The basics of personal finance generally include budgeting, understanding credit, effective financial goal setting, and understanding investment. A beginner just starting out with personal finance should begin with understanding credit, especially if she has already encountered problems with debt. Budgeting and goal-setting can correct financial problems and help prevent or eliminate acquired debt. Once a budget beginner has a handle on her financial situation, investing can help grow savings to help her achieve her financial goals. Though a person can invest in many different things, common types of investments include stocks, bonds, and mutual funds.
When learning the basics of personal finance, understanding credit means knowing the terms of the credit agreement and understanding the costs of using credit, including the consequences of failing to pay on time. Important aspects include the annual percentage rate (APR) that will be applied to the balance, also known as the principal, and the terms of repayment, including the payment schedule and the fees that will be applied for late payments. When considering the basics of personal finance, requesting a copy of a personal credit report can help identify any credit problems that might affect transactions like real estate and automobile purchases.
An understanding of budgeting is another important aspect of the basics of personal finance. Budgeting requires that a person evaluate all sources of income and monthly bills, known as expenditures, and plan her monthly spending so she can meet her financial goals. It can help a person on unstable financial ground understand where money can be saved by cutting costs or reducing unnecessary spending. Often, a person many not even realize how much money is spent on impulse purchases and disposable luxuries such as daily coffee from retail coffeehouses like Starbucks®. Keeping a budget can help identify financial leaks and habits that add up to an expensive indulgence.
One of the most motivating parts of learning the basics of personal finance, setting effective financial goals can help someone struggling with finances get a clear picture of her financial future. Choosing goals that are emotionally motivating can help the goal-setter fuel a lasting emotional drive to achieve the goals. For people who are married or committed to a life partner, setting financial goals together as a couple helps make accomplishing goals a team effort.
Stocks represent partial ownership in a company, and each unit of partial ownership is called a stock share. When an investor buys a bond, she is loaning money to an entity, often a country or regional government, for a specified interest rate. The money is returned to the investor that loaned it to the entity once the period of time specified in the loan has passed. A mutual fund is a fund in which many investors have pooled their money in order to have a more powerful source of investment capital for investing in more expensive stocks. Each type of investment option carries its own benefits and risks and should be thoroughly researched prior to investment.