Effective personal finance requires a strategic approach, and financial analytics plays a crucial role in making informed decisions. By leveraging financial analytics tools and techniques, individuals can gain insights into their spending patterns, investment performance, and overall financial health. Analyzing income and expenses through the lens of financial analytics enables better budgeting, goal-setting, and the identification of areas for potential savings or investment optimization. In essence, integrating financial analytics into personal finance empowers individuals to navigate their financial journey with precision and confidence.
Goodness, have you seen how few Americans have enough saved for retirement? How about how few Americans can handle a sudden expense of a few hundred dollars without taking out a loan? Or how about how many Americans-
Woah, okay, enough. We get it. What can we do about it? Well, we can ditch regular IRAs for Roth IRAs! Stay away from stocks and invest in bonds! Or we can wait a few days and read that we should ditch Roth IRAs for regular ones, stay away from bonds, and invest in stocks!
It sometimes seems that newspapers and magazines run two types of financial articles: one decrying the average American’s poor financial knowledge and another designed specifically to confuse the average American. Forget the paranoia and the complexities. Instead, learn the basics.
Budgeting and saving money
The way to build wealth is to spend less than you save, of course. How can you do that?
Simple: you make a budget.
Start with how much you make per pay cycle, how much of that is withheld for taxes (check out the array of Taxcaster free tools for a little extra help figuring out your taxes), how much rent you pay (over that same period), and how much you spend on other non-negotiable expenses, like loan payments and health insurance premiums.
If you’re already in the red, you need to make changes. Are you spending too much on rent? Do some research on how much people of your means usually spend in your area (there are general rules about how much of your salary you should spend on housing, but if you live in a big city like New York, they are impossible to abide by, so it’s best to look at local standards). Can you get a better job? Refinance your loans?
If you have a surplus in your budget, your first priority is saving. Open a bank account at a local bank or credit union. Don’t keep your money at home – money decreases in value over time, so anytime your money is sitting around and not earning interest, you are becoming poorer. So get to the bank! You’ll need a checking account for your expenses, but as soon as you can, try to open a savings account as well (the interest is better).
If you’re saving a good chunk of your money – say 10%, at least – you can now budget for everything else, including your fun!
Now that we’re on to spending, we can consider credit cards. Credit cards are good, but be careful! Credit card companies make more money on interest than they lose on perks like cash back (if they didn’t, they’d go out of business). Pay off your bill every month in full so that debt does not build up. If you do accrue credit card debt, it will rise very, very quickly. If you think you can’t handle a credit card, don’t get one.
Let’s say you’ve been saving for a while and have a decent chunk of money – a few thousand more than you really need for upcoming expenses and potential emergencies. It’s time to talk briefly about investing. Savings accounts are better than checking accounts because of their higher interest rates; for higher interest still, investments are essential. You won’t get rich quickly from most (safe) investments, but you can get rich slowly!
Investments use the power of compounding interest to grow your money over time. Interest gives you a certain percentage back on the money you have in the stock. Compounding interest refers to what happens when you invest that interest right back in: you’ve increased the amount of money in the investment, so even if you make the exact same interest this year as you did last year, you’ll make more because the amount you have in the stock is higher this year (thanks to last year’s interest). Over time, this can mean big bucks!
Stocks can go down, of course, so invest wisely. Leave some money in your savings account and put some more in safer investments, such as index funds (which track various measures of the entire market) and bonds (which can be less volatile than stocks, especially in the case of short-term bonds). Put only some of your money in volatile stocks and decrease that amount as you get closer to retirement. A financial advisor can help you here.
Once you have a good amount saved in traditional investments, you can diversify with other types of assets. Some people own valuable minerals like gold bullion; others invest in real estate, collectibles, foreign currencies, and more. It’s never a bad idea to have your money spread out a bit because your risk is higher when you rely entirely on one type of investment.
Tax-free retirement funds
Saving in a traditional brokerage account (that’s what you’ll need to own stocks and bonds) is a good idea because you can always pull the money out when you need it. But you should also consider saving in a tax-free retirement fund. For employees, this is a 401(k); for independent contractors, you’ll use an IRA. Both of these put your money in investments. Put in as much as you can, but remember to save in your bank account as well, because you may need money for a future expense, and penalties from drawing early from tax-free retirement funds are quite steep.
You’re ready to save
That’s all there is to basic personal finance! Make more than you spend, save the difference, build a nest egg in your savings account, and invest a good portion of your money in the stock market through regular and tax-free accounts. If you do all of this, you’ll be in good shape – and in a better mood when you read those finance magazines and newspapers.