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Personal finance basics: Here's where to start

At a glance:

  • Setting personal finance goals

  • What are short-, medium, and long-term financial goals?

  • How to build a financial action plan

  • Saving and investing to meet your financial goals

  • How small changes add up to big savings

  • Summary of personal finance basics

  • Practical ideas you can start with today

Personal finance is economics on the family and individual levels. Get a basic introduction to it in this tutorial. Learn about goal-setting, financial action plans, various investments, and how small, everyday choices impact your financial life.

This tutorial is ideal for those seeking a good foundation for more in-depth personal finance topics.

Setting personal financial goals

If you do not know where you are going, how will you know when you get there? This is very true about financial goals. You need to set financial goals to help you make wise financial decisions, and also as a reward for your efforts.

Goals should be clear, concise, detailed, and written down. Unwritten goals are just wishes. Those who set goals and fail often find that they didn't set realistic goals to begin with.

So, the first step in setting any goal is to determine what is realistic and what is not. In this article, you will learn how to set realistic and achievable financial goals.

How you achieve your goals

You achieve your financial goals when you have the cash available to satisfy some immediate financial need, want, or desire. The key is to be prepared to have the required cash when the time comes to achieve the goal.

For example, suppose you want to buy a brand-new car costing $30,000 using cash five years from today. In five years and one day, you will know whether you achieved that goal. If you have the $30,000 five years from today, you have achieved your goal. That is all pretty definite, but is it realistic?

You will have more than one financial goal to achieve. Besides the new car, you might be considering buying a home, funding higher education, paying for a wedding, taking a vacation, or accumulating retirement nest savings. Each financial goal has its own price and time horizon—when you need the money.

You should have a plan

In order to achieve all your goals, you will need a plan. Starting from what you already have available, you will need to determine how much more you need to accumulate and when you will need it.

Don't neglect to consider that the price of your goal items might actually increase as well. Depending upon how you invest your savings over time, you might receive interest, dividends, or gains to help you along—you should consider this as well. Do you have the means to make additional investments necessary to accumulate the required wealth? Don't neglect to consider the effects of taxes on your savings.

After considering the foregoing, you might determine that you can achieve some goals in less time. Or you might find that it could take longer. The time horizon is important to setting realistic goals.

What are short-, medium-term, and long-term financial goals?

Consider the time element

Consider how important it is to achieve your goals on time. Some goals are so important that not achieving them would be not only disappointing, but also disastrous.

When a goal must be achieved by a specific date, you must plan conservatively, save more money, and take less investment risk to help ensure against loss. However, if the timing isn't as important or if you have discretionary assets and can take some investment risk, you might be able to invest more aggressively.

Let's say you needed to save an additional $15,000 in five years to buy the car mentioned above. After five years, you only manage to accumulate $27,000—you're $3,000 short of your goal. So, it will take you longer to buy the car.

Had you invested more aggressively, you might have made the goal, but you might also be worse off. In this case, let your risk tolerance help you determine your time horizon.

Short-, medium-, and long-term goals

Goals should be grouped as short-term (three years or fewer), medium-term (three to seven years), and long-term (more than seven years). Generally, the longer the time horizon to achieving a goal, the more aggressive you can be in your investment approach.

However, you should never exceed your risk comfort level—the amount of risk you can take without abandoning your goal. This is your risk tolerance. If you approach setting financial goals in this way, you will make better financial decisions about setting goals and ways to invest to potentially achieve them.

You should always monitor your goals to be sure they are on track. Set up a way to measure your progress. If you see that you are lagging behind, you may need to make an adjustment in the amount or way you are investing. If you are way ahead, you may want to be more conservative, shorten your time horizon, or add a new goal.

How to build a financial action plan

A note about writing your goals: It's not enough to say something like "I want to have some extra spending money." Goals like this fail because they are not specific. To really work, they should specify three things:

  • What the goal is

  • How much money is needed for it

  • When the goal is to be achieved

In our example, we should say: "I want to save an extra $40 at the end of every month to spend on what I want." That is not only specific, but it can be measured at the end of every month. Of course, it should also be realistic and attainable.

Here is a sample financial action plan:


  • Goal: Save $40 at the end of every month to spend on what I want.

    • Task 1: Make a budget.

    • Task 2: Look for less expensive alternatives to existing expenses. For example, eat out two fewer times per week and save $10.

    • Task 3: Divert the amount of money saved into a separate place.

  • Goal: Save $1,000 for a different car by 10 months from now.

    • Task 1: Make a budget.

    • Task 2: Cut out unnecessary expenses; perhaps $100 per month.

    • Task 3: Take on a part-time or temporary job to raise the needed money.

    • Task 4: Divert the amount of money saved into a separate place.

  • Goal: Pay off a $1,000 balance on a credit card in 12 months.

    • Task 1: Determine the amount that must be paid each month (online calculators can help with this).

    • Task 2: Set aside that amount each month by cutting out unnecessary expenses.

    • Task 3: Take on a part-time or temporary job to raise the needed money.

  • Goal: Create an emergency fund of $5,000 in 24 months.

    • Task 1: Reduce the phone bill, cable bill, eating out bill, and other bills by $208 per month.

    • Task 2: Divert the amount of money saved into a separate account, such as a savings account.

The owner of this plan should monitor it at the end of every month to make sure it is on track.

These examples are simple, but they are the kinds that millions of people struggle with. As long as you make your goals specific enough to be measurable and you set specific actions down in writing, you have a working financial action plan.

As the time frame of your plan goes on, you will want to review and revise it, based on how well you are sticking to it. If you are not sticking to it, perhaps you were unrealistic, or perhaps there were interruptions that prevented you from reaching your goals. In that case, you can revise your plan and continue with it.

Consider using the example above as a template. If you wish, you can and should embellish it to include how you will measure your progress. You can even add a reward at the end.

Saving and investing to meet your financial goals

Personal finance helps you make better savings and investment decisions because it focuses on your goals.

Your budget (or spending plan) should be built around your day-to-day expenses, including your short-range lifestyle and financial goals. These may include your goals for your family's well-being, shelter, food, clothing, and recreation. It should also provide for future personal lifestyle and financial goals as well.

Savings and investments are designed to help you reach your goals

Savings and investments should be used to match your short-, medium-, and long-range financial goals. You save and invest for a purpose, not just to accumulate great wealth. In fact, you save and invest for many purposes, and how you save and invest depend upon the purpose.

For example, if you need to replace a household appliance costing a few hundred dollars in the next 12–18 months, you will save differently than you would if you were saving to pay for a child's education in 10–15 years.

To make these decisions, you need to understand the relationship among investment risk, time horizon, and investment reward.

The reward for risk

Investors are rewarded for taking investment risk. To encourage investors to take higher risks, the potential rewards must be higher for those higher-risk investments.

You can spread investment risk over many different investments. This is called diversification. (There is no guarantee that a diversified portfolio will protect against loss, enhance overall returns, or outperform a non-diversified portfolio. Diversification does not ensure against market risk.)

You can use this relationshi in making savings and investment decisions—low risk for short-term goals and higher risk for longer-term goals.

How small changes add up to big savings

Building wealth is a daunting task for many because they see it as looking up a tall mountain and thinking it's too high to climb. But the truth is, even putting aside small amounts can add up to something big.

Small, periodic expenses on discretionary items like coffee, candy, and fast food (and the sales taxes on them) can add up to a lot. If those expenses were saved and put into an account that earns interest, dividends, or capital gains, the results over time could be substantial.

Learn more about the risks of investing.

  • Investing involves risks, including fluctuation in value and possible loss of principal.

  • Generally, greater volatility means greater risk.

  • No investment provides guaranteed returns.

  • You should consider your risk tolerance, investment horizon, liquidity, and other personal factors before purchasing any investment product.

What it means

This need not mean that you must deprive yourself of the little things in life. Rather, it is just an example; it means to look closely at your spending by tracking it for a while, see where you are leaking money needlessly, and make changes to your spending.

Many an investor has built wealth by doing just that—all without suffering much deprivation in the process. It's about full awareness of where your money is going.

The next step is diverting these small amounts into savings or investments where they can grow in value or earn interest, capital gains, or dividends. With compounding, the earnings can add up even faster. In fact, for many people the lost earnings are the biggest casualty of not saving and investing more.

It’s a starting point

Saving small amounts here and there is not what investing is about. Rather, saving small amounts here and there is one starting point for gaining the discipline to control your spending.

A good way to find out where you can make changes is to track your expenses for a month. Record every single penny spent. Check any online bank accounts to see if withdrawals are being made that you are unaware of.

Most people are surprised to find expenses they can cut out—without depriving themselves of the little things in life. The drive to save is much stronger when you first establish a goal that you want to work for—retirement, a house, a small business, a hobby item, etc.

How much can you save by making small spending changes?

So-called "latte factor calculators" that you can find online let you plug in the numbers. For example, spending $3 every other day over the course of 10 years could instead become over $7,200 if put into an account earning 6% interest (compounded annually). This figure includes over $1,700 worth of interest alone. Is what you are spending money on periodically worth losing all this potential interest?

Of course, interest rates change, prices change, spending habits change, and time periods change. You probably cannot predict with certainty the amount that you will save, but you can see that small changes do indeed add up. That's the point.

And you can still splurge on your favorite things (more so once you have built up a good savings), but you may need to scale it back or cut out other expenses. Going cold turkey could backfire and prompt you to binge-spend at inopportune moments.

Here's what you should know about personal finance. (Graphic: Hannah Smart/Cashay)
Here's what you should know about personal finance. (Graphic: Hannah Smart/Cashay)

Summary of personal finance basics

Personal finance uses the process of personal financial planning to help you develop a spending plan around your lifestyle and financial goals. It helps you set realistic goals and budget to meet them while managing your savings and investments.

With this in mind, we'd like you to think about crafting a personal financial action plan, perhaps using the ideas explored earlier.

Practical ideas you can start with today

  • List your financial goals, the date you want to accomplish each goal, and the dollar amount of each goal.

  • Match each of your short, medium, and long-term financial goals with a specific portion of your savings or investments.

  • Determine how much you should save to meet your goals.

  • See how you can allocate my assets.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Planning section

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