Are you in need of a money makeover? Well then its time to dive into the personal finance basics that will help you get there. Today, we’ve got Personal Finance 101 tee’d up for you. It will give you everything you need to know to start developing healthy money habits and growing your wealth.
And, Personal Finance 101 is just the first post in the Financial Independence series! In the series, we will provide the entire money makeover tutorial. We’ll get into money principles to live by, building multiple streams of income, becoming FI/RE (financial independence / retire early), being your own boss, money mindset, and so much more!
But first things first, we need to get a hold of the basics.
These are the common types of accounts, cards, and investments you should be aware of when thinking through your personal finance money makeover:
Daily Funds
Checking Account & Debit Card: This is likely where you deposit your paychecks. Find a bank you feel comfortable with that doesn’t charge for monthly fees, insufficient funds, or require a minimum balance.
The higher the annual percentage yield (APY) the better! This is the power of compounding interest: the bank will pay you this percentage of your available funds every period…so it’s like free money!
If possible, choose a debit card that doesn’t charge for using out-of-network ATMs. If you travel internationally often, check for foreign transaction fees.
Credit Card(s): This is an important one because it links to the ever-daunting credit score. If you’re a financial beginner, I recommend sticking to one simple card until you feel confident in your money habits. More experienced credit card users can look for things like travel benefits and other rewards cards to maximize points.
PAY YOUR CREDIT CARD OFF EVERY MONTH. You can automate this so you never have to stress about it!
Be careful of things like annual fees, interest rates (the higher the rate, the more you’ll have to pay the bank extra money for not paying off your bill in full), and foreign transaction fees.
Savings
Short-Term & Long-Term Savings: This is pretty straightforward. If you don’t have a savings account yet, open one! You can choose to put all of your savings into one account and track what you’re saving for your short-term and long-term goals. Or, you can open separate accounts.
Like with checking accounts, the higher the APY, the more free money. Stellar Tip: ditch the regular savings account and open a high yield savings account (HYSA) instead.
High Yield Savings Accounts (HYSAs): This is a must in my book because we love free money. Typical savings accounts will give you an APY of 0.01% to 0.1% (on a good day). Thats not very much. In a HYSA, your APY can be anywhere from 0.40% to 0.55% (or more!). Woah, big difference!
Emergency Funds: This is a type of savings account category that is a must, must, must. You never know what unexpected things pop up in life that you need to have money ready for: a big move, a medical emergency, or a global pandemic (*sigh*). My emergency fund is the thing powering me through my sabattical & mental health recovery, and I’m very grateful I started saving early on. If you don’t have an emergency fund yet, start one! Bonus points if you open a HYSA.
Investing
Individual Stocks: This is where things get more complex and where finances can get intimidating. If this is you, don’t worry because there are lots of women investing experts and coaches out there to help make investing less “wall street chad” (ugh).
If I were explaining stocks to Michael Scott, I’d say something like: a stock is a piece of pizza in the entire pizza pie that represents a company. The cost of each pizza slice “stock” is dependent on how everyone buying different company’s pizza slices determines how good a particular company’s pizzas are. The better people think a pizza is, the more expensive a slice.
Stock Bits: This is pretty cool, and a great way for beginners to start investing with literally just $1. In Michael Scott terms: a stock bit is a smaller piece or “bit” of a pizza slice for people who want to buy slices, but can’t really afford an entire slice.
For example: Apple is a company that a lot of people highly value, so their pizza slices are pretty pricey. Let’s say its $300 a slice. If you only have $10, but want to buy something, Apple will instead sell you a peice of pepperoni, worth $10, of one of thier “stock” slices. In this way you own a “bit” of the stock.
Bonds: Essentially, this is a fancy I.O.U. that is most typically used by the government. For example: if your state wants to build a new highway but they don’t have the money for it, you can loan them some money via a bond and they agree to pay you that money back with interest.
Mutual Funds: Okay, we’re getting more complicated now. This is where those fancy Wall Street companies will pool investor’s money together to invest in groups of stocks, bonds, and other assets.
Back to our super simple Michael Scott example: Let’s say there’s a lot of people interested in exclusively buying cheese pizza. These fancy Wall Street companies will take everyone’s pizza money and buy select pizza “stock” slices, bonds, etc. that are only from cheese pizza companies, governments, etc. All of these different purchases form the cheese pizza mutual fund that is managed by that fancy Wall Street company, and anyone else interested in cheese pizza can buy in.
Exchange-Traded Funds (ETFs): This is very very similar to how a mutual fund is set up. The main difference is that it can be bought and sold much like the way a stock can on the stock exchange (i.e. the individual pizza market).
Retirement Investing
Individual Retirement Accounts (IRAs): This is a type of savings account with tax advantages that is designed for long-term investing. There are many different types of IRAs that you can choose from based on your needs, like traditional IRAs, Roth IRAs, and SEP IRAs. Money typically can’t be withdrawn before 59.5 years of age without heavy penalties. So, it’s best to leave your money here to grow over time.
401(k): This is a retirement savings account with tax advantages that is offered by companies as a benefit. When you sign up for a 401(k) with your employer, you select a percentage of your paycheck to be paid automatically into your account.
What’s important here is that some companies will offer match contributions—this is also free money! Make sure that you are maxing out your employers match!! (i.e., if they will match 6%, make sure you contribute at least 6% of your paycheck)
Next Up, Money Principles to Live By!
Well, there you have it friends! Thank you for attending personal finance 101. You are one step closer to that beautiful money makeover glow.
Next, we will dive into the key money principles that will help you save for your goals, grow your wealth, and build the lifestyle of your dreams. Are you ready??
Stay Stellar,
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