Takeaways
- Most schools, colleges, or universities don’t teach personal finance courses.
- Personal finance is the art of managing how money flows in and out of your life.
- The Smart Money steps to healthy money skills include budgeting, debt management, saving emergency funds, and investing to grow your net worth.
- Mastering personal finances is about money systems and behavioral change.
- The main spheres of personal finance include making money, saving, paying off debt, investing, and borrowing money.
What Is Personal Finance?
Personal finance is the management of household finances. It encompasses all money decisions related to you and your immediate family and deals with the entire life cycle of money management.
This cycle starts with money flowing into your household through income, gifts, inheritances, or investment income. Your money is then managed through a series of decisions that help you spend, save, invest, and manage funds. Personal finance decisions can be as simple as deciding what budgeting system to use or as complicated as sophisticated tax planning. In one way or another, money decisions affect all aspects of your life.
Why Personal Finance Is Important
Managing your finances is one of the most critical decisions you can make to increase your level of wealth. Proper finance decisions can accelerate your net worth, boost your financial flexibility, and improve your ability to do more things you enjoy.
Many people find handling money decisions intimidating, hindering their long-term financial success. With over 70% of Americans financially stressed about their personal finances, it makes sense to understand the basics of personal finance and start making smart money moves.[1]
These moves include earning more income, managing your spending patterns, paying off debt, and increasing your assets.
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How Personal Finance Affects Your Life
Personal finance is a framework for managing all of life’s money decisions. For most people, this can seem like an overwhelming waterfront to conquer. Everyday life comes with decisions about money spread throughout the day, and understanding the ins and outs of personal finance can help you make the best decision.
Personal finance answers questions about money, such as: How much should I spend on lunch? What type of budget system should I use? Where should I stash my emergency fund? How do I apply for a credit card? What is investing?
Getting smart about your money gives you the confidence to tackle life’s money questions. You don’t have to understand everything about personal finance all at once. Instead, you can take bite-sized nuggets of digestible finance information and implement them one step at a time.
10 Pillars of Personal Finance
Here are the ten fundamental aspects of learning, each with its own building blocks and nuances. Get started today.
1. Making Money
Everyone must find a job that pays for their lifestyle, and if you are like most people, you are at a point where you want to make more money. Earning more money can accelerate your collision with financial success and expedite the path to becoming wealthier.
- Earning Income: Millionaires tend to have multiple income streams. These income sources come from primary jobs, startup businesses, investing, saving, and more. Boosting your primary income can be a terrific place to start earning more cash to invest back into yourself.
- Starting Your Business: More discretionary income can give you the funds to you start your online business. Some of the most financially successful people have started, grown, and sold their business. A thriving business can be the ticket out of a dead-end job or career.
- Side Hustles: In today’s economy, starting a side hustle has never been easier. You can think of a side hustle as another job, side project, or business that adds to your household income but isn’t your primary source of income.
- Career Management: While adding more income to your household budget from multiple sources is a smart money move, one of the fastest ways to consistently enjoy more income is career management. In the short term, you might be able to make more working from home or increase your salary by changing jobs.
Career management is about managing your career trajectory over the long term. Successfully managed careers can give you consistent access to savings vehicles, like 401(k) plans, insurance products, health and life insurance plans, or special savings accounts, like Health Savings Accounts (HSAs).
Take the Next Step:
on Upwork’s Website
Upwork
Smart Money Rating: 5/5
Best For: Finding Remote and Freelance Work
Success: Freelancers earned $2.3B on Upwork in 2020
2. Saving Money
Saving money is deferring consumption today for the prize of consuming more in the future. Personal finances assist with mastering the art of delayed satisfaction through budgeting and other tips and tricks to help you keep more of what you make.
As income is earned, it is deposited into your checking or savings accounts. From here, money can flow in two ways: to pay for expenses or to save and invest.
- Spending Fasts: Tricks like the 30-day no-spending challenge can detox a heavy spender and curb excessive spending. Spending less can be the key to jumpstarting a heavy savings plan or paying off debt. By spending less cash, you can spend more on reaching your short—and long-term financial goals.
- Aligning With Income: Many financial experts argue that spending and saving money should be considered in healthy ratios relative to income. For example, saving 20% of your discretionary income is a healthy savings rate. As your income grows, so does the absolute value of your savings.
Take the Next Step:
Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
3. Budgeting
One of the fastest ways to start saving more of what you make is to make a budget. Your household budget should track all your income and expenses. A budget spotlights where your cash goes each month and highlights areas for improvement.
- Creating a Budget: Most Americans either don’t have a budget or create one they don’t adhere to throughout the year.[2] However, those who budget have a much higher likelihood of achieving their financial goals.
- Curbing Spending: Spending money can be fun, but spending more than you make can be a recipe for financial disaster. Budget systems like the cash envelope or the zero-based budget can get you back on track with your finances.
- Household Management: Even if you want to budget, knowing where to put your money can be tricky. Budgeting systems like the 50/30/20 budget give you specific guidelines on how much to spend in every category. Check out Smart Money’s 50/30/20 calculator.
Take the Next Step:
Quicken’s Website
Quicken App
Smart Money Rating: 5/5
Best For: Tracking Personal Finances
Bonus Offer: 50% Off for New Customers (Terms Apply)
4. Loans
You can find various credit products that allow you to support the purchases you need when you need them. A loan will enable you to borrow capital to make purchases you need and want. You might need to renovate your bathroom, pay for a wedding, or buy a new car.
Bank loans can relieve the pressure of not having cash to make these purchases and allow you to secure low-interest rate loans. Here are some typical loans:
- Personal Loans: A personal loan is one of the fastest ways to get the financing you need for a landscaping project, home renovation, or to pay a significant medical expense. Personal loans can range from as little as $1,000 up to $100,000 (or more), letting you spend the money virtually as you see fit. They can be excellent products for those with a good credit score.
- Auto Loans: The purchase price of cars has been rising steadily for years. Most new car purchases are made with a combination of a car down payment and an auto loan. Your bank, credit union, or other financial institution can provide an auto loan.
- Payday Loans: You might be in a pinch where you need a short-term loan to cover the costs of groceries, bills, or unexpected expenses. Payday loans, short-term loans that let you bridge paychecks, can help you solve this problem. Although these loans can be costly, they might have been the credit product of choice for some.
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on Upstart Website
Upstart Personal Loans
Smart Money Rating: 5/5
Best For: Fast Online Loans
Loans From: $1,000 – $50,000 (Terms Apply)
Bonus Offer: Checking Interest Rate Won’t Affect Your Credit Score
5. Credit Cards
Credit cards are ubiquitous in our modern economy and are one of the main channels of paying for goods and services. They are so commonplace that most Americans have at least four credit cards.[3] Signing up for a new credit card should weighed heavily because it affects your finances. Here are several topics to consider when deciding what credit card is right for you:
- Credit Report: The main credit bureaus – Equifax, Experian, and Transunion – create your unique credit report. A credit report is a detailed account of your credit history, consolidated into an easy-to-read report provided to lenders when you request a credit product. You can request a free credit report.
- Credit Score: Credit agencies leverage your credit report to make credit scores. The two most popular credit scores are FICO and VantageScore. These scores determine your eligibility for terms and interest rates from lenders.
- Best Credit Cards: Keeping a healthy credit report and high credit score will help you secure the best credit cards. Getting the best credit card could mean securing travel rewards, cash-back offers, product discounts, and exclusive access to events, venues, and entertainment.
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On Pesto’s Website
Pesto Secured Mastercard
Smart Money Rating: 4.75/5
APR: 29.99% % (Rates Vary)
Best For: Rebuilding Credit
Required Credit Score: No Credit Score Check
6. Banking
Part of maximizing your personal finances is working with a bank that can assist you in reaching your financial goals. Whether setting up a checking account or finding the best savings account, selecting a bank that aligns with your lifestyle and goals is a crucial decision. Here are some thoughts to consider:
- Checking Accounts: This deposit account allows you to write and deposit checks, transfer funds, or make automatic payments. Checking accounts are usually the central hub of your financial ecosystem or the central node of your automated financial framework. Some accounts even offer high-yield savings. Read about Smart Money’s selection of the best checking accounts.
- Savings Account: Saving accounts are savings products banks, credit unions, and online banks offer. You can keep excess funds – like an emergency or slush fund – to earn interest income in these accounts. Not all savings accounts are equal. Read about Smart Money’s selection of the best high-yield savings accounts.
- Debit Cards: Many people dislike using credit cards and don’t want to use a line of credit to make purchases. A debit card is a payment card that draws funds from your checking account. Read more about how to apply for a debit card today.
- Credit Cards: Banks also issue bank-specific credit cards. For example, if you bank with Chase, they have a buffet of credit cards you can apply for. However, this might not be the best credit card for you. Explore your options.
Take the Next Step:
Member FDIC
Primis Checking Account
Account Type: Free Checking Account
Required Minimum: $1 to Open
Bonus Offer: Earn 50 Cents for Every Purchase
7. Investing
Personal finance is also about the strategy of growing savings over time. Learning to invest gives you the education you need to grow your net worth and increase your wealth. Here are several standard investment vehicles:
- Stocks: A stock, or share, is a piece of ownership of a company. Many publicly traded companies listed on stock exchanges – like the Nasdaq or NYSE – can be purchased through your online stock brokerage platform. Investing in mutual funds or target-date funds allows you to diversify your investments.
- Bonds: A bond is a short-term debt instrument that pays investors fixed or variable rates of return. It is considered a staple fixed-income investment. Investors can invest in different types of bonds issued by companies, governments, and the U.S. Treasury. Bonds add diversification to your investment portfolio.
- Certificates of Deposits: A CD is a savings account issued by a bank or credit union with a fixed interest rate and term. Certificates of deposits can be short-term (several months) and long-term (many years) in their term and have varying interest rates based on those terms. A CD’s term is set at the beginning of the agreement, and the bank or credit union uses these funds for a predetermined period. Read more about the different types of CDs.
- Real Estate: Investing in real estate can be done directly through owning your home, buying investment properties, or investing in Real Estate Investment Trusts (REITs). You can invest in generating rental income, watch the value of land appreciation, or take advantage of rising appraisals in your area. Read about five ways to start investing in real estate.
- Retirement Accounts: Saving for retirement is essential to a well-balanced financial plan. You might already have access to a Roth IRA, Traditional IRA, 401(k) plan, or 457(b) plan. Contributing to these plans over the long term can prepare you for retirement and relieve financial anxiety. Ready to jumpstart the process? Check out Retirement 101 and consider consulting with a financial advisor.
Related: What Is an Accredited Investor?
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Acorns Website
Acorns Investing App
Smart Money Rating: 5/5
Intro Offer: $20 Bonus Investment
Best For: Beginner Investors
Annual Fee: N/A
8. Mortgages
Part of the American dream is being able to buy your own home. With inflation and the rising cost of home prices, it can be challenging to see how you can save your way into the traditional housing market. Personal finance concepts can give you the power to steer your finances in the right direction. Here are several to consider:
- Saving for a Down Payment: The largest impediment to buying a house is the saving for the down payment. The traditional down payment on a jumbo or conventional loan of 20% can feel out of reach for many young professionals. Without years of diligent budgeting, saving, and intention, it can be hard to achieve. If you are renting but want to purchase a home, here are our tips on how to save for a down payment while renting.
- Buying Your First House: Even after you have accumulated the necessary down payment, there are many other hidden costs of homeownership to understand. The homebuying process is opaque at best. In Smart Money’s Ultimate Homebuying Guide, we break down everything you need to know.
Plug and Play: Smart Money's Down Payment Calculator
9. Insurance
Ensuring proper insurance coverage is an often overlooked but essential part of constructing a well-thought-out financial plan. Insurance is a financial product that protects you financially if something unexpected happens. There are many types of insurance to consider:
- Health Insurance: Maintaining mental and physical health is part of a well-balanced life. Health insurance affords you the ability to get the care you deserve, whether you visit your primary physician for a routine checkup or the emergency room in case of an accident.
- Car Insurance: Transportation costs can be a large part of your monthly and annual budget. You can control these costs from getting out of hand with car insurance. Car insurance protects your new or used car in case you get into an accident. Understanding the scope of your insurance coverage can help answer questions like, how much does your car insurance cover if you get into a car accident?
- Home Insurance: As a homeowner, most of your net worth is probably derived from your house. It is a smart money move to protect that investment with home insurance. Your mortgage provider probably requires you to maintain at least a baseline minimum coverage, but you can consider protecting yourself even more.
- Life Insurance: Life insurance is not fun to contemplate, but you can have peace of mind knowing that your family will be well taken care of financially if you were to pass away unexpectedly. There are many types of life insurance, and it is a vital piece of your family’s diversification.
Read Also: Learn About Different Types of Insurance
10. Taxes
Optimizing your taxes can be the difference between saving thousands of dollars and watching these funds flow out of your savings account. Taxes are an unavoidable reality of earning money, and learning how to file your taxes appropriately is essential to personal finances.
- Income Taxes: You are probably already familiar with income taxes. If you work for a company, you can glance at your monthly paystub and taxes taken out of your paycheck. Freelancers must allocate a percentage of their earnings to save for taxes, and working a side hustle might bump you into the next tax bracket category. Learn about how to file taxes and the income tax brackets and rates.
- Best Tax Filing Software: A recent study showed that filing taxes produces tremendous financial anxiety.[4] Luckily, there are tax filing software companies that can streamline the process for you. Here are our picks of the best tax filing software.
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H&R Block Website
H&R Block Online Tax Software
Smart Money Rating: 5/5
Current Offer: 20% Off Online Tax Prep
Best For: Individual Tax Filing
Smart Money Calculators
There is no better way to translate a conceptual idea into a more concrete reality than through plug-and-play calculators. Take advantage of the Smart Money Calculators to determine how much money you need for a down payment, your current net worth, the actual cost of owning a car, or what you should allocate in a 50/30/20 budget. Get started with free calculators to help you make better financial decisions.
Smart Summary
Personal finance paves the way for you to master your money instead of your money mastering you. Understanding how money works is one of the critical keys to learning how to make more money, build a budget to keep your money, manage your debts, save for your future, and invest in growing your wealth. Handling your money the smart way can set you up for long-term financial success.
You Might Also Like:
(1) CNBC. 70% of Americans are feeling financially stressed, new CNBC survey finds. Last Accessed January 16, 2025.
(2) Gallup. One in Three Americans Prepare a Detailed Household Budget. Last Accessed January 16, 2025.
(3) Experian. What Is the Average Number of Credit Cards? Last Accessed January 16, 2025.
(4) U.S. News. 1 in 5 Americans with Tax Debt is “Extremely” Stressed About It. Last Accessed January 16, 2025.
