FIRST STEPS: Simple Personal Finance for Everyone

I am often asked what things people should be doing and why when it comes to personal finance. Everything seems to come at you at once, and taking care of your finances can be a lot of work – work that most people do not want to do. As a result, people tend to do nothing because everything seems so daunting. So, here we go on a list of things to get you started.

GET OUT OF DEBT! Number one on my list is to get yourself out of bad debt – notably credit card debt. At 14% to 25% interest, your credit card debt puts you in a huge hole that seems impossible to dig yourself out of. The only way to get out of debt is to pay it off, and the only way to pay it off is to pay your debt before you pay anything else. This means that as soon as you get money (from any source) part of that money will automatically, without reserve or thought, go to pay down your debt. Depending on the size of your debt, it may take 12 to 24 months, but getting rid of the shadow of debt will do a great deal to giving you a more positive look at your finances.

SPEND LESS THAN YOU MAKE! This would seem like an obvious statement, but very few people (myself included sometimes) live by this statement. If you have a hard time keeping track of your money, by all means switch to cash only. By doing this you can easily prevent yourself from spending more than you have. It’s less convenient and sure you don’t get those handy rewards (what good is a 5% reward if you’re overspending by 10% and building debt all the time?)

PAY YOURSELF FIRST! Everyone needs to be saving. Wisdom built from 1000 BC says keep 10% of everything you make for yourself. These days, that may be too conservative to retire. However, most people still do not have much savings to show. Whenever you get money (again from any source) put aside 10% (or more if you can) for yourself. Open up a savings account (high-yield if you can) and do not withdraw from the account unless you absolutely need to. You’ll be amazed at how much can amass so quickly, and you’ll be even more amazed at how much “free money” (interest) you get when that savings builds up.

TAKE THE FREE MONEY! Besides the tax advantages of a 401(k), most employers often match part of your contributions to your 401(k). Let’s say you make $30,000 a year and your employer matches 50% of your contribution up to 5% of your salary. This means that if you contribute between $1 and $1500 (5% of $30,000) your employer will give you between $0.50 and $750 for free. An additional $750 a year when you make $30,000 is the equivalent of a 2.5% raise. For comparison, my employer matches 75% up to 8% of my pay.

TAKE FULL ADVANTAGE OF TAX SHELTERS! Right now, the best deal in savings is the Roth IRA. You pay the taxes now, but any gains you make are tax free (especially worthwhile when you consider you may have 20-40 years of gains depending on your age). Let’s say you put in $1000 into a Roth IRA every year for 30 years and you make 7% on average. When you’re ready to retire in 35 years the $30,000 you put in turns into $141,760. Unlike interest or dividends (you owe tax from your tax bracket – let’s say 18% when you retire) or capital gains (current law stipulates 15% taxes on long term gains), you owe nothing. In addition, you may be able to claim a credit on your taxes that save you even more money. See Get $2000 Tax Saver’s Credit (if you qualify)

Personal finance, if you’re willing to optimize and strategize, can take many years to learn and build the necessary habits to control. Obviously, many more strategies and ideas can be presented for a BETTER system for your finances.

However, personal finance does not HAVE to be difficult. You can dig yourself out of a hole and put yourself in a good position with two simple statements: SPEND LESS MONEY THAN YOU MAKE AND KEEP 10% OF EVERYTHING YOU MAKE FOR YOURSELF.