You might think of your personal finances as mainly your banking activities or your investments, but it's a much broader topic than that. Personal finances include your banking, budgeting, credit management, home loans, and much more -- to position yourself for maximum financial security and a comfortable retirement, you need to be making smart choices in all aspects of your financial life.
Here's a quick overview of some of the key areas of personal finances. It can give you a rough idea of how well you're managing your money.
The first thing to get right when it comes to your personal banking is to choose and use the bank that's best for you. Your main contenders may all seem the same and may mostly do the same things, but there are still some critical differences, such as fees, interest rates, and convenience. If you won't be keeping much in your account, or you won't have many transactions per month or year, you might get whacked by some high fees or low interest rates. Some banks levy "inactivity" fees, too. Determine exactly how you will be using your bank, and then shop around to see which one will serve you best while charging you relatively little. If you'll be writing a lot of checks, find out how much that will cost you. If you will be maintaining a high-balance account, seek solid interest rates. Consider credit unions, too, as they will typically offer just about all you need, often while charging lower fees and paying higher interest.
Bank safely , too, especially if you're banking online. Paying bills online is a great convenience, but it carries some risks, too, if you're not careful. For starters, have a robust password, not just your childhood pet's name. Keep your mobile devices locked, and don't enable automatic log-ins. Don't conduct business on an unsecure Internet connection, either. Cellular connections are preferable, or a secure home Wi-Fi network with a strong password of its own.
Budgeting gets a bad rap, sounding terrible boring. But it can actually be a fascinating exercise to figure out exactly where your money is going and how you might tweak your spending in order to reach your goals.
Start by keeping track of every dollar you spend, for at least a month. Total spending by categories such as housing, food, transportation, utilities, entertainment, debt repayments, healthcare, taxes, savings, and more. Be sure to add in less regular expenses, such as insurance payments and subscriptions, travel, or membership fees.
Once you're done, evaluate how well your spending habits are helping you meet your goals. For example, are you saving as much for retirement and/or college expenses as you need to? If not, study your spending and see where you can make some changes. Perhaps you could brown-bag a few lunches per week, or drop cable TV while keeping your streaming services. Figure out how much you should and want to spend on each category and then keep within your limits. People who grow wealthy over time generally live below their means.
How well you manage your credit can have a huge impact on your financial life, thanks to your credit score. A good credit score can help you snag better interest rates, among other things, which can save you tens of thousands of dollars on a mortgage and a lot of money elsewhere, too.
Roughly 90% of lenders will check your FICO credit score, and per the folks at MyFICO.com, here's the kind of difference your credit score makes in the interest rates you're offered. When I checked it recently, it showed that if you were borrowing $200,000 via a 30-year fixed-rate mortgage, and you had a top FICO score, in the 760 to 850 range, you might get an interest rate of 3.642%, with a monthly payment of $914 and total interest paid over the 30 years of $129,046. If your score was 650, though, your rate would be more like 4.685%, with a monthly payment of $1,035 and total interest of $172,770. That's $121 more per month ($1,452 per year) and a whopping $43,724 more in interest.
Keep your credit score high by paying bills on time and keeping your debt load in check. If your credit is poor, know that you can improve it. Millions of people have.
Homes and mortgages
When it comes to buying a home and taking on a mortgage, there are many mistakes to avoid, such as buying more home than you can comfortably afford, and not shopping around for the best mortgage deal you can find. A solid credit score will help you get offered good rates, but you also need to decide whether you want a 15-year or 30-year loan, and a fixed-rate mortgage or adjustable-rate mortgage (ARM). Longer terms will give you lower payments, but you'll pay much more in interest over the life of the loan. If you're not comfortable with the payments a 15-year loan would demand, consider getting a 30-year loan that permits prepayments and then aim to pay significantly more than you need to each month, in order to shorten the life of the loan.
If you're not planning to be in the home long, an ARM could serve you best in today's low-interest rate environment, as it can lock in low rates for a few years. If you think you'll be in the home for decades, it can be better to lock in a low rate for the life of the loan.
There's a lot you can learn about a wide range of personal finance topics, and the more you learn, the more you'll likely save and earn. Making smart financial choices throughout your life can lead to a happier life.
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