Knowing how to manage personal finances can sometimes feel like we’re in that recurring dream where we show up for a test only to realize we didn’t study the material. That’s because personal finance 101 was never one of the course offerings for many of us! But there’s no need for nightmares. Consider this your personal finance for beginners cheat sheet, where we cover everything from creating a budget to saving for retirement.

Bonus material: You’ll also learn why credit unions and personal finance are excellent study buddies. Visit your local credit union for low fees, top rates, and even more financial education opportunities.

Set financial goals

Achieving financial success as a newbie starts with defining your goals. What does financial success look like to you? With that picture in your head, you’re more likely to find focus, motivation, and discipline to stay on course. 

Concrete goals prioritize your actions, help foresee potential pitfalls, and reinforce positive financial habits. Here’s how to set them. 

Short-term vs. long-term financial goals

Short-term goals are typically concrete and have specific deadlines meant to be reached within six months to five years. Common short-term financial goals often include buying a new car, saving for a down payment on a house, or funding a vacation.  

Long-term goals are usually broader, with flexible timelines that take more than five years to meet. Financial long-term goals may include:

• Saving for retirement

• Paying off a mortgage

• Opening a business

• Contributing to a child’s college tuition 

Be SMART about your personal finance goals

Whether your goals are short or long-term, many financial advisors recommend creating them using the SMART system. The acronym stands for specific, measurable, attainable, relevant, and timely.

• Specific goals should clearly show the desired result, such as opening a business by age 40 or retiring by age 65 with $1 million saved.

• Measurable goals have benchmarks for gauging progress and seeing where adjustments may be needed.  

• Attainable goals are ambitious but achievable. In contrast, unrealistic goals can become discouraging and may lead to giving up.

• Relevant goals are personally significant. If they aren’t, you won’t be motivated to follow through. 

• Time-based goals have deadlines that maintain a sense of urgency. Having an end date on the horizon can help you feel good about your sacrifices.

Create a budget

Making a budget is critical to achieving financial success as a newbie. Without a plan, you can’t effectively save for the future, pay off debt, or make other major financial decisions. Budgeting helps you to live within your means and monitor where your money is going.

To create an annual budget:

• Calculate your net income, which is how much money you take home after taxes and other payroll deductions. 

• List fixed recurring expenses like your mortgage or rent, car payment, utilities, and insurance. 

• Consult your most recent credit card and/or banking statements to gauge variable expenses like groceries, fuel, and entertainment. 

• Consider your financial goals, like creating an emergency fund, paying off debt, or buying a house. 

• Create a spending plan using your fixed and variable expenses. Cut from variable areas if needed to free up money for financial goals.

Experts recommend spending half of your income on “needs,” like housing, utilities, and groceries. Another 30% should go to “wants,” like entertainment, vacations, and shopping. The final 20% should be channeled toward savings and debt. 

Staying on track is a significant theme in personal finance for beginners. It takes hard work and discipline. But there is an app for that! Many apps categorize spending from linked financial and credit card statements to make tracking easier. 

Manage debt

One primary reason for budgeting is to work toward paying off debt. Eliminating debt is often one of the goals of Personal Finance 101, but it’s important to remember not all debt is bad. Mortgage loans allow you to buy a house and work toward building home equity. Student loans help make a career possible. Still, they must be paid, along with other consumer loans, vehicle loans, and credit cards. 

Many experts recommend paying off your smallest debt first, then moving on to larger loans. Others advise paying high-interest loans first to keep them from growing. Consider consolidating several higher-interest loans for a lower rate if you have several higher-interest loans. 

If you take out a loan to pay other debts, use reputable lenders. Unscrupulous lenders often trap borrowers with high-interest rates or payments that make it difficult to dig out of debt. Paying off credit card debt using other credit cards can have similar negative results. 

Build an emergency fund

Unplanned expenses aren’t a predictable part of your monthly budget but can still set you back. An emergency fund can help prevent a financial tailspin when life happens. 

An emergency fund is a cash reserve to cover unplanned expenses. Every bit of cushion can help. Start with a small amount from each paycheck. For example, you can arrange for your credit union to transfer a recurring amount from your checking account into savings or potentially have your employer divide your paycheck between two accounts. Another option is to set aside unexpected windfalls, like a large tax refund. 

According to Personal Finance 101, it’s best to save enough to cover three to six months of expenses in case of job loss or work interruption. If that’s unattainable, start by calculating the unplanned costs you’ve faced over the past year. This method may not be perfect, but it helps gauge where you’ve been vulnerable in the past and what the price tag may be.

Invest for the future

Investing when you’re young can lead to big payoffs down the road. If retirement is decades away, those are decades your money can grow and accrue interest, too. Starting small is fine. Every dollar counts when it comes to personal finance for beginners. 

Common investment tools include: 

• Stocks in individual companies can be a daily roller coaster but will often pay off over the long haul. 

• Mutual funds are a collection of stocks or bonds that are less risky than individual stocks.

• Bonds are relatively stable investments of money you lend to the government, corporations, or other entities in exchange for accumulated interest down the road. 

• Certificates of deposit (CD) keep your money at the issuing financial institution for a set term in exchange for a higher interest rate.

• High-yield savings accounts give you an interest rate higher than a standard one but lower than a CD. And unlike a CD, you can access your money at any time. 

Choose investment options based on your risk tolerance — the level of risk you are willing to take with your money. Risk tolerance is personal and based on your goals, timeline, and other assets. Diversifying your investments is essential to achieving financial success as a newbie. Spreading your investments among several areas is vital so you don’t lose all your money if one fund, industry, or financial institution suffers. 

Save for retirement

It’s hard to imagine funding retirement if your current focus is reaching the next paycheck. But without savings, you’ll be forced to work as long as you can, rely upon your dependents, and count on Social Security. Social Security is only intended to replace 40% of your income, and that’s today’s calculation. The Congressional Budget Office predicts Social Security will become insolvent in the 2030s. How that will play out is murky, but it’s safe to say that you need other investments.

Retirement accounts are a significant place where credit unions and personal finance come together. Some of the most common ways to save for retirement include:

• Individual Retirement Accounts (IRAs) allow you to contribute money tax-free. However, in most cases, you’ll pay taxes if you withdraw your money early and, depending on the type of IRA, at the time of withdrawal. 

• 401(k) plans allow employees to contribute part of their paycheck to retirement accounts. Your employer may also contribute a percentage to the account.

• 403(b) plans are similar to 401(k) plans but are established for employees who work for not-for-profit institutions. 

• Pension plans provide employer-guaranteed income for retired employees based on their ending salary and how many years they worked for the company. 

Each account type has different benefits, but the most significant benefit comes from starting early. The sooner you save, the more time dividends and interest have to snowball into your accounts. The later you start, the more you’ll need to carve out of your budget.

Understand taxes

You’ve probably already noticed, but the government is taking some cheese out of your paycheck. The feds and many state and local governments take taxes out of your wages, including income tax. This tax and others cover government expenses, goods, and services. 

You can, however, reduce the amount of your income from government taxes through deductions. Deductions prevent you from paying taxes on unrealized gain. At tax time, you can choose a standard deduction or itemize deductions for things like student loan interest, mortgage interest, charitable contributions, and more.  

Tax credits are another way to reduce the amount of taxes you owe. These credits usually encourage specific behavior or benefit those in need. Common tax credits include those for minor children and care of other dependents, qualified undergraduate college expenses, and home ownership. 

Protect your financial future

Once you start working toward financial goals, protecting your investments is essential. Personal finance for beginners includes proactively guarding your assets.  

• Insurance is a critical piece of the puzzle. When you pay regular premiums, insurance companies agree to pay all or a portion of covered expenses. Otherwise, you or your dependents will have to absorb the costs yourselves. Some types of insurance include: 

• Health insurance pays a portion of your medical expenses, such as checkups, lab testing, hospital visits, and prescription drugs.

• Auto insurance protects against losses if your car is damaged or stolen. It can cover medical treatment, rehabilitation costs, and even funeral arrangements for deaths resulting from injuries sustained in accidents. It can also cover damage or injuries you cause.

• Homeowners insurance covers your house, property, and often the belongings they contain in case of damage.  

• Life insurance, in most circumstances, provides a payout to one or more beneficiaries when the insured individual dies.

In addition to life insurance, it is wise to create a will and plan your estate. A will spells out the distribution of your property and care for your minor children in the event of your death. Without a will, assets will go to your spouse or biological children if you have them. Otherwise, the local probate court will decide these issues. Estate planning includes a will and outlines your wishes for your property and medical care if you are alive but incapacitated.

Preparing for every possibility is impossible, but paying down debts and maintaining your residence and vehicles can help keep you agile and ready to adapt. Don’t forget to monitor your financial plan to ensure it’s still on track and adjust for major life changes. 

Further resources on financial success

Getting your finances in order can feel overwhelming. But there’s help along the way: 

• Create a budget. This budget guide from the Federal Trade Commission can help you take your first steps toward financial success. 

• Calculate an emergency fund. Know how much you’ll need in your emergency fund with this emergency fund savings calculator. 

• Win the debt battle. Struggling with debt? Here are tips on how to get out of it.

Credit unions and personal finance: an excellent education 

Consider this guide to be your personal finance 101 syllabus. We’ve outlined the areas to focus on, but there’s plenty more to learn. Fortunately, the experts at your local credit union are like the tenured professors of personal finance for beginners. Find a credit union near you to schedule your ‘office hours' visit today!

Did you know?

Many credit unions offer both savings and retirement accounts at higher interest rates that help personal finance beginners get the ball rolling faster. Unlike large national banks, not-for-profit credit unions are focused on members rather than shareholders, so they can offer better terms on a variety of products that help achieve financial success.