The Four Components of Personal Finance

Depending on your circumstances, financial success may seem like a far-off destination. But with some focus and planning, it’s a goal you can achieve.

It starts with learning the ropes of personal finance. But what is personal finance and how do you master it?

The basics of personal finance come down to four fundamentals: managing your expenses, dealing with debt, building credit and saving money.

We’ve gathered what you need to know about these key components of financial planning, along with personal finance tools to launch healthy new financial habits.

1. Manage your expenses

Do you find yourself shopping without knowing if you’re spending too much – or if you should be spending at all? If you answered yes, it’s time to start managing your expenses. And that starts with creating a household budget.

While the idea of budgeting can feel overwhelming, it’s not hard to get started. It boils down to knowing exactly how much you take in after taxes (net income), then identifying and subtracting your monthly expenses.

If you feel like your money’s disappearing every month, a budget calculator can help you figure out where it’s going – and how to cut back.

2. Deal with debt

Debt isn’t necessarily a bad thing. Handled correctly, it can actually work in your favor, such as financing a home or higher education. But if you have too much debt, or if you incorrectly manage the debt you have, it can stand in the way of your financial goals.

For example, paying late on revolving credit accounts (such as credit cards), even just occasionally, can negatively impact your credit. So can spending more than you earn, which raises your debt-to-income (DTI) ratio and can make it difficult to borrow in the future.

If you’re struggling with debt, simple changes can make a big impact. Decide to steadily pay off credit card debt, or commit to something like paying off a personal loan faster. Research sensible options, such as bill consolidation, while avoiding dangerous quick fixes such as payday loans and debt settlement companies, both of which can hurt you in the long run.

3. Build your credit

Like debt, credit can help you reach financial goals when properly managed. But when managed poorly, it can have a negative, far-reaching impact on everything from car loan interest rates to the ability to rent or purchase a home.

Lenders look at your credit score to determine how likely you are to repay the money you borrow, helping them decide what kind of loan offer you might qualify for – or if you’ll qualify for one at all. That’s why it’s essential to build your credit, then maintain it.

The first thing you need to do is get familiar with your credit report, which is used to calculate your credit score. Fortunately, there’s more ways than ever to check your credit for free. If you find mistakes, take time to fix them. If your credit could use improvement, examine your credit report to see where you’re going wrong (paying bills late, for example, or carrying a high credit card balance), then take basic steps to improve it.

4. Increase your savings

Saving can be an intimidating venture, especially if your budget is tight. But it’s an essential component for financial success – and you don’t need to make a lot of money to save money.

Before exploring ways to save, it’s important to understand why saving is so important. One reason is to reach long-term goals. Purchasing a home, for example, preparing for retirement or even taking a dream vacation. The other is to have a financial cushion for emergencies, such as auto or home repair, job loss or medical expenses.

You can kick things off by identifying easy ways to start saving. Maybe you need to make small changes, such as eliminating daily lattes, exercising at home instead paying for a gym membership or signing up for automated savings. If the idea of a “side hustle” appeals to you, there’s more ways than ever to earn money without even leaving home.

However you decide to save, be sure to funnel some of your earnings into an emergency fund so you can be ready for the unexpected.

Financial success is within reach!

Now that you see reaching personal finance goals comes down to just four fundamentals, you may start feeling like success is attainable. Remember, you don’t have to master everything at once. Just commit to getting started and take it one step at a time.