particularly pleasant and there’s no perfect time to get your financial data in order overcome that obstacle by setting yourself a time on your calendar to do it and schedule something that you love doing right afterwards remember once the facts are in front of you it doesn’t matter if it’s an excel sheet a mint calm account or a plain old pen and paper keep coming back to those numbers and track them over time you work so hard to earn a living doesn’t it make sense to spend a little more time on tracking exactly what’s going on with your money so it’s coming up on tax time do you have a feeling of dread when I say that or did you think great I’m all set I can skip this video taxes do bring up all sorts of emotions but regardless of the feelings that tax-time invokes you will most likely be paying taxes here so let’s see how we can minimize the stress and maximize your return if you’re lucky enough to have a salary your employer has most likely had tax taken out of each paycheck via the pay-as-you-earn system depending on the with holdings you signed up for when you took the job you will have either overpaid in which case you’ll get a tax refund or underpaid in which case you’ll owe additional tax either way you’re better off than independent contractors and small business owners who need to keep track of taxes they owe in the course of a year and put money aside to pay them in order to feel less stressed about tax be aware of expenses you can deduct all year round not just prior to tax time to make things easier have a folder for things that you think might be deductible business and school expenses charitable donations or child care and medical expenses keep it in sight and organized so it’s not a source of stress rather it should give you a sense of being in control in the US if you made less than 62 thousand dollars last year you can file directly with the IRS for free they even have some state forms that you can also file for free go to and look for the Free File link also research the different online services like TurboTax and H&R Block these programs have developed a lot in the past few years if you’re claiming

itemized deductions these services are a great alternative to the higher price of accountants if you live in the US make sure to check if you’re eligible for the Earned Income Tax Credit this is one of the only tax programs that is a refunded credit it’s free cash and 25 percent of people eligible for it don’t Clemen the IRS has an e ITC tool to check if you’re eligible then do one more thing if you think that you may owe taxes here make sure to set up a goal within your savings account or a new account completely and direct deposit on a monthly basis to cover any surprise tax bills here’s the great thing about that should you be hit by a bill it won’t eat into your savings or worse put you deeper into debt but in the u.s. the odds are in your favor 8 out of 10 American taxpayers get a tax refund so if you do get a refund make sure you don’t spend it right away think about prioritizing these two things paying down debt or increasing your investments these aren’t as much fun as a new TV but both of these options will pay off more in the long run lastly a word about fraud these last few years have seen an increase in fraudulent tax returns with people going to file their taxes to find that they’ve already been filed and their returns have been cashed by someone other than themselves try to file earlier to reduce the chances of this happening doing these things can help you focus on what’s really important making sure that you’re taking advantage of all the deductions that you can and more importantly making sure you’re focusing where it really counts on earning as much money as you possibly can for most people under 50 the concept of retirement can be difficult to imagine let alone plan for how do you plan for something that seems so far away and how do you navigate the minefield of acronyms and regulations and service providers if you’re lucky enough to live in a country where you’re provided a pension or a defined benefit for your life beyond employment congratulations but that doesn’t mean you don’t need to think about what the third phase of your life will look like for many people all over the world their comfort level in retirement is determined by a simple factor prioritizing your future self over your current self but think of yourself at the age of 71 can you imagine what you’re going to be doing on a Tuesday morning when you serve anyone it’s not easy right here’s four building blocks to make sure the 71 year old you will rock your retirement number one take advantage of any free money offered to you usually in the way of a company match for your contributions in the US this is your 401k you should contribute enough to get the maximum company match if your company doesn’t contribute a 401k loses some of its benefit it’ll still lower your taxable income but you won’t get the long term benefit from your company’s extra cash also look at setting up a separate long term taxed advantaged account in the US this is an IRA which is an individual retirement account try to deposit the maximum allowed each year these accounts will allow you to grow your money tax-free or deferred until you retire also make sure the funds are invested and not sitting in cash the easiest way to do this is to buy a super low-cost ETF which is an exchange-traded fund or an index fund that tracks the overall market in the US these two funds are the best known lowest cost examples your retirement accounts are for your future self there are often huge penalties if you want to withdraw money early 25% of Americans take money out before retirement and they hit with huge taxes and fines so make sure the money you put into retirement accounts can be left there until retirement and depending on when you start contributing and how much you put in it still may not be enough that’s where it’s important to consider your assets across your life tracking your worth over time and prioritizing ongoing investments many people rely on their homes to be a core asset when they retire but homes aren’t liquid meaning you can’t get cash out of them quickly and many people want to remain in their homes and you need to live somewhere right so don’t rely on your house as your retirement plan lastly the biggest impact on your long-term financial health isn’t how much you earn but how much you spend it’s an annoyingly simple formula spend less than you earn and prioritize saving and investing think about the relationship between your short-term wants versus your long-term needs that is rethinking retirement and it’s much easier than trying to imagine the 70 year old you as much as human nature conditions us to live in the present and make ourselves happy the more you can prioritize your future self the better you