I love hearing from readers, and I always learn when I hear from them. I’ve learned that everyone is so unique in terms of our understanding of personal finance, where we are in our journey and also what we really value in life. I’ve also learned that it’s what we value in life that will ultimately determine where we go on our financial journey, and how we get there. Finally, I am frequently reminded that it’s important to ensure that all readers have access to the same financial principles and basics. So whether you’re a long-time reader with your black belt in personal finance (BTW there’s no such thing…alas) or a newbie, let’s dive into the basics of personal finance! 

How to earn money

Ah, perhaps the not so fun part of personal finance; actually working and earning the money. While there are basically limitless ways to earn money in terms of the work that you’re doing, they’ll primarily fall into one of two categories – either as an employee, or self-employed. Sometimes the lines can be a bit blurred for when you feel like an employee but are treated for tax purposes as self-employed. The differences will come around tax time, if you’re an employee you’ll get a W2 and if you’re self-employed, you’ll get a 1099. The big gotcha is around the social security + Medicare tax, which is around 15%. If you’re employed (W2), your employer will pay half, but if you’re not (1099), you’re responsible for all 15%. Outside of that, employers will potentially offer benefits, like retirement or health insurance. However being self-employed often comes with more perceived freedom to be your own boss, work your own hours and earn all you can. 

As an employee, you’ll get paid on a regular basis, potentially weekly, bi-weekly, or monthly. Your employer will deduct an appropriate amount of tax withholdings (based on the amount you tell them to), the mandatory taxes (social security and Medicare) and then the benefits for which you take advantage of (retirement contributions, health insurance etc). If your self-employed, it’ll depend on how often you get paid by your customers! This amount will likely come by direct deposit, or will come in the form of a physical check. 

How to budget money

I always say that if I could only recommend one thing for personal finance success, I’d recommend a budget. A budget is not a limiting tool that takes all your fun away, a budget is a tool that tracks your income and spending, and helps you meet the financial goals you are setting. 

There are lots of budgeting tools out there, ranging from the high tech (Mint.com, EveryDollar, Personal Capital) to the low tech (spreadsheets). The best budgeting tool is the one that will work for you. Try a few out and find the one that a) is easy for you to use b) is one that you’ll keep up with and c) one that helps you track towards your goals. 

Simply put, your Income should equal you Saving/Investing + Spending. To put it another way, don’t spend more than you earn. You do this by having a good tracking system for what you’re earning and what you’re spending. If you’re getting started out, try following the 75% rule, which means you save/invest/give away 25% of your money and live off of (i.e. spend) the rest. Whenever you can, try to setup automatic transfers for yourself to make that 25% as mindless as possible – and so that you’re not tempted to spend it otherwise! 

How to spend money

This is going to be a short paragraph as I feel confident in each of our abilities to spend money. Of course back to the previous section, don’t spend more than you’re earning on a regular basis, and I recommend saving up for bigger purchases instead of going into debt for them. Debt is a powerful tool, one that can be used for good or bad, so handle it carefully!  

The other piece of advice I’d give is to spend your money on things that will provide happiness or create a memory. Too often we spend our money on stupid stuff that quickly fades away or that we forget about. I’ve done way too many goodwill trips just giving away old stuff. Spend your money on quality things, or memories and experiences. For Mrs. Money and I we love to travel, and so we save our money up for trips. Those memories last a lifetime for us. 

How to invest money

Most of us don’t want to work forever, and will need to save for retirement. Saving for retirement most often means investing it through a tax-advantaged plan (why pay taxes if you don’t have to) and investing in the stock market. You’ll never see a decent enough return on money in your savings account, and it probably won’t even keep up with inflation. 

In terms of investing, I recommend keeping it simple. As sexy or as fun as it is to invest in high flying (high risky) stocks, more often than not things won’t work out well. I keep most of my investing money in a low-cost index fund. It’s not super exciting, but it on average outperforms picking individual stocks and requires much less thinking on your part. If you don’t have a brokerage account (where you buy stocks), you can easily open one online, either through your bank or through a site like Vanguard, Charles Schwab or E*Trade. Once you’ve got that open, search on the site for ‘index funds’ compare their fees (the lower the better) and start stocking your extra investing money there. It can be that simple!

How you pay taxes   

Ugh, no one likes paying for taxes but hey, I’m sure thankful for things like roads, schools, police and firefighters. There are a few different types of taxes – federal, state, maybe city and then residential and automobile. Each has their own nuances for how they are calculated and how they are paid. The more common ones you’ll definitely be running into are federal and state taxes. You’ll most likely utilize software (like H&R Block or TurboTax or something else) as that makes the entire process so much easier. It’s important to note that federal law mandates that if you have an adjusted gross income (AGI) under $72,000, you must be offered the ability to file for free. AGI is defined as your total income minus adjustments. Tax filing software often charges, $50, $100, $200 to file, so if you don’t have to pay, don’t! 

There are lots of deductions available to you, some offered through your employer (like health insurance, retirement contributions), and some offered through the state (i.e. BabyMoneyFinance has a 529 college plan that I deduct from state taxes), or even on your own (charitable donations or an IRA – individual retirement account). A little research on your options could help you save big come tax time! 

Summary

Personal finance isn’t something that can be covered all in one blog post, but I hope that this overview summary is a great starting point! There are plenty of other articles on this blog (going on 9 years of them!) so please stay and check around!