Financial wellness starts with mastering your personal finances. But what is personal finance, anyway?
The term personal finance refers to short-money management like budgeting, saving and spending. It also pertains to your financial future: how you invest, plan for risks and emergencies, or build wealth over your lifetime.
Why is personal finance important? It helps you manage your day-to-day needs – and plan ahead for future financial events. Here’s what you need to know to budget, save, and build financial wellness with confidence and clarity.
Simply put, budgeting is creating a plan for how you’ll spend (and save) your money. It involves tracking your monthly income and expenses, and strategizing how you’ll pay for the things you want and need.
Budgeting is important because it helps you get the most out of your money. A well-designed budget ensures the bills get paid and keeps you on track towards your financial goals.
There’s no one-size-fits-all approach to budgeting, but there are some universal basics. For starters, you’ll need to get clear on your monthly income and expenses. How much money is coming in the door each month – and where is it headed?
Your gross income is your total compensation before taxes and other paycheck deductions. Your net income is your actual take home pay. This includes any money you pocket from side-hustles, commission, and work bonuses.
Understanding your gross monthly income will help you budget and plan for loans and lines of credit. If you’re a salaried employee, divide your annual salary by twelve to calculate yours (Ex: $40,000/year ÷ 12 = $3,333).
If you’re paid by the hour, multiply your hourly wage by the number of hours you work each week, and multiply the total by 52. (Ex: $15/hr x 40 hours/week x 52 = $31,200/year) Divide by twelve to find your monthly gross income.
You’ll also want to understand your net income, or how much money actually ends up in your pocket. To find yours, calculate how much money gets deducted from your paycheck each month and subtract this from your monthly gross income.
Once you’ve identified your monthly net income, it’s time to take a look at your expenses. It can be scary to crunch the numbers, but it’s an important part of financial wellness. Calculate your fixed and variable monthly expenses to get a clear picture of how you spend money.
Any bill that stays the same each month is considered a fixed expense. For most people, this includes rent or mortgage payments, phone bills, installment loans, and insurance premiums. Fixed expenses are predictable, which makes them easy to factor into a budget.
Variable expenses change from month-to-month. They include things like gasoline purchases, credit card payments, home maintenance costs, and leisure spending. Since variable expenses are less predictable, it’s smart to budget on the high-end. That way, if you spend less, you can redirect that money to your savings account.
Once you understand your personal finances, a budget helps you allocate your income wisely. Different methods work better for different people, but there are a few tried-and-true approaches.
The basic rule of the 50-30-20 budget is to split up your after-tax income and spend: 50% on needs, 30% on wants, and put away 20% for saving. Of course, with rising costs of living and inflation rates, you may have to tweak the numbers based on your reality.
Zero-based budgeting earmarks every dollar you make – whether for bills, debt payments, leisure spending, or your savings account. The goal is that your income minus your expenditures equals zero by the end of the month.
The envelope budget system is another time-tested method. It’s simple: label envelopes with specific monthly expenses – like loan payments, rent, or membership fees – and split your cash into each on payday. You can also take this system digital with envelope budgeting apps like Myvelopes and Goodbudget.
Mint is a simple, straightforward personal finance app great for anyone new to budgeting. Its easy-to-use money management features include: personalized budgets; automatic spend tracking: and financial goal-setting.
Honeydue is a free app that makes it easy for couples to link and track financial accounts, collaborate on bills, and manage their shared spending and saving.
With StellarFi,, you can manage your bills on one platform and pay them on time. StellarFi pays your bills on your behalf, then reports your positive repayment history to credit bureaus to help improve your credit.
What is personal finance? It’s making the most of your money – and budgeting is one of your most powerful tools. With a well-structured budget, you can identify ways to reduce your expenses, spend less money, and take control of your money mindset.
Reducing your expenses creates extra wiggle-room in your budget. You may: cancel rarely-used memberships and subscriptions, switch to a better insurance policy, or refinance your credit card debt.
Review your budget to determine where you’d like to spend less. Get an idea of how many times you order in, go shopping, or go out each week – and try to cut that number in half.
The best way to stick to a budget is to reframe your money mindset. Money is a mindset, so focus on the benefits of financial wellness: set clear goals; think more deeply about your spending; be more realistic with your needs and wants; and recognize the emotional benefits.
Saving money is central to financial wellness. It reduces the burden of unexpected expenses, gives you greater peace of mind, and helps you avoid taking on debt. A healthy savings account creates the financial freedom to pursue your goals and create your ideal future.
What is a personal finance goal? Any future goal that you need money to achieve. This could be purchasing a new car, improving your credit to obtain a home loan, or saving for a vacation.
When you’re setting a financial goal, it helps to get as clear as possible. That’s where S.M.A.R.T. goals come in.
Savings accounts don’t build credit directly, but they improve your financial stability. This makes it easier to use credit responsibly, which benefits your score in the long run.
A healthy savings account makes it easier to stay on top of bills, even in a financial crisis. And if you use your savings to make larger down payments, you’ll pay less interest every month – making it easier to pay your debt.
While it’s good to do both, focus on improving your financial wellness. For instance, you’ll rarely earn more on savings than you pay on toxic debt. If you have high-interest loans and credit cards first, you may want to pay those down first. On the other hand, if your debt is very low-interest, building a nest egg could be the smartest first step.
Even once you understand what personal finance is and why it’s beneficial, it can be daunting to develop new habits. Keep these quick tips in mind to build your savings:
Read more: How to stop spending money
Simply put, personal banking is banking for people. It refers to all the services banks create and provide to individuals and families rather than businesses.
Banking centralizes your personal finances. Your accounts let you organize, track, and access your money. You can use different services to spend, save, and access lines of credit. Money in a bank can’t be lost or stolen like stowed-away cash – and you can even earn a small profit on your savings.
Picking a bank can be daunting, and you may feel wary or reluctant – especially if your community has been harmed by financial discrimination. But choosing the right bank creates a strong foundation for financial wellness.
Consider the following:
A checking account is one that money flows in and out of regularly. But not all checking accounts are the same. You may have a regular-old traditional account, a premium account with added perks, or a special account if you’re a student, senior, or business-owner.
High-yield checking accounts pay interest for meeting transactional requirements. Most pay at least 2% APY with the top-payers exceeding 4%. The catch? You have to follow all of the requirements to earn your monthly interest.
You can’t answer the question “what is personal finance?” without understanding savings accounts. Savings accounts are a place to store money you don’t intend to spend immediately, and earn a little interest while you’re at it.
You can keep your money in a traditional or high-yield account, money market, certificate of deposit (CD) or cash management account. Each has its unique perks and parameters.
Current national average savings account interest rates are at historic lows, around 0.06%. But some online banks offer rates several times higher – so shopping around can be a smart personal finance decision.
Simple interest is paid only on the value of deposited funds. Compound interest is calculated based on the principal and all accumulated interest in the account.
Continuously compounded interest means there’s no limit to how often interest can compound. The balance is constantly earning interest, which is added to and increases the overall balance, earning interest exponentially.
One good place to put money for compound interest is a Certificate of Deposit (CD). CDs are issued by banks and generally offer higher interest than savings accounts. In return, you agree to leave your money deposited for a certain amount of time.
Banks aren’t just a place to keep your money, they can help you budget too. You can set balance alerts, automatic transfers, and even spending limits.
Try the Three Account System: open one account for fixed expenses, another for savings, and another for variable spending. Divvy up your paycheck into each on payday.
Most banks offer online banking tools, which can be handy for building credit. Automated billing ensures you pay your bills on time, avoiding late fees and negative marks on your credit. Some solutions even turn automated billing into a credit-building tool. Check out Stellar to learn more.
There’s no one answer to the question “what is personal finance?” Every aspect of how you manage your money comes into play. When you budget wisely, set smart savings goals, and using banking to your benefit – you improve your financial wellness for the long haul.
But all of that is only just the beginning. Using credit responsibility helps you build a positive credit history. And when you have good credit, you can access the funds you need – when you need them.
With StellarFi, you can build credit with the bills you pay each month already. Sign up and start building a positive credit history with your monthly rent, cell phone payment, and even that Amazon Prime subscription.
Getting started is easy!
The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.