Personal Finance Is Complicated

Good personal finance habits are acquired through education and experiences. Drozd Irina/Shutterstock

Personal finance can be complex and challenging. It takes diligence, determination, and discipline. It also takes knowledge and understanding, without which we find ourselves being caught and trapped without the money to pay for the car repair, without enough saved for retirement, with too much debt to make all the payments, without the ability to help a loved one who also desperately needs financial help from us.

Good personal finance habits are acquired through education and experiences. In fact, it will be the mistakes you make that will teach you the most when it comes to money management. The investment that was popular and had so much momentum that it seemed everyone was getting rich … until you finally jumped in. The house you bought because even though you couldn’t afford it, you didn’t want to watch prices continue upward, and you figured you could use the future newly accumulated equity if you ever found yourself in trouble making the mortgage payments. The car that could only be afforded with an 84-month lease or payment plan.

There is nothing here that you haven’t seen or heard before. Yet each is a pillar and foundational to your quest to become better when it comes to matters of money. The primary categories below each contain an observation of where most people tend to fall far short or even fail. An awareness of the pitfalls and mistakes just may be enough to help you avoid falling into these traps.

Budgeting

Keeping track of income, expenses, savings, and investments aligned with your customized goals and objectives is really all that budgeting entails. The worst thing you can do is fail to have a budget plan, as many do. The second worst failing is to have a budget-lite or unrealistic plan that is superficial, optimistic, and ignores risks and emergencies.

A well-structured personal budget typically includes the following:

• Income from your job or jobs, freelance work, investments, rents, interest, and other sources.
• Housing, mortgage payments, rent, electricity, water, gas, internet, and phone bills, maintenance and repairs.
• Insurance premiums for health, auto, home, and property.
• Monthly payments for loans, credit cards, and other debts.
• Food and household supplies.
• Transportation expenses, including gas, the various forms of public transit, and maintenance costs.
• Dining out, movies, events, and subscriptions. Costs for hobbies, sports, and other leisure activities.
• Purchases of clothes and accessories.
• Savings set aside for upcoming expenses, vacations, large purchases, unexpected expenses, and emergencies.
• Money set aside for charitable contributions or gifts.
• Out-of-pocket medical expenses, hair and grooming, personal care.

Saving and Investing

The toughest decisions you will make are how much to save and invest, and in what vehicles should you place your investments. The mistakes made most often are too little and too risky respectively. There are various rules of thumb that relate to savings, whether it’s for retirement, emergency savings, or planned large purchases but the consensus is to set aside between 10 percent and 20 percent of your income each month for savings. The personal saving rate recently fell to 3.6 percent, the lowest level in more than a decade. This is simply not going to cut in when people finally retire.

In the past, Americans were taking too little risk when it came to investing. The bank savings accounts that paid 5 percent came at the expense of stock and bond investments clocking in at almost twice that rate. But today, the opposite has occurred. Baby boomers are piling into stocks, gold, and cryptocurrency, and even using their increased home equity to make these risky investments. When you’re young, stocks dominating your portfolio is wise because you have plenty of time to get through the down cycles that inevitably occur. But as you age, you need to move more of your portfolio into high-rated bonds and money market funds to protect your principal investment.

Debt Management

Paying down debt while still saving and investing for the future can be tough. Some debt is unavoidable, such as the mortgage to purchase a home or the loan for a car that you need to get back and forth from work and home. But Americans today simply have gone too far into debt. Literally put your credit cards through a paper shredder. If you can’t pay cash for something, you don’t need it. Not now anyway.

Source: Federal Reserve Bank of New York, Household Debt and Credit Report, Q1 2024

Tax Planning

Tax planning is challenging. From income taxes to sales, gift, and other taxes, the greatest challenges come in the decisions you make as you seek to minimize the overall total taxes you will ultimately pay in your lifetime. Already, people are anticipating the changes in tax code that will come from the new U.S. administration set to take office on Jan. 20, 2025.

Insurance

“Adequate” (or optimal) coverage for health, life, property, and other risks isn’t easy to determine. People tend to be exposed with too little or even no insurance, others tend to over-insure. My own life insurance policy for my three children is age-adjusted. Though I could easily afford the payments while I was younger and working, today my life insurance premiums are beginning to stand out as a relatively high number in my budget that I struggle somewhat to pay each month. And it will only get higher with each passing year.

Balancing these elements requires careful planning, regular monitoring, and making difficult trade-offs. Each person’s financial situation is unique, which adds another layer of complexity. Make the study of personal finance a lifelong pursuit.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.