Personal Finance and Budgeting

Budgeting

• A budget is a plan for how to allocate income towards expenses, savings, and debt repayment
• 50/30/20 rule: 50% for necessary expenses, 30% for discretionary spending, 20% for saving and debt repayment
• Categories to include in a budget:
  • Income
  • Fixed expenses (rent, utilities, insurance)
  • Variable expenses (groceries, entertainment)
  • Savings
  • Debt repayment

Saving

• Emergency fund: 3-6 months' worth of expenses set aside for unexpected events
• Types of savings:
  • Short-term (less than 1 year)
  • Medium-term (1-5 years)
  • Long-term (more than 5 years)
• Compound interest: earning interest on both principal and accrued interest

Debt Management

• Types of debt:
  • High-interest debt (credit cards, personal loans)
  • Low-interest debt (mortgages, student loans)
• Debt repayment strategies:
  • Snowball method: paying off smallest balances first
  • Avalanche method: paying off highest-interest debts first
• Debt consolidation: combining multiple debts into one loan with a lower interest rate

Investing

• Types of investments:
  • Stocks
  • Bonds
  • Mutual funds
  • Exchange-traded funds (ETFs)
• Diversification: spreading investments across different asset classes to minimize risk
• Dollar-cost averaging: investing a fixed amount of money at regular intervals, regardless of market conditions

Credit and Credit Scores

• Credit report: a record of an individual's credit history
• Credit score: a numerical representation of creditworthiness (e.g. FICO score)
• Factors affecting credit score:
  • Payment history
  • Credit utilization
  • Length of credit history
  • Credit mix
• Good credit habits:
  • Making on-time payments
  • Keeping credit utilization below 30%
  • Monitoring credit reports for errors

Budgeting

• A budget is a plan that allocates income towards expenses, savings, and debt repayment
• 50/30/20 rule: allocate 50% of income towards necessary expenses, 30% towards discretionary spending, and 20% towards saving and debt repayment
• Budget categories: income, fixed expenses (rent, utilities, insurance), variable expenses (groceries, entertainment), savings, and debt repayment

Saving

• Emergency fund: 3-6 months' worth of expenses set aside for unexpected events
• Types of savings: short-term (less than 1 year), medium-term (1-5 years), and long-term (more than 5 years)
• Compound interest: earning interest on both principal and accrued interest

Debt Management

• Types of debt: high-interest debt (credit cards, personal loans) and low-interest debt (mortgages, student loans)
• Debt repayment strategies: snowball method (paying off smallest balances first) and avalanche method (paying off highest-interest debts first)
• Debt consolidation: combining multiple debts into one loan with a lower interest rate

Investing

• Types of investments: stocks, bonds, mutual funds, and exchange-traded funds (ETFs)
• Diversification: spreading investments across different asset classes to minimize risk
• Dollar-cost averaging: investing a fixed amount of money at regular intervals, regardless of market conditions

Credit and Credit Scores

• Credit report: a record of an individual's credit history
• Credit score: a numerical representation of creditworthiness (e.g., FICO score)
• Factors affecting credit score: payment history, credit utilization, length of credit history, and credit mix
• Good credit habits: making on-time payments, keeping credit utilization below 30%, and monitoring credit reports for errors

Learn how to create a budget, allocate income, and manage expenses, savings, and debt repayment. Understand the 50/30/20 rule and the importance of an emergency fund.