Getting started with managing your personal finances can be daunting. There are so many different financial products and services available that it’s difficult to know if you’re set up in the best way to meet your goals. This article should help you get started with personal finances.
For many people, having money left over at the end of the pay cycle is a sign that you’re moving in the right direction. But how much you have left and what you do with it can make a huge difference in your overall financial wellbeing.
If you want to build wealth, you have to understand how money comes and goes in and out of your life. Not knowing where your money goes may not seem like a big deal if you’re getting ahead, but it could be a costly mistake later in life.
Whatever you want to know, understanding your personal finances allows you to analyse and improve your financial situation.
The most important word in “personal finance” is “personal”. There’s no “one size fits all” approach to understanding money, since everyone’s financial situation is different.
This is the second article in my FIRE Series – a series that’s focused on showing you how to achieve the ability to retire early from your job starting from nothing.
Below are some of the things that I would recommend for beginners to understanding personal finance and begin your journey towards Financial Independence.
Tip #1 – Learn about Personal Finance
This seems obvious, but if you want to learn a new skill, you have to study. If you want to get started with personal finances, you have to begin somewhere.
A great way to do this is by reading personal finance content. If you want to get started with personal finance, you’ve taken a good first step by reading this blog.
There are plenty of finance bloggers you can learn from, and there are many books which dive deep into the subject. The Barefoot Investor is an excellent first read for Australian audiences, as it offers actionable steps you can follow along with as you read the book.
The more personal finance content you consume, the greater the breadth of your knowledge. You won’t agree with everything you read, but that always happens as you learn more.
Once you’ve learned enough, you may even feel confident enough to share your opinions online. That’s what happened to me.
Tip #2 – Check your bank statements and payslips
When getting started with personal finances, you need to know where your money is going.
You won’t get far with personal finances if you don’t know what happens to your money when you get paid. Review your bank statements often to check for fraudulent transactions or any subscriptions you may have forgotten about. It’s always important to know exactly which bills are direct debited from your account so that you can plan accordingly.
Your wage is likely your biggest source of income, so always check your payslip to make sure it’s correct. Mistakes are unlikely if you’re on a salary, but if you work different shifts each week then it’s vital you know exactly what you’re getting paid for. Shift workers often have the benefit of negotiating shifts with higher penalty rates. If you have the capacity to work these hours then it may be worth your while.
Once you understand your income and expenses, you’ll find plenty of ways to optimise your spending.
Tip #3 – Shop for Better Deals
Your bank statement should give you a good idea of how much you spend each month. I’d recommend looking at your utility costs to see if you can get a better deal from another provider. This can be hard if you’re on a long term utility contract, like a phone plan. But switching over just one bill will make a big difference.
Finder and Canstar are two excellent websites where you can compare any expense you can think of. Comparing bills like insurance before you renew your existing plan almost always results in you saving some money. Don’t trust your current providers to give you a good deal – take the initiative to shop around before you pay.
Tip #4 – Determine your Net Worth
Your net worth is the value of everything you own, minus everything you owe. Think of it as a summation of as the net result of your contributions to society.
Society rewards your contribution to it through your labour with money. The things you consume directly take away from that money.
To calculate your net worth, you’ll need to know the values of a lot of things: your property, any investment accounts or cash, and your debts. If it has value and you’re willing to sell it, feel free to include it in your calculations.
When calculating net worth, avoid counting things that are difficult to sell. Always calculate the value of things you do include as their selling price – not what you paid for them.
Once you’ve added up your assets and deducted your liabilities, you’ll have your net worth.
It doesn’t matter if it’s positive or negative – finding this number is just a bonus. You do this calculation to clearly define your current assets and liabilities.
Remember that your net worth doesn’t take your income into consideration either. The purpose of achieving Financial Independence is to create the ability to survive without a traditional income. You’ll need a high – but not unachievable – net worth to do this. And learning how is why you’re here.
Learning what assets and liabilities you have is essential to managing your personal finances well.
Now you can plan your financial future, whether it’s paying off certain debts, investing, or saving for a long term goal.
Tip #5 – Create a Financial Roadmap
If you’ve taken the tips above into consideration, you can estimate your monthly income and expenses, as well as your current assets and liabilities. You can use these figures to come up with a financial plan for your money in the future.
This doesn’t have to be an extravagant plan. As long as it encourages action then it will be beneficial. For example, if you find that you usually have $200 left over at the end of the month, you can set a goal to save $2,500 in 12 months. You’ll have to make sure you save that $200 each month, but you’ll also need to save a little extra to meet the goal.
Whether you’re saving or looking to clear a debt, this stage involves looking at your finances and creating a plan to suit your future needs.
Tip #6 – Learn how to use spreadsheets
Spreadsheets are great. If you’ve used them before then you’ll know that they’re excellent at tracking numbers. This makes them perfect for managing your personal finances.
Even if you’re not a spreadsheet nerd like I am, I strongly suggest learning the basics of how to use spreadsheets. You’ll get a lot of valuable information from tracking your money over time.
I track almost every aspect of my finances: my loan balance, monthly expenses, and net worth spreadsheets are all updated monthly. I can easily spot if there’s a discrepancy or if I’ve overspent in a specific month.
If you want to learn about your spending habits, loan progress, or net worth, then I can’t recommend using spreadsheets enough. It ties the above information together and allows you to see your financial health improve.
Closing
There’s a lot of advice out there on getting started with your personal finances. It’s easy to get lost in the noise.
My advice is to start with the basics – understand your money, what you have, and what you spend.
From there you can look outward and make decisions about how to best use your money.
And who knows, if you manage your personal finances for long enough, you may just find yourself getting closer to Financial Independence.
Thank you for reading.
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Bonus Tip #7 – Get Started!
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