Introduction To Personal Finance

15 mins

Introduction To Personal Finance


Here at Finimize, we try our best to demystify the world of finance.

But finance isn’t just about company earnings and mega-merger deals. Finance begins and ends with individual people: and for an individual, the most important thing is your own personal financial situation.

We believe that, just as a company’s finances essentially boil down to a few key principles, so too is personal finance, at its heart, really quite simple.

And so we’ve done the research, put in the hard yards, mined the gems, and cut the chaff to present you with your journey to financial freedom through just a few simple steps.

In this guide, we’ll first focus on getting set and protecting your money: helping you understand what debts are good or bad, and whether you’re saving and budgeting in the best way for you.

We’ll then tackle some of the big questions when it comes to living your life. And finally, we’ll look at how can you go about growing your pot of gold today so that it sprouts a financial rainbow in the future.

introduction to personal finance: clearing the path ahead

Clearing the path ahead

Debt often gets a bad rap – but not all of it’s earned. Some debt can arguably be good – so how can you tell the difference?

Bad debt vs. good debt

As you set off on your financial journey, you’ll probably want a clear path ahead. That could mean getting rid of any outstanding debt. Debt often gets a bad rap – but not all of it’s earned. Some debt can arguably be good – so how can you tell the difference?

Well, good debt provides a financial benefit over and above the money, thereby leaving you better off overall (cha-ching!). For example, once a mortgage is repaid, you’re left the sole owner of a property which can increase in value and potentially generate rental income. Student loans are likely good debt too, since higher education can boost your job prospects and earnings potential.

But watch out for bad debt. It’s all take and no give, in that it doesn’t provide any future financial benefit. Debt-fuelled shopping sprees or luxury holidays – or using credit to pay those bills, bills, bills won’t do you any favours in the future.

Getting rid of bad debt

One simple way to defeat the expensive bad debt beast is to transfer outstanding credit card balances.

Although there are often initial fees involved, some credit cards allow you to move existing debt to a new card interest free (for a while). That should help you pay off your balance more easily – but be careful not to add to it, as you’ll probably be charged interest on new purchases.

For larger or longer-term debts, consolidation might be a better fit. By taking out a single new loan and using that money to pay off all your other loans, you may be able to reduce your interest costs and, again, pay off your balance faster.

Budgeting basics

There are several good budgeting apps out there that can help you keep track of your comings and goings – and when in doubt, you can always go retro with the trusty combination of pen and paper.

No matter your preferred budgeting tool, here are a couple of strategies that’ll help turn those pennies into the pounds, dollars, or euros that’ll meet your financial goals – from buying a house to retiring as you desire.

The approach championed by none other than the “Oracle of Omaha” himself, billionaire investor Warren Buffett, is to pay yourself first.

He suggests putting money from your paycheck directly into a savings or investment account before doing anything else. Of course, leave enough behind to cover your necessary expenses. But the idea is that money out of sight is money out of mind – and is less likely to get splurged on restaurants or sneakers.

And teamwork can make the dream work. Like going to the gym, sometimes budgeting works better with a buddy to hold you to (bank) account.

This will probably require brutal honesty about your spending habits, so your buddy knows what to look out for – but it can provide some seriously good motivation, especially if you’re in it together.

intro to personal finance

Ready for whatever life throws at you

Alrighty, adventurer – now you’ve mastered the basics, you’re all set to continue your journey. Next up: protecting yourself and your wealth for whatever life might throw at you.

Protect: expecting the unexpected

What is an emergency fund?

An emergency fund is money you set aside to cover unexpected financial shocks. Whether it’s losing your phone, your job – or even a few teeth – these events can be expensive as well as stressful.

It’s important to expect the unexpected, and you’ll appreciate saving up for an umbrella when a rainy day rolls along. A good rule of thumb is that you should have three months’ salary after tax set aside to help weather the storm during life’s more testing times.

Sadly, the average Brit has less than one month’s salary set aside for emergencies. And in the US, 20% of people don’t save any of their salary at all.

This can easily lead to rising debt (of the bad kind), because when a financial emergency strikes, you’ll be forced to borrow – ultimately increasing your financial burden thanks to interest payments.

The good news is that you can start building up your emergency fund right now. Putting aside as little as $10 or £10 a month soon adds up. You might want to store your cash in a savings account with “instant access”, meaning you can get hold of it quickly in an emergency – and while it’s sitting there, it’ll also earn you some interest.

Insurance – for when life throws you a curveball

The complex world of insurance is made even more so by countries having different rules for what’s necessary. No matter where you are, however, there are two types of insurance that are particularly worth thinking about.

Life insurance is key for those with people to look after. It protects your loved ones against an even greater financial burden if the worst should happen to you.

Popular options include policies that pay off the remainder of a mortgage; those which promise to pay a fixed amount if you join the choir invisible within a certain period; and those which promise a payment no matter how long you live. A rule of thumb is to insure yourself for 10 times your annual salary.

In the same vein, income protection insurance is designed to step in if you can’t work because you’re ill or injured. For a small monthly fee, it springs into action when you’re out of it, replacing your lost income until you’re back on your feet again (or until the policy ends). That may be especially important if you’ve got mouths to feed in the meantime.

intro to personal finance

Choosing wisely

You’ve navigated your way through debts, budgeting, and protecting yourself against unforeseen circumstances. What’s next?

Live: enabling life's big choices

You’ve navigated your way through debts, budgeting, and protecting yourself against unforeseen circumstances. But what’s financial freedom without the ability to enjoy the spoils of your hard work?

Everyone deserves a small spontaneous treat now and then, which we leave to your discretion; but when it comes to saving for the big financial choices in life, let’s tackle them together…

Saving for goals up to three years away

In general, financial goals up to three years ahead are considered “short-term”. The money for those may be better off in a savings account.

But when saving, remember: the key is to preserve the value of your money. That means not having it eroded by inflation, which is the rate at which the prices of goods and services are rising.

Rising inflation means a dollar, pound, or euro buys less with every passing year. Money earning no interest will lose value over time. For example, annual inflation of 3% would halve the value of your cash in just 24 years.

As you budget and save, therefore, keep an eye out for savings accounts with interest rates that are higher than inflation in order to limit your losses.

What’s the best account for your savings?

Two popular savings options in the UK are fixed-term savings accounts, which are similar to American certificates of deposit (or CDs), and flexible cash Individual Savings Accounts (ISAs), which don’t have a direct US equivalent. The closest is an Individual Retirement Account (IRA) – but more on that later.

With fixed-term saving your money’s locked up – funnily enough – for a certain period of time. In exchange for not being able to access your dough instantly (without incurring a fee), banks will offer you higher interest rates.

What a cash ISA gains in flexibility, it loses in payout. You can add and withdraw money as you wish, but compared to a fixed-term account, the interest you earn is often lower. On the plus side, any interest you do earn on savings up to £20,000 each year is tax-free.

Using your pension to save for the long term

Employees of many companies have the opportunity to get their pension contributions matched by their employers. Depending on the amount of influence you have over it, a pension can be another way of being invested; that money will be put into a fund and managed on your behalf.

You may well be better off maximizing your pension contributions before you do any direct investing yourself – and may want to consider doing so via a self-invested personal pension (SIPP), which gives you more control over how your money’s invested.

You can manage everything yourself, instead of having a professional investment manager make the decisions for you. Managing your pension in this way can become expensive, however – so mind you aren’t stung by high fees.

intro to personal finance

Looking to the future

We’re almost at the end of your journey through personal finance. Of course, true financial freedom is an ongoing journey. And to get there, you’ve got to look beyond the end of the garden path. Looking to the future means saving – and investing – for the long term

Grow: looking over the horizon

What’s the point of investing?

Investing is all about growing your pot of money significantly over the longer term, allowing smallish annual gains to build up into something quite impressive.

Investing will help you meet your medium- (say, three to five years) and long-term (five years and beyond) financial goals. When you invest, you do accept the risk your nest egg might fall in value – but in return, you open yourself up to the potential for much larger gains.

Planning your investment

You should begin by figuring out how much money you have to invest in longer-term goals – remember, this is separate to your emergency fund. If you’ve taken Warren Buffett’s advice to “pay yourself first”, you’ll hopefully have a good idea of how much you can spare each month.

Next, decide the levels of risk you’re willing to take, perhaps based on how soon you might need to access your money again.

In general, the more long-term the investment, the more risk you should be able to tolerate. Because – while things can very much go down as well as up – you’ll have more time to recover from any short-term losses.

Active vs. passive investing

Next, decide whether you want to be hands-off (a.k.a. “passive”) with your investments or hands-on (a.k.a. “active”).

Passive investors, tend to spread their money across a few exchange-traded funds, then sit back and not think about them too much. If the value of the markets you’re invested in rises, so too does your pot of money.

Likewise, when those markets take a downturn, your investment loses value. Passive investors, therefore, are happy to have their investments do just as well as the overall market on average.

Active investors regularly buy and sell stocks, bonds, funds, and so on – aiming to exceed the market’s average performance. Some investors do this themselves – others give their money to investment managers to do so on their behalf, paying larger fees in exchange for the possibility of above-average returns.

Starting to invest

When it comes to buying and selling investments, you have a number of choices.


This is the most hands-on approach, where you select and manage all of your own investments yourself. Many people do this through online platforms (a.k.a. “brokerages”) that give you access to a range of different investments, without advice. If you’re feeling confident in your knowledge of the stock markets, you might jump in here.

Wealth Managers

If you’ve got a pretty large nest egg to begin with, you might go to an independent financial advisor (IFA) or a wealth manager. They’ll take your personal circumstances – risk tolerance, investment goals, and time horizons – into account and recommend some suitable investments. You won’t do any of the buying or selling yourself.

Online investment management

If you don’t quite have enough cash to warrant hiring a wealth manager, but also lack the time to make all your own investing decisions, you might choose to have your portfolio managed online – where investment experts (or computer algorithms, in the case of “robo-advisors”) build a strategy and manage your money based on your financial goals.

You don’t have to pick sides. Instead, you can mix and match – keeping some cash in a bank, some in passive investments, and actively managing the rest. Lots of investors make a few direct investments while also keeping a managed portfolio. For more information on investment strategies, check out our detailed guides on what to look out for and how to get involved.

What about tax?

Ah, tax. Whether you make money via interest or investment gains, you’ll want to keep as much of it as possible – and that means taking advantage of tax-free investment and savings options.

personal finance union jack

For UK investors, any money you make from an ISA will be tax-free. You’re allowed to invest up to £20,000 each year into this sort of tax-free account – and there are different types, depending on your goals:

  • Cash ISAs – which we gave you the lowdown on earlier.
  • Stocks and Shares ISAs offer a tax-free way to invest your savings however you want – they’re especially helpful if your portfolio’s doing well, allowing you to keep more of your gains for yourself.
  • Lifetime ISAs help you save toward your first home or retirement. Note that you’re only allowed to put £4,000 of your annual allowance towards this type of account each year.
  • Innovative Finance ISAs promise no tax on returns from peer-to-peer investments.
  • Junior ISAs allow you to save money on your children’s behalf. These have an annual investment limit of £4,280, which is in addition to your own allowance.

A last word on the ISA: use it or lose it! Your annual ISA allowance can’t be carried over to the following year – so if you don’t use part of it, it’ll disappear when your allowance resets each year.

personal finance usa flag

Americans, we haven’t forgotten about you. Your best tax-light options for the long term (think: retirement) are 401(k) plans set up by your employer and Individual Retirement Accounts (IRAs).

You’re allowed to contribute $18,500 per year to your 401(k) and $5,500 to your IRA. When you’re over 50, that limit rises by $6,000 for a 401(k) and $1,000 for an IRA. (Note that these limits change annually, so as to not leave your ability to save hampered by inflation.)

Aside from its higher limit compared to an IRA, amounts contributed from your salary to a 401(k) can be matched by your employer, effectively doubling your money before it’s invested.

An IRA therefore offers a way to save a little extra for retirement. And the good news is you, can have both. But if you dip into either your IRA or 401(k) before you hit retirement age, you’re likely to face penalty costs.

Traditional vs. Roth* 401(k)

* Don’t worry, Finimizers – we haven’t abandoned our principles and decided to overload you with jargon. “Roth” is just the word bigwigs in the US decided upon to differentiate between the two types of 401(k). Because “version two” was just too mainstream...

The key difference between traditional and Roth 401(k)s is when you pay your tax. With a traditional 401(k), your contributions are deducted from your annual tax bill – while with a Roth 401(k), you make your contributions after Uncle Sam’s taken his cut.

A Roth 401(k) therefore doesn’t give you an immediate tax break. However, when it comes time to withdraw your cash in retirement, you won’t have to pay another dime in tax. So choosing between a Roth and a traditional plan is effectively choosing whether you’d rather pay tax now or when you retire.

If you’re making big bucks now, a traditional 401(k) should mean you end up paying lower taxes, since the money you put into the plan is tax deductible. But if you’re not quite there yet, then a Roth could help you down the line – paying tax today might be worth it to avoid heavier taxes once retired. Of course, paying into both types (within your total annual contribution limit) is an option – a.k.a. “tax diversification”.

You're in the clear

And that’s it. Follow these stages, and your personal finances will be on track to enjoy robust health.

Just remember: the journey of a thousand miles begins with a single step. So whether you’re focused right now on building up your emergency fund or you’re looking at investing for the long term, we hope this guide helps, well, guide you towards personal financial freedom.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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