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Understanding Financial Planning Basics

Two businessmen discussion analysis sharing calculations about the company budget and financial planning together on desk at the office room.

What does personal finance mean to you? Very few people understand what personal finance means. Here we explain everything you need to know to manage your money well.

So, what is personal finance?

Personal finance is a broad term that covers managing your money, including investing and saving. Everything about retirement planning, insurance, budgeting, investments, banking, and mortgages falls under personal finance. 

The primary focus of personal finance is making sure you are in a position to address both short-term financial needs as well as long-term financial needs comfortably. Long-term goals include your retirement planning and saving for your children’s education. Your financial literacy is a big plus in personal finance as that knowledge helps you live within your financial constraints.

Personal finance strategies

It is never too late to create a financial goal and focus on it. So if you don’t have one, feel free to create one; the earlier, the better. Let’s go through some of the basics of personal finance.

Come up with a budget

It is prudent to devise a budget if you truly want to live within your means. The 50/30/20 method can guide you on how to spend every dollar you earn. Here is how this method works:

  • 50% of your income after taxes goes toward living essentials such as food, rent, and transport.
  • 30% goes toward lifestyle expenses such as clothing and dining out.
  • 20% is allocated to retirement, saving, paying, and other plans.

If you find it challenging to manage your budget, consider using apps like YNAB and Mint. Such apps are very helpful and will guide you in allocating every dollar you bring in wisely.  

Cutting expenses 

Once you have a budget, it will be easier to know where you can trim. For example, if you spend much on unnecessary subscriptions, you can do away with some. This way, you will have enough money to fulfill both short- and long-term goals. 

Create an emergency fund

You can have an emergency any time of the day, and it is good to make sure you have enough money to address any uncertainty that comes your way. So, make sure to allocate some cash for unexpected expenses. Financial experts recommend setting aside 20% of your paycheck every month. Once you have enough emergency funds, continue finding other goals. 

Debt management 

Only borrow when it is necessary. Avoid this habit of borrowing from time to time, as that will hurt your short- and long-term goals. You can avoid borrowing money by spending less than what you bring each month. 

Use credit cards wisely

Make sure to manage your credit card astutely. That includes paying off balances on time and working to improve your credit rating. Your credit rating is crucial, especially when securing a loan. So, make sure to safeguard it all the time. Missing to make payments and regularly paying them late are some of the things you may want to avoid, as they will hurt your credit score.

Monitor your credit score 

As mentioned above, your credit score is crucial when obtaining any form of financing. Your credit score is directly linked to your spending, so you may want to ensure you have a good credit history and an appealing credit-to-debt ratio. Here is how the credit score is calculated:

  • 720 = good credit
  • 650 = average credit
  • 600 or less = poor credit

Paying bills on time is crucial to building a solid credit score. You can even set up direct debiting if you often forget to make payments. The other alternative is subscribing to reporting agencies that provide regular credit updates. That way, you will know when your score is appealing and when it is not. You can obtain free credit reports from TransUnion, Experian, and Equifax.

Consider your family

When you are gone, how will your family divide your assets? Will your family receive maximum benefits from the insurance company? Will the will you left be honored? It is crucial to consider your family in every decision you make because if you don’t, all you have left can vanish or land in the wrong hand. That is not something you want to happen after investing. 

Talking to professionals like attorneys and financial advisors is crucial when contemplating your family. Equally, it is prudent to teach your children the value of money and how to spend so that even in your absence, they will spend the little or much they have wisely.

Pay off student loans

Devise a plan that will see you pay your student loan on time. Fortunately, there are various ways to repay student loans quickly. For example, you can pay off the principal faster to avoid high interest. Some private and federal loans are eligible for a rate reduction if you (the borrower) enroll in autopay. Here are some federal repayment programs you can consider:

  • Extended repayment stretches the loan out over a period that can be as long as 25 years.
  • Graduated repayment, which gradually raises the monthly payment over ten years

Plan and save for retirement 

Don’t be like some people who think retirement is a lifetime away. Each day that passes, your retirement gets closer, but are you ready for your retirement? Starting early to save for retirement is the only way to be sure you are ready. One easier way to save for retirement is by contributing to retirement accounts like 401(k) or IRA. Other things you can do to plan for retirement include converting a term life insurance policy to a permanent life one and waiting long enough to receive social security benefits.

Maximize tax break

Leveraging tax breaks allows you to reduce past debts and focus on your plans by maximizing tax savings. Starting annual saving receipts and tracking expenditures for all possible tax credits and deductions is equally significant. Tax credit cuts the amount of tax you owe, and a tax deduction reduces the income you are taxed on. 

Give yourself a break

Don’t focus too much on planning and budgeting; forget to reward yourself. You need to enjoy the fruit of your labor. For example, you can reward yourself by purchasing and visiting places you love. Just do anything that will give you a break and is fulfilling at the same time.

You can as well delegate. Sometimes you don’t need to be fully involved. Hire an expert, relax and wait for the results.


No one is sure when uncertainties will knock. Are you sure when they will knock at your door? Of course not. Therefore, it is crucial to be prepared for the unexpected by getting good insurance coverage. Make sure you understand your need well to get a good cover.

Learning about personal finance 

Very few schools will teach you how to manage your money, but that should not be an excuse for managing your finances poorly. The good news is that today you can learn about personal finance online. Other alternatives include visiting a library, searching for a book about personal finance, and listening to podcasts.