‘Personal finance’ as a subject can sound intimidating. However, the reality of it is very common sense. As soon as you grasp a few money management basics, you’re set for life. And once you apply them, you will prosper.

We share a few small (yet big) items that are important for everyone to understand about money. They will help you keep your finances and credit report clean. And those two things are the keys to your prosperity.

When I was 26 years old I had a late payment on an account. I moved and forgot to notify my one credit card. When they called me the next month to ask me about my payment, I was mortified, but the bank rep was very nice, believing me and updating my address on the spot. Yet a couple of years later, when I applied for a loan, that one late payment was loud and clear on my report, and I remember thinking how something so little such as forgetting a move notification could still be pointing an accusing finger at you so many years later. Since then I’ve never been late with a bill payment.

Today I will share a few financial ideas and concepts that I learnt over the years; they will stay with you and help you for life.

Making a budget

Some people are under the wrong impression that your budget consists of deciding how much you spend on stuff; they are, to some degree, correct. However, a proper budget means knowing what you earn, and what is the wisest way to spend it; there’s some science to it. Here are the benefits of knowing what your budget looks like:

• It tells you, right away, if you’re overspending on something;
• You will identify ways to save;
• A budget teaches you frugality.

Let me be clear, frugality isn’t stinginess. When you’re frugal, you learn how to save on some things, so that you can use that money on things that you want. After all, saving without enjoying it is a very sad thing.

Since it’s the end of the month, it’s the perfect time for you to set out about making your budget exercise. Here’s the article that will help you get started, and here the article that will help you map out your budget with all the data in hand.

Saving

 Grandparents always say to save 10% of your take-home pay. It’s hard, but they’re right: if you don’t have a savings account, do it soon*. If you can’t set aside 10% of your pay, let me suggest what I did to start my own savings when I was dirt poor (when I worked at a bank): at the end of the month –or the end of your pay cycle if you get paid bimonthly- that money that is still sitting in your account from this month’s salary? Move that to savings. If you worry about spending that money, ask your financial institution to please not link that account to your debit card. That will help you resist temptation.

It sounds like a small thing; it is. but little by little that money will grow and soon you’ll see how at the end of each pay cycle moving that little bit of money away will feel good and make you proud.

Once you have one month’s salary saved up, if you can, move it to a separate account that you are going to keep as an “emergency fund”. This is where credit unions come in handy: they don’t charge you extra for having several savings accounts! It’s best if you can grow this account to be the equivalent of three months of salary so that if you lose your job you have funds to tide you over.

The key to saving: planning how to spend it

Once you have an emergency fund set aside, it’s time to start making bigger plans with the rest of the money you’re saving. Like I said, saving should have a good purpose. While I don’t advocate stopping saving for other long term plans, it’s good to find a balance between being safe with your money and living nicely.

You can create a vacation fund to travel regularly, or use the extra money to pay down any high-interest debts you have. Maybe you can do both! The point is to plan, and to follow through. Because the more you set out to do and actually accomplish with your money, the better you will feel about yourself.

One’s credit report

Everyone should know their credit history because it defines your chances of getting loans in the future; if you have a properly running budget, and are managing your money well, your credit history (and score) will improve over time. You can obtain your credit report for free once a year from any of the three major credit bureaus. Keep track of your credit report to ensure that everything is accurate and there are no identity theft attempts. There are apps that can help you do that.

If your credit history is brief and rather thin, and what you seek is to establish credit, here’s an article on

how to do that. And, if you have a decent credit report but want to build a superb one, yep, we also have information on that.

Retirement plans

You must be thinking “is she serious…?” I get it, you’re 50 years away from retirement and there’s plenty of time. That’s true! It’s also true that the sooner you start working on your retirement, the better you will retire.

Find out if your employer offers a 401(k) plan. If they do, figure out a way to set into it a small portion of your salary, no matter how little, into it. Having a good budget will be of help in that. Retirement plans are a great investment because employers usually make a “matching gift” of an additional percentage of whatever amount you set to your plan: freebie money!

What makes up a portfolio

Keeping a proper portfolio isn’t hard either; it’s a matter of diversifying properly. Investments in these types of retirement plans are usually divided into three types:

• Cash or liquid funds: your money gets invested in money market funds and complex common savings certificates. They provide very low yields (profit, that is) but are close to having no risk to you.
• Bonds: that’s usually government bonds, which also have low yields but are very safe.
• Capital or equity: this refers to stocks in which you invest via mutual funds. In a normal investment portfolio you’ll find various types of capital funds in specific industries like: biotech, IT, agriculture, specific markets (like emerging market funds, or Asian) or with specific types of companies (large corporations, environmental funds). Each one has different types of risks and returns. Because of the associated risk, these are the most volatile types of investments. Of course, they offer the greatest chance to make a profit in the long run.

Managing your investments

Financial experts say that the younger you are, the greater risks you can afford to take. That’s because short term losses can be offset by long-term gains. Conversely, the closer people are to retirement, the safer their investment choices become. Contact the person who manages the 401(k) to get advice. Keep in mind that you can always change your future investment allocations to adjust your risk. If things look very bad, you can even empty a fund and move the balance somewhere else. However, always find out beforehand what the cost to do that is, because transfer fees might be higher than the benefit of the transfer.

And if your company doesn’t offer this type of retirement fund, you can contact the credit union or your bank to ask about retirement savings accounts, which allow you to save little by little and offer tax benefits on the deposited amounts. They might also have affiliated investment companies, like we have Cetera Advisors.

The proper use of borrowed funds

One thing I learnt from my aunt Eleanor –who is an honest-to-goodness hippie, but also happens to be an economist- is that you should never borrow money to finance your lifestyle. Meaning that loans should only be taken out for investments.

What does that mean? For example, that using your credit card to buy everyday items is a bad idea: you’re paying interest to live.

On the other hand, borrowing for your future might sometimes be a good idea: have finished paying off your student debt, and are considering studying something new? Learning a new skill, or a specialty field of study that will help you get a better-paying job, would be good investments in your future. Therefore, a loan to do something like that would make sense.

Buying a home: a good investment?

We’ve all heard it that owning a home is a great investment. It’s true that in the long term they can provide a nice profit, but that’s the catch: how long do you need to wait to make a sell-off profit?

If you buy a house to live in and sell off later on, calculate a possible increase in value per year. Compare that to the loan interest plus closing costs; usually, you need to stay in the house at least 5 years to make money on a resale. Plan carefully where you want to live, and how long.

And my last bit of advice: live your life 

It’s hard not to compare when you see the pictures of others doing things you’d like to do on social media.

Some get depressed. Others fall to temptation and lead lifestyles that, as I mentioned earlier, they can’t afford. That’s why you should always remember two things:

1. People only post images of the good stuff, never the bad; and
2. It’s your life, your money, and your future.

Focus on what is good for you, and your goals. Ultimately, when you use your money well, it will take care of you.

* Do you know the best way to open a completely free savings account? Join a credit union! When you become a member the credit union you will set a small amount (typically $5-20) in a share savings account. That’s how you become a member. And that is a savings account that earns interest and everything.