The Basics of Personal Finance 🧮

The term, personal finance, is an extremely broad one... which could theoretically incorporate just about anything relating to your money!

With such a wide scope, you may not feel all aspects are immediately relevant to you 🤯 But by the end of this article we hope you’ll see how they are all inherently linked, and form part of a lifelong strategy aimed at providing for yourself and your loved ones.

Given we’re talking about personal finance, it also stands to reason that there is an element which is… well, personal! What’s right for one person might not be equal priority for another, but by learning the underlying principles we hope you’ll be in a position to understand where the focus of your attention should be for your particular stage of life 🎯

But before we launch into a discussion on personal finance basics, we’ll begin by clarifying exactly what the term might mean for everyone 👨‍👩‍👧‍👦

What is Personal Finance?

When we talk about personal finance, we’re actually just referring to the process of managing your own money.

This could include everything from getting out of debt, creating a budget, sticking to a savings plan, and ultimately making sure that you’re able to provide for yourself and your dependents.

But this isn’t about simply making ends meet this month, or even this year. The aim here is to ensure you’re able to finance the lifestyle you desire over the entire duration of your life. Yep… that’s all 😯 Easy, right?

How to Organise Your Personal Finances

If that all sounded a bit daunting to you, then we have great news to share! None of this stuff is especially hard... but proper financial planning requires some thought and a few tough choices in order to help you attain your long-term goals 👴

If you’re a millennial, planning your retirement funds or making provision to help pay for your child’s higher education may seem a distant concern… even more so if you’re still in your 20s! However, doing so now may be the only way to guarantee you have the money to achieve what matters to you (both now and in the future).

If money were no object then you could employ a professional financial planner for this task… but you’re already saving money if you can do this yourself!

The Importance of a Budget in Personal Finance

If you have an underlying feeling that you’d like to improve your money management, then step one is to get an accurate read on the current situation. Many people fall into poor financial practices not through lack of ability, but because they’ve been unwilling to face (potentially) ugly truths, and create a plan to make things better.

So whilst the idea of pouring over your bank records and credit card statements may not sound like your idea of a holiday 🏖 This is the only way things are going to improve. Time to take some short-term pain for long-term gain!

How to Create a Budget

The initial task is to look for any immediate savings… the low hanging fruit 🍒 A good way to look at this is to consider any savings here to be like earning more to begin with. Yep, this is as close to free money as you’re likely to get!!

You may see a recurring payment being taken from your current account / checking account that you don’t recognise. And even if you do remember what the subscriptions are for, now’s an opportunity to cancel any that you're not using.

Next up are any regular bills, like utilities (gas or electric), for example 🔌 There are many services online that will allow you to compare and switch in minutes, and Plum can even do the searching for you! When looking at ‘earnings’ per minute, this is one of the best uses of your time going.

You could stop here and feel content with a job well done… but now you’re on a roll, why not also take stock of how much you spend on travel or buying lunch. With the figures in front of you, it can be surprising just how quickly they add up.

Not everyone can ditch the train and cycle to work instead 🚴‍♀️ but most people can easily save £20 per week by taking a packed lunch with them 🥪

The Secret to Budgeting

Come close and listen carefully. We’re going to let you in on a little secret. There’s one guaranteed, sure-fire way to boss your budget. Interested?

Ok, it’s this. Keep your spending less than your earnings! 🤔

More Pro Budgeting Tips

As we’ve already established, personal finance needs to be just that... personal to you and your specific situation. But there are also a few general guiding principles that can provide a helpful rule-of-thumb to use as a starting point.

If controlling your spending is your biggest challenge, then you can curb your desire to splash the cash by using the ‘30 Day Rule’. Quite simply, when the desire to impulse buy strikes, you just walk away from the situation. Make a note of the date and the thing you want to buy, and then revisit the decision again… you guessed it, in 30 days! 📆 If you still feel the same way, the chances are that you won’t regret your purchase if you do then decide to make it.

When working out your budget and calculating how much of your after-tax income to allocate towards needs, wants, and savings, the ‘50/30/20 Rule’ gives a useful suggestion as to how your money should be apportioned 🧀 The catchy name is derived from the fact this rule suggests 50% for essentials, 30% for the nice-to-haves, and the remaining 20% for your future (be that saving, or paying off debt).

Now that you’ve decided on the correct amount you should be saving, the question remains of how you ensure you stick to this exciting new budget. One way to make sure that you tuck money away (even when you’re not thinking about it!) is to automate savings. This topic is one close to our heart. In fact, we’re so passionate about it that we wrote a whole article on the subject of automated savings alone.

How to Tackle Debt

You should now have a decent understanding of your current financial situation. That’s the homework bit done… now time to implement some positive action!

For people struggling with problem debt, it can start to feel like a weight around their neck that can have a severe impact on their happiness and health. If that feeling is all too familiar, then you’ll appreciate the importance of clearing it once and for all.

When addressing any outstanding debt, the priority should be to begin with that carrying the highest interest rate and / or fees (when combined, referred to as the ‘Annual Percentage Rate’, or APR) 💳 Normally this is credit card debt (i.e. a rolling credit card balance that you’re struggling to clear), or an overdraft.

If you have numerous different loans / debts, then it may be worth refinancing to consolidate them into a single loan, with a lower interest rate / APR.

What About Student Loans?

If, like a lot of people, the only debt you’re carrying is your student loan, then you may need to do a few more calculations before deciding on your approach.

Because there are different loan repayment rates, depending when you studied and how much you’re earning, the ideal solution will not be the same for everyone.

Broadly speaking though, student loans are one of the cheapest ways of borrowing, and so it may not make sense to immediately pay yours off… even if you have the spare cash.

It may actually be possible to earn a rate of return from your money that is enough to offset the interest on your student loan, meaning that your money could be better placed elsewhere for as long as this is the case 📊

What Is an Emergency Fund?

When talking personal finance, you’ll often hear people refer to something called an emergency fund. This is simply a readily accessible store of money that can be used to cover short-term living expenses, should something unforeseen happen 🔮

The precise amount will be dependent on each individual, but the widely accepted wisdom is that your emergency fund should cover your basic living costs for 3–6 months (up to 9 months if you work freelance, or your income is less regular).

The intention is that having this buffer of an emergency fund will greatly reduce your chances of plunging into problem debt in the event that you lose your job, or if you have to suddenly pay for, say, expensive car repairs 🔧

A key aspect worth reiterating is that your emergency fund should be available to you at immediate notice. You need to be able to lay your hands on it quickly and easily if you do happen to fall on desperate times.

For this reason you should think about keeping this money in a regular savings account. These types of savings accounts are notoriously low-interest (a reflection of the flexibility they offer), so whilst it’s still worth shopping around to try and get the best deal, don’t be tempted to lock your money away to get a better rate ✋

The Importance of Controlling Credit

With your debt cleared, you’re now set for a fresh approach to managing credit. We’d like to put on record, once and for all... credit is not the devil 👹

It’s ok to have a credit card, and there are many situations where they can be extremely beneficial. But this section is all about forming good credit habits, so if you do decide to use a credit card, then you should make sure that balances are paid off each month, in-full (as opposed to paying the minimum amount).

If things are tight it can be very tempting to slip into bad habits, but it’s important to remember that when you only clear the minimum payment on your credit card... it means you’ll be paying an extortionate interest rate on the balance for the rest of the month. And this is where credit can get out of hand, really quickly! 🤯

Why You Should Check Your Credit Score

It’s sometimes essential to rely on credit. Unless you’re planning to buy a property outright (in which case, go you 🎊), then you’ll probably need a mortgage to do it!

Your ability to obtain credit, and the terms on which it’s offered, will be dependent on prospective lenders reviewing your credit score.

This credit score is simply a numeric display of what’s in your credit report (which gives the specifics of how you’ve managed credit in the past).

Although that is consistent, it’s worth noting that there’s no industry accepted way of calculating a credit score… so the same person would get different scores depending which credit reference agency they used. The number itself is therefore relative to the provider who calculated it, however ludicrous this may sound 🤷‍♂️

As part of a holistic approach to personal finance, it’s good practice to keep track of your credit report and credit score. You don’t need to obsessively check them 😳 But at least be aware of how this information can help you get more favourable terms, like better interest rates, or access to more credit (to use sensibly!).

Are You Ready to Retire Early?

With life expectancies rapidly extending and state pensions struggling to provide for an ageing population, the importance of a personal pension plan has never been greater.

Whether you’re aiming to live the highlife in retirement… or just want to ensure that you’re not a burden on your children, your pension is a way to do this.

Thankfully, if you’re in regular employment (i.e. you don’t work freelance) and you don’t specifically opt-out, it’s now compulsory for your employer to enrol you in a workplace pension scheme. Most importantly though, your employer will also contribute towards your pension too! When this is combined with additional government tax relief, it could mean that you effectively receive double the amount deducted from your pay packet.

Is it Time for You to Invest?

If you feel like you have your day-to-day life under control, then it’s time to start thinking a little more long-term. Any debts should be paid-off in full, and you should have an emergency fund close at hand for a contingency plan ☂️

If you’d like to try and grow your money over time, then consider investing. There are many strategies when it comes to investing for beginners, but the best approach for young people is simply to start as early as possible!

As long as you’re certain that you won’t require access to your money in the foreseeable future, then investing it early could be a wise move because it allows you to take advantage of compounding.

Compounding is the process whereby earnings from investments are reinvested (and the long-term effect can be both surprising and powerful) 😯

Note: Your capital is at risk if you invest. Past performance is not a reliable indicator of future results

When opening your investment account, a cash ISA or stocks and shares ISA are often considered a good place to start due to the tax-free allowance on earnings that all adults in the UK are given (subject to an annual cap).

If you’ve never invested previously, putting your money into stocks and shares may initially sound intimidating. But there are ways to easily do this without having to actually pick specific stocks, such as investing in mutual funds.

These funds are professionally managed portfolios, normally put together around specific sector themes (such as ‘Emerging Markets’) or risk levels (like ‘Slow and Steady’). Ultimately though, they are designed to help diversify your investments to spread risk, by ensuring that the value of your investments is not closely tied to a specific company, industry, or geographic region.

Nothing is Certain… be Sure About Insurance

With your pension prioritised and your investments in order (check out the new Wolf of Wall St.) you’d be forgiven for thinking that your finances are fully finessed. But there’s one more aspect to address for maximum peace-of-mind.

As we’ve seen so far, personal finance has much to do with simply planning. It's about considering what your priorities are in life, and making preparations that will help you achieve them. But what about the things you can’t plan for?

The final step in your journey to financial mastery is to provide protection for you and your family 👨‍👩‍👧‍👦 It’s not a nice thought, but sometimes bad things happen to good people… and that’s where health insurance or life insurance comes in.

It’s compulsory to have car insurance, and your landlord or mortgage provider may insist you take out renter insurance or buildings / contents insurance, but you should also consider safeguarding against sudden death or illness.

When it comes to selecting the correct policy for you, the two main aspects to consider are the policy value and the policy term (both the policy value and policy term will be heavily dependent on your personal circumstances).

If you’re in a regular, full-time job, then your employer may offer some form of basic life insurance that covers simple funeral costs. But if you have a family to support, then it’s probably wise to put additional protection in place.

Determining the value of your life insurance policy can seem daunting. You'll likely want to assure your family a certain quality of life, should the worst happen… but just how much is enough when it comes to insuring your life?

A helpful rule of thumb when deciding on the value of your life insurance policy, is to ensure that your family could live off the interest from the potential payout. You can the reverse engineer this to calculate the appropriate amount 🧮

When looking at the type of life insurance, there are a couple of broad choices to consider. Term life insurance will cover you for a specific period of time, whilst whole life insurance will provide a specific amount (with a cash value).

Finally… Finances Feeling Fine

If you made it this far... then congratulations 🎉 You should now have a solid understanding of the basic principles of personal finance!

Not all of the sections covered may be relevant to you and your life at this time, but hopefully (no matter what stage of life you’re in) you can see how they link together and form a lifelong approach to managing your money.

The cycle of borrowing, debt, and less-than-ideal financial choices can quickly spiral out of control, and make managing money feel like a black art.

But by following these principles in order of priority it is possible to turn any situation around… no matter how bleak it seems. Being mindful of the choices you’re making and whether or not they’ve brought you closer to the life you want is much of the battle.

Finally, remember that life is a mystery to be lived, rather than a problem to be solved 🤔 At Plum, we’re all about promoting sensible choices, but maintain your personality (and sanity) by having fun from time-to-time. If the slog of saving is getting you down then there are lots of great ways to have fun with no (or at least very little) money.

If you'd like to learn more about Plum then you can check out our website.

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Your capital is at risk if you choose to invest and as with all investments, the value can go down as well as up. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.