Personal Finance Basics

Financial Success Starts with a Foundation in Personal Finance

foundation in personal finance

According to the Education Data Initiative, ~70% of high school students enrolled in college the Fall after they graduated.  So, 30% of students are likely to enter the workforce with almost no financial literacy education. Even the students who go onto higher education find themselves with limited personal finance courses and it is quite rare to find a college that has personal finance coursework as a graduation requirement. Most young adults learn to just “figure it out” and already start their adult lives at a disadvantage.  

It boggles my mind how the education system continues to fail our children and one of the most practical courses that one will use for the rest of his/her life isn’t a requirement.

Children are not learning about personal finance at home either. A 2017 T. Rowe Price Survey showed that 69% of parents have some reluctance to discuss financial matters with their kids. Parents with poor money habits tend to pass it on to their children and this continues the cycle of poor financial habits. Children with good money habits start with conversations with parents about money and managing their own money. 

As retirement benefits move from pensions to defined contribution retirement programs, such as 401(k) plans, more responsibility is placed on young adults to save and invest and ensure they have enough for retirement. Failure to plan for the future will lead to significant economic burden on our society. 

Financial literacy leads to better personal finance outcomes and decisions.

The financially illiterate end up paying more, having less, and struggle to survive with little retirement and investments. 

Personal finance may seem overwhelming but it’s not. Whenever I’m faced with a complex problem, I always like to break it down into smaller, digestible chunks. Personal finance is no different. 

What’s Personal Finance?

Personal finance is used to describe all the elements of managing one’s money from saving to investing. Other fundamental topics include budgeting, banking, retirement planning, tax and estate planning, and more. Personal finance management refers to tools that people can use to help manage their money.

Let’s cover some key foundational aspects of personal finance so you’re better prepared for your financial journey.

Crash Course in Personal Finance (Life 101)

The following are the top 10 lessons in Personal Finance

Lesson 1: Create a Budget

it starts with a budget

The first step in personal finance is to create a budget. A budget is a personal finance management tool that helps you track your spending and identify where your money is going. Better financial decisions begin with a budget.

Without a budget, you’re essentially “flying blind” which means you don’t really know if you are spending beyond your means or not. Budgets enable you to zero in and analyze your spending habits. Many people I know don’t budget and spend money without thinking. These purchases might include buying lunch every day, grabbing drinks with friends after work, spa days, or afternoon coffee at Starbucks. These may seem like insignificant purchases on their own but the costs add up.

A budget is a foundation for setting financial goals and having a plan. You can use it to measure against your plan. Are you saving for that car, wedding, exotic trip to the Caribbean? How will you know how you are progressing towards that goal if you don’t keep track?

Here’s two budget templates to get you started.

Budget Template – I created this template to help you create a budget and compare your budget to actuals on a monthly basis.

How to Make a Budget – This template is from the Federal Trade Commission and made available on

You can use your own. Regardless of what template you use, making a monthly budget and comparing what you spend vs what you planned to spend is very telling. It helps people avoid and get out of debt. Over time, you’ll be more aware of what you’re spending and then more inclined to save cash and use that cash to pay for big purchases and avoid debt.  

Lesson 2: Pay off high interest debt

credit card high interest debt

Before savings and investing, pay off high interest debt. If you don’t have any debt, congratulations you are already ahead of the game. Try your best to avoid personal loans and credit card debts with interest rates ranging from 10-20% or more.

Not all debt is bad and it’s important to distinguish between healthy debt, like traditional mortgages, and bad debt, like 20% interest on a credit card. If you have high interest debt, prioritize paying it off.

Mortgage interest rates can range from 3-5% and federal student loans in 2021 range from 2.75% to 5.28%.

Credit card and unsecured loan debts charge high interest rates 10%+. When you are talking about interest rates that are higher than what you can earn by investing or saving, you should do everything you can to pay this high interest debt off as soon as possible.

Know Your Credit Score

Your credit score is important to determining the types of loans and the rates that you pay. This shows lenders how likely you are able to repay debts and is especially important in obtaining a mortgage. Credit Scores range from 300 to 850 and are based on a few factors such as:

  • Payment history of previous debt. Late/Missed payments will lower your credit score.
  • The amount of debt you owe including personal loans, student loans, car loans, and credit cards. Don’t spend the limit on your credit card as this will also lower your score.
  • The length of your account and how you’ve paid over time. Longer credit history is actually helpful for your score.
  • Types of credit you use
  • How often you take on new debt or open up new credit accounts. Your score goes down if you apply to several credit cards at the same time.

Check your credit report every year.

You’re entitled to a free copy of your credit report every 12 months from the three nationwide credit reporting companies. You can obtain this report from

There are other companies that provide credit reports but watch out about inadvertently signing up for an unnecessary and hidden subscription service. Some services might charge you $1 to receive your credit report and sign you up for a trial subscription membership, which you might forget to cancel and be left with a $20+ monthly charge. Go with the free report.

Personal Finance Tip: Some banks and credit cards may offer free credit scores that you can also check but it’s best to obtain the official credit report once a year. It’s always good to check and ensure that you’re not the victim of identity theft and everything looks in order.  

Lesson 3: Establish an emergency fund

Emergency fund

An emergency fund is just what it sounds like. This is a buffer of savings that you set aside to cover 6 months to a year of expenses. Remember the budget you put together in Lesson 1? What happens if you lose your job or have to leave the workplace for an extended period of time? Accidents happen and you should be prepared just in case something were to happen to you or a loved one.

Look at your monthly expenses from lesson one and multiply by 6 or 12 months to get the estimated emergency fund amount. This might seem like a lot of money to save but you can do it. Let this be your first financial goal to reach.

Lesson 4: Establish good banking habits

saving for retirement piggy bank

I met a young man who stored his cash in his glove box of his car so he could easily access it when he needed it as he was always on the go. I also met an old woman who didn’t trust banks and saved her money in her mattress and the pockets of her expensive fur coats. Both of these people were taking on lots of risk. What happens if the car was stolen or if the old woman’s house caught fire? It probably would be very difficult to recoup your money. They were also hurting themselves by not letting their money grow and earn interest.

Most banks have deposit insurance from the Federal Deposit Insurance Corporation (FDIC) which is an independent agency created by Congress to maintain stability and confidence in the country’s financial system. At an FDIC-insured bank, the FDIC protects your money in the unlikely situation that the bank fails. The amount of coverage is $250,000 per depositor, per bank, per account. You’re automatically covered at FDIC-insured banks and there are no extra fees on your end as a consumer.

Open a checking account at a FDIC-insured bank. A checking account allows you to store your money and centralize your income and spending. Most checking accounts include a debit card that you can use instead of cash. Like a credit card, you can tap, swipe, or insert the card for transactions and pay with the money from your account. Make sure you have enough money in your account to pay for these purchases to avoid potential fees.

You can also set up direct deposit from your employer. I never understood why some people prefer paper checks that can easily be lost. My father had a side business selling computers and he received paper checks and would forget to deposit them. When cleaning up the house recently, I found several checks from the 1990s that he forgot to deposit. Direct deposit automatically deposits your money on payday which might be faster than getting it in the mail and you won’t have to remember to deposit it each pay period.

Each month, the bank will provide a statement so you can track your deposits and spending in an organized manner.  

Establish a Savings Account to Earn Interest

Start with a checking account but you can eventually open a savings account.

A savings account gives you interest on your money in the account. Savings accounts are good for storing your cash. Each bank has different minimum balance requirements and potential fees. Unlike checking accounts, savings accounts have a withdrawal limit of six transactions per month. Federal Reserve Board Regulation D is a federal law that states that you can’t make more than six withdrawals or transfers per month out of your savings account. If you need to make several withdrawals, transfer money to your checking account and make as many withdrawals as you need from your checking account.  

Regardless at what bank you open your checking or savings account, pay particular attention to the fees. You should not be paying money each month for a bank to hold your money. It should be the other way around.

Bank fees to watch out for:

  • Account closing fees
  • Overdraft fees
  • Monthly maintenance fees
  • Paper statement fees
  • Inactivity or escheatment fees
  • Card replacement fees
  • Returned item fees

Start Building Your Credit Score By Opening a Credit Card

If you are confident that you won’t spend more than you make (and stick to your budget), then opening a credit card would be a good idea. Credit cards let you borrow funds from a pre-approved limit to pay for purchases. At the end of your billing period, you’ll receive a bill from the credit card company. Pay off the full balance. You might be tempted to provide less than the full balance but whatever you don’t pay is credit card debt with a very high interest rate that accumulates. This is the power of compounding but in the wrong direction. 

There’s credit cards for all types of lifestyles. Some provide initial one-time bonuses for signing up, while others offer cash back, rewards, and frequent flier miles to name a few. Whatever you choose, look at the fees and interest rates. If you are just starting out, look for credit cards with no annual fees.

Most credit cards offer fraud protection and most of the time, you won’t be responsible for stolen credit card or unauthorized purchases. Credit card companies also fight for the consumer during disputes and might offer a form of purchase protection. I’ve had situations where I made a purchase for clothing that didn’t fit and the store refused to issue a refund. I reached out to my credit card company and they issued me a credit for my purchase price. In another situation, I purchased a TV using a credit card that extended the manufacturer’s warranty for 2 years. This credit card feature came in handy when my TV failed after 2 years. I submitted my paperwork and the credit card company issued me a credit that I was able to use to purchase a new TV.  

With a debit card, money is taken right away. With a credit card, you have until the billing statement date. When using a credit card, cash spends more time in the bank accumulating interest until the due date.

If used right, credit cards can help build up your credit history and improve your credit score. People with high credit scores have the option to get the best credit cards with the best perks.

Don’t get a credit card if:

  • You can’t pay the balance in full on time.
  • You tend to spend more than you make.
  • You can only get a credit card with low credit limits and you spend close to the limit. Exceeding the limit can lead to additional fees as well as ding your credit score.

Lesson 5: Spend your money wisely

spending money

A key to reaching your financial goals is to control spending. Financial advisors provide different approaches on this subject. Some say don’t sweat the small stuff and focus on the big ticket items like housing and transportation. Others say that the small stuff can add up to a sizeable amount. I say listen to both.

Tackling Big Ticket Spending

Housing and Transportation are the two larges spending categories for most Americans accounting for 25% and 12% of a person’s budget respectively1.

Finding ways to reduce spending in these areas can drastically improve your savings rate.

One way might be to set financial spending targets (using your budget). 

A good target might be the following: 

  • 20% or less for housing
  • 10% or less for transportation

This might take some creative thinking. For instance, my friend Amy went to college in a high cost of living area and the on-campus housing was very expensive. Amy’s parents saw that the housing in the area continued to appreciate in value and on-campus housing costs only went up. The parents proposed that they would buy a 3 bedroom apartment but Amy would have to find roommates and cover the mortgage, insurance, and utilities. During the first year of this arrangement, Amy split the cost evenly among the roommates where everyone was happy because each was saving money compared to the expensive on-campus housing. By the time Amy graduated, her college roommates moved out and she listed the two available bedrooms on Craigslist for slightly below the market rate. When the new post-college roommates moved in, Amy was living rent free since the new roommates were paying a higher rate to live there which covered all the housing expenses including the mortgage. Not bad considering Amy was able to virtually eliminate the largest spending category in her budget. Amy was able to save up the money she would have spent on rent/housing and invested that money in another apartment.    

Lesson 6: Not all “assets” appreciate in value

Thinking about buying a new car?

From a financial point of view, it’s smarter to buy a used car. New cars depreciate faster than used cars. In fact, a new car loses value as soon as you drive it off the dealer’s lot.

cost of a car new vs used

By purchasing a vehicle used or certified pre-owned, you don’t take a huge depreciation hit and the vehicle depreciates more slowly as it ages. Depreciation is one of the largest costs of car ownership – wouldn’t it be better to have the first owner take the massive depreciation.

When you purchase a pre-owned vehicle, you can end up buying a better car that’s more affordable. If you are concerned about the vehicle’s history, you usually can take the car to a mechanic before you purchase or view the vehicle’s history using

Certain brands are known to build a quality vehicle such as Subaru, Toyota, and Honda. Depending on the vehicle’s mileage, you can go years without a major repair. When you buy pre-owned, you can research the reviews and reported problems. There’s plenty of owner forums including Facebook groups as well as enthusiast sites where current owners share their issues (if they have any).

Avoid Depreciating Assets using High Interest Debt

The same principle applies to other expensive purchases like electronics which also depreciate in value over time. Avoid high interest debt or loans for items that will lose value over time.

Note that the above is in reference to a typical functioning market. During the 2020-2022 COVID market, we are seeing an abnormal market due to supply chain issues. Car prices have skyrocketed — average new car prices are $40k and average used car prices are ~$25k. If you don’t need a car at the moment, it’s best to wait. Eventually, the costs of used and new car prices should decline as supply chains are corrected.

Lesson 7: Save at least 15% of your income and invest

As you follow these lessons, you should be increasing your savings. Saving is not enough, especially in a low interest rate environment where savings accounts are earning 0-1% (as of 2021).

Set a goal to save at least 15% of your income. When you get a new job or a promotion, don’t increase your spending. Continue to spend as much as you did before and use the increase in income to save.

Saving is not enough. You need to generate income for you in the future and you do this by making investments into appreciating assets such as stocks, real estate, bonds, etc.

Growth rate for each of these assets matter. The younger you are, the more risk you can take. Stocks are riskier than bonds but over a greater average return than bonds.

stocks vs bonds chart

The above chart shows average annual returns since 1928 for S&P 500 and US Long Term Government Bonds.

Historical Returns on Stocks, Bonds, and Bills 1928-2020.

Take a look at the graphic below about the priority of where to invest first.

Personal Finance Tip: Start automating your savings and investments. Set up an automatic transfer from your bank account. Employers do this with your 401k and you can also do this for other investment accounts.

priority of investing

The saying is out of sight, out of mind but in the background, you can be experiencing the power of compounding.

Lesson 8: Protect yourself and loved ones

Accidents are a part of life and you don’t know what the future brings but you can protect yourself and loved ones.

Everyone needs health insurance. 67% of bankruptcies are related to medical issues such as illness and medical bills.

If you are renting, get renter’s insurance and if you own a home, make sure you’re covered with adequate home owner’s insurance. Renter’s insurance covers you and your personal belongings and provides financial reimbursement in case of a natural disaster, fire or theft.  Homeowner’s insurance is coverage for a person who owns their home or apartment and it covers that person’s personal belongings and the structure of the home. Policies depend on the location and coverage details vary by insurance company.

The same thing applies to automobiles. Get adequate auto insurance to ensure you are covered in an accident. Getting your state’s minimum is a good first step but the minimum coverage might not be enough if you are involved in a motor vehicle accident.

When buying insurance coverage, some of the language might be confusing and many don’t really know what they are signing up for. By the time you understand what each part of the policy means, it’s likely you were involved in an accident and your insurance company is explaining the coverage to you. Take the time to understand what is and what’s not covered in your policy.

If you have loved ones who are dependent on you, explore term life and disability insurance. If you are single, you might be able to skip this coverage for now.

Personal Finance Tip: For smaller valuables that you can afford to replace, skip the insurance as it’s a waste of money and a money maker for companies trying to sell it to you.

Lesson 9: Reduce or defer taxes

taxes and money

When you start making money and increasing wealth, you soon realize how much you pay the government in taxes.

There are many ways to reduce or defer taxes that will let you continue compounding.

Pay attention to your employer benefits. Some employers offer pre-tax and tax exempt benefits where you can use untaxed money for education, transportation, and childcare.

For example, your employer might use commuter benefits from Wage Works or a similar company that offers the ability to pay a sizeable portion of your commute from your pay check before paying taxes. Depending on your income level and tax bracket, this can be a significant tax savings and reduce the cost of commuting to work each day. The IRS limits this benefit and the actual amount could potentially change each year. For 2021, the monthly maximum benefit is $270.  

When you invest in traditional retirement account like a traditional IRA or traditional 401(k), you are deferring taxes. That is, you are not eliminating but delaying your taxes. You don’t pay taxes until you retire and you benefit from having a lower taxable income now.

If you get your health insurance through your employer, you might be able to use a Flexible Spending Account (FSA) to pay for medical expenses including co-pays, prescription drugs, and other healthcare related costs. A Flexible Spending Account (FSA) allows you to leverage pre-tax funds from the account to pay medical expenses. Using this approach, you can save the amount that is equal to the taxes you would have paid on the money if you didn’t use the FSA.

The above are just a few tax savings strategies.

Lesson 10: Review your financial plan monthly to ensure you stay on track

Set financial goals for immediate, medium and long-term targets.

When you are reviewing your plan, think about how you can increase income or decrease expenses. Always aim to be cash-flow positive, meaning having your income exceed your expenses every month. Scrutinize your bank account and credit card statements for errors and mistakes. Lastly, continue to build up your assets and use the power of compounding to become financially free.


The above content covered some key foundational aspects of personal finance to better prepare you for financial success.