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304 North Cardinal St.
Dorchester Center, MA 02124
Do you need to take your personal finances to a higher level? This personal finance for dummies article is right for you.
Deep down we all want the same thing and that is to not worry about money, because money should never be a problem, but instead an opportunity for us to do more things.
Before making any decisions about your personal finances, you should know where you stand, financially speaking.
Meaning you know where your money comes from and how it exits your bank account. And the way we do this is by creating a budget.
Don’t think of a budget as a bad thing instead think of it as a way of life or a critical part of your lifestyle.
It’s a guide and it guides you through your expenses in your life and it is there to be changed.
It is not set in stone and it adapts and it changes as your expenses and your priorities change.
But having a budget gives you control over your finances. And that comes with a lot of perks.
Creating a budget shows you where you can spend on different areas of your life.
So let’s say you think you don’t have money for investing but then you do a budget and you go over it and it turns out you have a little money left over that you could be WORTH investing. That is something you want to know.
And the most important part is that a budget will help you set your financial goals.
A budget is composed of three parts, and that is your income, your expenses, and your savings. Yes, your savings are part of your budget.
So for step number two you’re gonna create an emergency fund and you want to set this aside in a high yield savings account.
What is a high yield savings account? It is basically a savings account that has a higher interest rate, so you make more money than leaving it in a regular savings account.
If that makes sense. Now a high yield savings account can afford to give you a higher interest rate because most of them are online-based, meaning they don’t have a huge overhead cost and that’s why they can afford to give you more money. You do not want to invest this money because as it’s in the name emergency fund.
It’s for emergencies so you need this money to be liquid and you need to have it on hand whenever you need it. There are a lot of resources online that can tell you which one is the right one for you.
So really quickly I want to hear from you, what are you most excited about when it comes to financial freedom? I know there are a lot of things, a lot of goals that you want to do in life, but what is your goal? Why do you want to be financially independent? Let me know down in the comments box below this post.
In this step, we are going to get rid of debt! YES! Gotta get rid of them.
Now you are going to pay all of your debts except your mortgage because mortgages are huge and they’re going to take a lot longer but every other debt, you’re getting rid of them – car loans, credit cards, student loans, personal loans, anything, and everything. You’re getting rid of them.
Now, this is where the budget comes in. Because you made your budget you know how much money you have leftover in order to pay off these debts. Now there are two ways to pay off your debt: the avalanche and the snowball method. Both of them work, it just depends on which one’s better for you.
Both methods are valid ways for paying off debt. The one that you choose is going to depend on your personality just like choosing the right budget is based on your personality. Choosing the right debt payoff method is based on your personality as well and if you want to know more about choosing the right type of budget, this section is for you.
I’m showing it right here
In this method, you pay off your debt according to balances from the smallest balance to the largest balance. You write down all of your debts and their balances and organize them from the smallest balance to the lowest balance. You then start paying off those debts by using the following method.
Make minimum payments on all of your debts except the one with the smallest balance that one you are going to attack any extra money that you have available to pay towards your debt.
Once you pay off that debt you cross it off the list and then focus on the debt with the next smallest balance. You will throw everything towards that debt now and then.
Pay the minimum amount on the remaining balances so as you can see you are tackling the smaller balances first. Then make minimum payments on all of your other debts.
The benefit of the debt snowball method is that you can quickly see debts falling off your list.
You get a sense of motivation because you feel like you are making some progress.
One of the drawbacks of this method is that you may end up spending more in the long run. Because you’re not focusing on things like the interest rates that you have on these debts.
With this method, debts are paid based on interest rates. So you write down all of your debts and their funding interest rates and then put them in order from highest interest rate to lower interest rate.
Start paying off the debt with the highest interest rate first and then pay minimum payments on all other debts. Throw everything at that first debt with the highest interest rate until you get it taken care of and cross it off of your list. Then you’re going to move down the list in the same fashion as you did with the debt snowball method except in this method you go from the highest interest rate to the lowest interest rate. You’re not going to be focused on the individual balances in this method.
The benefit of the debt avalanche method is that you can ultimately end up paying less over time because you’re getting rid of that high interest.
Now the drawback to the debt avalanche method is that it takes longer for you to see progress.
You won’t see debts flying off your list because you’re tackling debts based on the interest rate and not based on balance.
So here’s the bottom line, if you are a “numbers person” and you are concerned with spending the least amount possible on paying off your debt then you might want to go with the debt avalanche method.
Paying off debt is not fun at all so if you need motivation and want to see those debts crossed out then you might go with the debt snowball method.
Personally, I am a debt snowball type. I like to see those debts getting crossed off and moved off of my list and that just keeps me motivated and excited to keep on smashing my debt.
Those are two methods for paying off debt we’ve got the debt avalanche method and the debt snowball method so stop for a minute and think about which one is going to be right for you.
What the video below to find more about avalanche and snowball
Keep in mind that paying off your debts can take a while depending on how much you have. It can take anywhere from one to five years, so it’s totally okay to take your time with this.
The important thing is that you do it. Let me put it this way, let’s say you’re a mountain hiker and you’re climbing this really steep mountain, but you have this super heavy backpack. It’s like weighing you down, you’re going slower because of it so you stop midway take all the heavy items out and now your backpack is lighter and you can move faster and you can run almost and reach the top a lot faster than you would have if you would have kept the heavy items in your backpack. The heavy items, that’s your debt and the top of the mountain is your financial goal.
Debt only weighs you down and it takes you longer to meet your financial goal. So now that you are debt free, congratulations!
At this point, you’re gonna grow your emergency fund up to three to six months worth of expenses.
The reason we do this is that emergencies are unexpected. You never know when
they’re going to happen, therefore, you have to be prepared so that way if your car breaks down or you get laid off or any emergency happens, you’re good for it.
Because you have a fund specifically for that and it’s not going to alter your other expenses. You’re going to be able to do everything else normally because that fund covered it. You can grow it to more than six months, but typically three to six months is the standard.
And now because you’re debt-free and your emergency fund is ready, you get to invest! And I know you probably thought that investing is the way to make you rich and like that’s the first thing you gotta do. No, personal finance-wise, investing is the last thing you do because you want to have a strong foundation before you start getting into risk.
A common rule of thumb is that you should invest 15% of your monthly income into a tax advantage account.
A tax advantage account is an account where you pay fewer taxes. So this includes 401ks, IRAs, HSAs. All those accounts are in there, those are tax advantage accounts.
Basically means you invest in the market but through one of these accounts so you pay fewer taxes and it’s pretty cool trust me it’s pretty cool.
Let’s say you are maxing out all these accounts, you’re debt-free and you have your emergency fund ready to go and you want to get into riskier things, now it’s your chance. That’s when you can invest in taxable accounts.
You can invest in real estate, a business, whatever you want to do. It’s your money. There are a lot of options when it comes to investing, so make sure you do your research and you pick the investment strategy that’s best for you.
In this personal finance for dummies guide, we looked at these five basic steps you need to take in order to be financially free.
Remember that everyone’s journey when it comes to financial freedom is different. If you take a little bit longer than other people that’s completely okay. You’re on your pace and that’s totally doable and fine.
Financial freedom is so appealing because you have options. You don’t live paycheck to paycheck. To be financially free is when you don’t worry about money but instead view money as a tool to achieve your goals, which is how it should be.