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6 Steps to Better Personal Finance

Good personal finance habits are essential to wealth building and financial security, not only in good times, but also challenging times.

There are always going to be downturns, setbacks, and challenges that shake our confidence in how we manage our money.

A good money foundation helps maintain that confidence. But what is possible and makes sense in a financial plan will likely differ from individual to individual. Still, there are basic guidelines and principles that are beneficial for most people.

They include:

  1. Keeping to a budget
  2. Paying bills on time
  3. Saving consistently
  4. Managing debt
  5. Having adequate protection
  6. Using professionals

 It's important to know the particulars of each area and how they possibly relate to your own circumstances.

1. Have a Budget

The first is, simply, to have a budget: a running account of what you are making, spending, and keeping over time. Many people don’t. In fact, a 2016 survey by U.S. Bank found that only 41 percent of adults follow a budget.

Budgeting is by far the most emotionally and mentally challenging hurdle of a financial plan, but also the most important because everything starts and ends with cash flow. 

And having a budget may help enforce financial discipline. As paychecks grow with time and circumstances become more comfortable, many people and families allow their spending to grow as well.

A budget is a reminder about priorities and goals. Indeed a 2016 FINRA Financial Capability Study reported that people with household budgets are somewhat more likely than those without to be spending less than their income, 44 percent versus 37 percent.1

2. Pay Bills on Time

Being late on bills results in late fees, damaged credit reports, and, in worse cases, legal trouble.

The most expensive thing someone can do is not pay bills on time. Late fees, interest expenses and other charges can easily add up to a few thousand dollars per year or more. Essentially ask yourself, if this item cost 30 percent more, would I still buy it?

Being on time may result in a better credit rating, which generally makes it easier to get mortgages and loans.

Indeed, paying bills on time was the financial accomplishment Americans were most thankful for achieving in 2018, according to a nationwide consumer poll commissioned by MassMutual.

3. Have a Savings Plan

The importance of savings should be obvious ― you will get old (barring sudden misfortune) and life will throw unexpected expenses your way.

However, MassMutual’s 2018 State of the American Family survey found that only 36 percent of respondents were confident they were doing a good job of preparing financially for their retirement. And a little more than half (52 percent) had less than three months’ worth of readily available savings set aside. Roughly 8 percent had nothing at all.

If you are in that latter group, establishing an emergency fund should probably be the first order of business.

Beyond that is having a plan for retirement. That may include taking advantage of retirement plans that may be available through an employer, which often offer additional matching funds, as well as individual savings and investments. And, whether you are just starting out or trying to build up retirement savings later in life, it’s never too late to start saving. 

In determining your savings plans, also remember to guard against inflation and be mindful of taxes. Keeping your emergency funds in low-risk accounts and retirement funds in tax advantaged investment accounts may be one way to help mitigate such issues.

4. Avoid High-Interest Debt

According to a 2018 State of the American Family survey, those households that reported carrying debt have an average credit card balance of $10,400.

While some types of debt are positive in the long run, mortgages for instance, debt that carries high interest rates, like credit cards, tends to eat away at personal finances. 

That’s because the interest charges, over time, can add up to an outsized bill. For instance, if you spent $50 on take-out using your charge card, but take more than five years to pay it off, the meal actually cost you over $1,000.

So many financial advisors and experts advise people to stay away from high-interest consumer debt and avoid carrying a credit card balance. If you already have a consumer debt load, consider drafting a plan for paying it off.

5. Have Protection Measures in Place

It’s not enough to build wealth and financial security. Once you have it, you need to protect it. That’s where insurance comes into play.

Health insurance, along with insurance for property like your car and home, are protection measures often taken for granted and, in fact, required by law to some extent.

Life insurance may help maintain financial security and stability for your family should something happen to you. Indeed, according to 2018 statistics compiled by life insurance researcher LIMRA:2

  • Almost everyone (90 percent) believes a family’s primary wage earner needs to own life insurance.
  • Over a third (35 percent) of all households would feel adverse financial impacts within one month if a primary wage earner died.

Most adults, 3 in 5 consumers according to LIMRA, own some type of life insurance, mostly through their employer but also individually. But one in five of those people don’t believe it’s enough. 

Disability income insurance  should also be considered as a way of helping to provide income should misfortune strike and you become too sick or injured to work. The Social Security Administration points out there is a one-in-four chance that a 20-year-old today will suffer an illness or accident that will keep them out of work at some point in his or her career.3

6. Use Professional Help

Money matters today can get complicated, especially for those who, perhaps using the suggestions above, have built wealth and started accumulating assets for themselves and their families.

And the rules and laws governing finances ― from taxes to loans to college savings ― can change in a matter of election cycles. That’s why it’s wise to consider working with a financial advisor to obtain professional guidance and investment management that is up to date and aligned to your financial interest and goals. 

Such a relationship can also provide some motivation to keep up your personal finance regimen.

Moving past a financial advisor’s job of having the technical knowledge of personal finance, an advisor is akin to a personal trainer. Think of all the people who sign up for a gym membership in January and print out a workout routine from the internet to do on their own. The vast majority start out great going three days a week, then a little less, then not at all.

However, those who commit to a personal trainer, set clear written down goals, and hold themselves accountable to another person not only keep exercising, but get the results they were looking for. A good financial advisor should fill that same role.

These are simple and, to some, probably the most basic steps. And, as noted earlier, their importance and applicability may differ from person to person. But for most people, it’s the philosophy behind the actual financial steps that are important ― the motivation to make oneself financially secure.

Preparation and practicing fundamental behaviors is key: use a budget, have an emergency savings—start with something small like $500—use credit responsibly, understand bank products and the services you engage in, and have a plan and save for the future. Everyone is capable, they just have to take the steps.

FINRA, “Financial Capability in the United States,” July 2016.

LIMRA, “2018 Life Insurance Barometer Study,” April 9, 2018.

Social Security Administration, Publication No. 05-10570, January 2018.

Provided by Commonwealth Financial Group, courtesy of Massachusetts Mutual Life Insurance Company (MassMutual). ©2020 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001 CRN202012-240772