Imagine waking up with the knowledge that your expenses are covered. Your future is secure with funds set aside for unexpected expenses, as well as dreams and perhaps a trip or two. That sounds wonderful. It’s all about understanding and implementing the five fundamentals of personal finance.
A lot of people feel that the term “finance” triggers stress. It’s like a subject that is only available to Wall Street types or math experts. Personal finance, however, is available to anyone, and it begins with five easy but effective concepts.
In this post in this guide, we’ll go over these five components of personal finances in a manner that is easy to comprehend, understandable and (yes) thrilling. If you’ve ever thought about what to do in your financial journey, this is the ideal starting point.
What Are the Five Foundations of Personal Finance?
The five fundamentals of personal finance are fundamental concepts created to help individuals, particularly young adults and college students, develop strong financial practices. The concept was first popularized by the financial professional Dave Ramsey; these foundations can be implemented in a practical and actionable manner, which can be used as guidelines for living a financially healthy lifestyle.
These are:
- Set aside a $500 emergency money fund
- Relieve yourself of the debt
- Cash to purchase your vehicle
- Cash for school
- Make money and donate generously
We’ll look into each of them in depth, using real-world examples as well as techniques you can use as soon as you can.
Foundation 1: Save $500 Emergency Fund
Why It Matters
The world is full of surprises. Tires that are flat, visits to the doctor, and unexpected vet bills are everyday occurrences. In the absence of an emergency savings account, these everyday expenses may turn into financial disasters.
Starting with an amount of $500 will not meet every situation, but it’s an important buffer. It’s particularly suitable for teens and college students, or any person who is just beginning their journey to financial independence.
As per the Federal Reserve, nearly 3 out of Americans could not cover $400 crisis without borrowing or selling something. It’s a sign of caution and an incentive to secure sources.
How to Build It
- Start with small. Start by saving $5 or $10 each time you collect a paycheck or allowance.
- Create your own savings account to ensure you’re not tempted to make a purchase.
- Make your money automatic when you are able to; many banks will allow automated transfers.
Real-Life Example
Maria is a freshman at college and has saved $500 through an hourly tutoring position. After her laptop failed during the course of her semester, she did not need a credit card. Instead, she dumped money into her emergency savings and purchased a new one the very next day.
Foundation 2: Get Out of Debt
Why It Matters
The burden of debt can be a drag on your financial future. It doesn’t matter if it’s student loans, credit cards, or interest costs that mount up, preventing the possibility of building money.
Repaying debt brings increased peace, less stress, and more funds to spend on your future goals.
As per Experian, the typical American is carrying around $6,000 worth of credit card debt. Many of them have a debt of more than 20% interest from the source.
Strategies to Get Out of Debt
- A. The Debt Snowball Method: Take care to pay off the lowest balance initially to build momentum.
- The Debt Avalanche Method The Debt Avalanche Method: Pay off your highest-interest debt first in order to conserve money over the long run.
- Eliminate charges and put extra money towards debt payment.
- Do not make new loans–pause by using credit cards or financing a major purchase.
Real-Life Example
Jake, the graphic designer, was carrying three credit cards with maxed-out balances. The snowball approach was used by him to pay off the smallest amount in just three months and he remained focused on paying off all the balances. After a span of 18 months, he was free of debt and saved enough to make a down payment for the purchase of a vehicle.
Foundation 3: Pay Cash for Your Car
Why It Matters
The process of financing a car may seem common sense, but it’s seldom an affordable option. The monthly payments, the interest rate and depreciation mean the car is often worth hundreds of dollars more than what the vehicle could be worth.
Cash payment signifies that you have the car in full, with no conditions and there’s no pressure.
As per Edmunds, the people who finance cars generally pay about $5,000 more during the term of the loan.
How to Do It
- Make a plan for your budget. Do not shop without realizing what you are able to afford.
- Pay your bills every month. Consider it a “car payment” to your savings account.
- A used, maintained automobile can be as trustworthy for less than the cost.
- Beware of emotional purchases. Avoid falling in love with a vehicle that isn’t within your budget.
Real-Life Example
Tina, a 22-year-old, saved the sum of $6,000 while in college, taking advantage of summers and weekends. Instead of borrowing money to purchase a new flashy vehicle, she purchased an old, reliable Toyota Corolla in cash. Today, she commutes to her work without stress and has no payment on a monthly basis, eating up the money she earns.
Foundation 4: Pay Cash for College
Why It Matters
Students’ loans may seem like an opportunity to secure a brighter life, but they’re an expensive cost. Students who borrow loans have a debt of more than $37,000 following graduation, Source: U.S. News.
The benefits of paying cash for college — or reducing the burden of debt aren’t only about not making payments. This gives you more flexibility with your lifestyle, career, and financial decisions.
How to Pay Cash (or Reduce Debt)
- Request grants and scholarships. Begin with Fastweb as well as Studentaid.gov.
- Go to community college first. It is possible to transfer your credits in the future for substantial savings.
- Work part-time during school: Even $200/month makes a difference.
- Living at home, or renting a room, could cut costs and make it less necessary to take out loans.
- Pick public schools that are in-state. The public schools in the state offer more quality than private schools in comparison to many.
Real-Life Example
Jordan was an incoming college student from the first generation who was a home-based student and employed as a part-time librarian. Between savings, scholarships, and work, Jordan graduated with no debts from a public institution. Today, he’s saving his earnings to travel and invest, without loans that are holding him back.
Foundation 5: Build Wealth and Give Generously
Why It Matters
Once your basics are covered–emergencies, debt, transportation, and education–it’s time to build lasting wealth. It’s about savings, investing, and boosting your savings to make it work for you.
This foundation is also about charitable giving. Success in finance isn’t only about accumulation. It’s all about having an impact.
The great Warren Buffett once said, “The more you give love, the more you get.” Something similar could be said about generosity. It fosters gratitude and a sense of purpose.
How to Build Wealth
- Make investments early and frequently: Compounded interest rewards the same way. Make use of an account such as a Roth IRA, 401(k), or a brokerage account.
- Make multiple streams of income. Think about the possibility of freelancing, real estate, or even a side hustle.
- Be mindful of your budget. It’s not about extravagant spending, it’s about making smart choices.
- Find out more about personal finance, such as reading books like “The Millionaire Next Door” or consulting resources such as Investopedia.
How to Give Generously
- Tithe or give the proceeds to a cause you are passionate about.
- Give back to your local community with volunteerism or local activities.
- Aid others in their education–share your experience, help mentor, or give to scholarship funds.
Real-Life Example
Ravi, currently in his late 30s, began investing in small amounts of money at the age of 25. He also donates 10 percent of his earnings to a non-profit organization that assists refugee families in relocating. “I thought I’d feel the pinch, but giving back actually motivates me to do more,” the man declares.
Read Also: How to Set Up QuickBooks for Personal Finances: A Step-by-Step Guide to Taking Control of Your Money
Final Thoughts: Why the Five Foundations Matter
Five foundations don’t look flashy. They do not involve day trading cryptocurrency speculation or strategies to make money fast. However, they do work.
These concepts can help you create your financial future based on the stability, purpose and freedom–not only for the present, but also for the years to come.
They’re equally an eternal resource. No matter if you’re a teenager or sixty, the books provide a clear outline of what you should do with your money, ways to avoid costly blunders as well as how to live with a sense of generosity.
What’s Your Next Step?
This is your chance to win: Pick one foundation to work on during the next week. It could be:
- Setting up a savings account and setting up an automatic transfer
- The cost of paying off an additional $50 credit card
- Are you looking for a pre-owned car that fits your needs?
- The application process for a new scholarship is now open.
- Contributing to a local cause that is important to you
However small each step is, it will move you one step closer to financial freedom.
Need more tools or reliable details? Check out your options with the Consumer Financial Protection Bureau (CFPB) as well as MyMoney.gov to find free information for budgeting, saving and investing.
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