Personal Finance Basics 101- The Very Essentials
Personal finance is an incredibly vast topic that demands a minute study of several books to get a fair idea of the subject. And so, trying to distill the most critical parts of this essential part of our daily lives without running into a 100-pg eBook is an arduous task. Nevertheless, the difficulty has never stood in the way of attempts to overcome the same, and so this attempt to acquaint you with personal finance basics in an easily digestible manner through a long-form blog post on personal finance. This post collects various personal finance blog topics to give you a bird’ eye view of the topic. So, without further ado, let’s start with the task at hand.
The Basic Components of Personal Finance
Four basic parameters determine your financial health or the lack of it. These are as follows:
· Income
· Investment
· Savings
· Debt
· And lastly, Net Worth.
Things You Must Do To Ensure Proper Personal Finances
· Make a budget
· Make it a point to continue to save and invest even during periods of economic downturn
· Document finances diligently and accurately
· Make sure your credit score is healthy
· Appoint a person who shall have a financial power of attorney, just if things go wrong.
· Allocate a portion of your IncomeIncome into an emergency fund
· Get insurance for things like health, property, car, life, disability. You may want to choose an umbrella insurance policy to get some additional savings.
· Make A Will
Emergencies
One critical period where all your finance wisdom that you have gathered from blogs posts on personal finance like this comes into its own is during an emergency. Such emergencies might occur both on an individual as well as collective levels. A health breakdown is an example of the former, while bears and bulls cycles in the stock market are instances of the latter.
When You Need Cash Fast
One of the most typical problems people face worldwide during a crisis is the lack of available cash. But, don’t sweat just yet; the following are some excellent ways to get that extra boost in your cash reserves:
· Conduct a backyard sale and get rid of valuable but unnecessary items or things
· Borrow money
· Make yourself push that extra bit and earn an additional amount. If possible, do two jobs, you won’t believe how many people do it.
Debt Management
We can’t overstress the importance of preventing Debt from spiraling out of control. You can achieve this in several ways, even when you are pressed for funds. These are as follows:
· Switch from a loan with a relatively higher interest to one that with a lower one
· Engage in debt settlement opportunities
· Be a part of specialized debt relief programs
Financial Literacy
When you are talking about personal finances, we assume that you possess some amount of financial literacy. Don’t fret if you don’t; this essential glossary accompanying this blog post on personal finance will get you up and started:
Retirement Planning- In a time past us employees would rely on pension plans to help them make a living during their retired life. However, these days, of the best possible bottom lines for businesses, financial instruments like 401(k) plans, tax-advantaged savings accounts, and open IRAs have taken their place. People wondering what those are will find this resource from CNBC to be helpful.
Bank Account- A bank account is a basic necessity that enables you to save, invest and spend money. Among the several types of bank accounts; the most widely found are:
· Savings account
· High-yield savings account
· And checking account
Cards- Cards serve as a proxy of carrying real money with you and are, as a result, they are almost indispensable online transactions. There are two basic types of cards viz:
· Credit Cards (You borrow the amount and payback later with or without interest)
· Debit cards (You spend the amount from your existing bank deposit)
Please note that the convenience of credit cards comes with a significant disadvantage in the form of a balance. This balance accumulates when you fail to pay back the borrowed money. With each month of late payment, the financial institution that gave you the card will charge interest on your borrowed amount. Credit Cards usually come in four flavors, which are:
· Cash-back cards
· Travel rewards cards
· Low-APR cards
· Balance transfer cards
Budgeting And Investments
Budgets are essentially comprised of three factors to consider as most blog posts on personal finance focussing on budgeting will indicate-
· IncomeIncome
· Expenditure
Just letting your savings sit there without allowing it to earn you more is simply bad personal finance. So here we come to the core idea behind making the most of your savings- making your existing money earn you more money. And the way to achieve this is through investments.
Investment Mediums- In terms of the medium you choose to invest through, you have three options at hand:
· Full-service broker
· AI / Data powered Robo-advisors
· Online/discount broker
Investment Options- Your Investment is usually in one of the following forms. Each of which is a significantly large-scoped personal finance blog topic to deserve a post on its own. Nonetheless, to summarize:
Stock- Almost all blog posts on personal finance point out that several terms are used synonymously with stocks, like equity or shares. The main thing about owning stocks is that it doesn’t give them the leeway to act at their discretion with a company or its assets. Having stocks do, however, give you voting rights in shareholder meetings. Stocks also provide the owner dividends. They are a part of the profit made by the company and are paid out as and when the company distributes them. Additionally, shareholders can sell their stocks to other people. The last thing that you must keep in mind about stocks is that their prices fluctuate throughout the market’s working days.
ETFs- ETF is an acronym for exchange-traded funds. There are many similarities between what people refer to as mutual funds and ETFs. But there are significant differences that we need to be aware of. ETFs have relatively more minor risks than stocks. While both are listed on a particular stock exchange, the latter comprises many securities. So, in most cases, when the value of some stocks goes down, others go up. This helps to maintain a balance.
Mutual fund- Mutual funds are a type of investment spread over a portfolio of promising stocks and other securities like bonds. The tremendous financial benefit that mutual funds extend to the ordinary investor is that it gives them access to managed portfolios. Such portfolios are not only diversified but maintained by expert professionals. And the investor gets access to such specialized expertise at a relatively low cost.
One important thing to note about mutual funds is that such stock ownership does not grant voting rights. It is technically not just one holding but an investment made in a wide range of stocks and other securities. One crucial distinguishing factor between an ETF or stock and mutual funds is that the former are traded throughout the day. In contrast, you can redeem mutual funds only after the end of the trading day.
Bonds- Bonds are a form of security that various institutions like municipalities, businesses, governments provide to raise the money for multiple projects and operations. Bonds are essentially financial sums that you lend to an organization that is issuing the bond. Such organizations borrow these funds by promising to repay the amount along with its interest.
Wealth Management
The highest possible level of financial planning is wealth management. The term itself is usually used to describe the activities carried out by a personal finance firm. Besides comprehensive management of a person’s wealth, it also encompasses tax guidance, financial advice, estate planning. Some firms offer legal assistance too as part of their wealth management services. First, however, you need to be aware of the distinction between asset management, wealth management, and portfolio management. Wealth management is the most comprehensive service among the three and often includes one or both within its scope.
Owning Your Own Home (Home Ownership)
Home is very much where the heart is, and in these days of remote work, your home has transformed into a home office. You need to exercise great caution and discretion while choosing a home for you and your family.
The primary financial instrument that lets most homeowners enjoy the privileges of having their own homes is the mortgage. So now, let’s discuss this personal finance blog topic in detail.
Mortgage
A home loan or a mortgage finances your home, letting you pay off the amount across a period. That means that you don’t have to pay for the entire price of the house right up-front, which makes it possible for a large number of families to enjoy the comforts of a self-owned home. However, some terms refer to mortgage components that you cannot simply do without.
Key Mortgage Terms
· Down payment
· Loan amount
· Loan term
· Interest rate
The typical mortgage loan is a fixed-rate loan with a repayment period of 30 years. Such fixed-rate home loans are also referred to as an FRM (Fixed-Rate Mortgage).
Characteristics of the Typical 30-yr FRM
· 30 years loan term or time to pay back the borrowed amount
· Fixed interest rate loans
· Equal monthly payments, i.e., they remain the same
However, according to most blog posts on personal finance and mortgage, you should be aware of the other options at your disposal. The variable parts are usually the loan term and whether the interest rate is fixed or adjustable. Accordingly, some homeowners might find a 15-yr adjustable-rate mortgage to be more suitable for their purposes. But the 30-yr FRM is very much the most popular option as the payments are usually affordable and, of course, predictable.
Mortgage Options Open To You
Sometimes, it just so happens that you decide to or need to move and naturally sell your home. If there is still a portion of the borrowed amount that remains unpaid, the lender will deduct the amount from the money you make by selling your mortgaged home. Another critical option worth being aware of is a mortgage refinance. Through this, you switch the existing type of loan to another one or choose a loan with a lower interest rate. In such cases, mortgage refinance is likely to be beneficial in financial terms.
Types Of Mortgage Loans
There are plenty of personal finance blog themes centered around real estate and mortgage. Here basically, we will discuss the four types of mortgage loans briefly on offer in the US. These are discussed in brief below:
Conventional mortgage loans — These are the typical mortgage loans that almost all lenders offer. From the point of view of the terms and the requirements for availing of the loan, it is indeed very flexible. However, you should know that such conventional loans are not government-backed. Aspiring homeowners with good credit scores and making a moderate to large down-payment usually prefer this loan type. Such down payment usually is in the 5%-20% range.
FHA loans — The Federal Housing Administration has a particular mortgage loan backed by it. It is meant for aspiring homeowners who have fair or poor credit and low to medium income levels. However, due to the flexibility offered by the loan program and low down-payment requirements, the loan program is popular amongst people with high credit scores too.
VA loans — The Department of Veterans Affairs offers its own VA mortgage program intended to make affordable housing easy for service members or veterans. But you need to qualify for the loan by having the required service history. You can get desirable loan offers with zero down payment and minimal interest rates if you meet this requirement.
USDA loans — The Department of Agriculture of the federal government offers USDA loans backed by it. Using such loans, low- or medium-income people can buy homes in rural America with zero down-payment and attractive interest rates.
Mortgage Qualifications
Different criteria decide whether you are eligible for one or more of the loans mentioned above. One such criterion is minimum credit score eligibility. The exact figures might vary accordingly to the particular lender, but on average, the required credit scores are as follows:
· VA loan: 580–620
· Conventional loan: 620
· FHA loan: 580
· USDA loan: 640
Down-payment requirements are as follows:
· VA loan- 0% down-payment
· Conventional loans- 5%-20% down-payment
· FHA loan- 3.5% down- payment
· USDA loan- 0% down-payment
Closing Costs
Yet another vital factor to consider is closing costs. When we talk about closing costs, we refer to the totality of fees involved when the mortgage started. It also includes the costs associated with transferring the ownership of the house to the borrower. Such charges are distinct from the amount you set aside as a down payment. The typical closing costs of mortgage remain in the 3%-5% range.
Mortgage Refinance
As we mentioned earlier, at times, refinancing your mortgage might be a suitable option for you. There are a large number of reasons that make a mortgage refinance attractive in certain situations. Some of the more prominent refinance options are as follows:
Cut Down On The Monthly Payment- You can choose to extend your loan term duration or go for a mortgage with lower interest rates. Both help to cut down on the monthly payment you are required to pay.
Leverage Your Home Equity- You can choose to borrow more than the due loan amount while refinancing your mortgage. If you decide to tread this path, the lender will check for the additional amount. This financial option is known as a cash-out refinance. It is not unusual to find such refinances being accompanied by relatively lower interest rates.
Repay the Loan Faster- Refinancing also lets you cut down the loan term from a long-term mortgage of 30 years to a significantly shorter period of, say, 15 years. That means that if your finances become better sometime after taking the loan, you can indeed pay the due amount faster without having to pay the entirety of the unpaid amount.
Dispose of Mortgage Insurance That Is Mandatory for FHA Loans- If you have a mortgage backed by the FHA, you must pay the insurance premiums for the loan. There is only one single way to get rid of it, and that is by selling your home or refinancing the mortgage once you have acquired adequate equity.
Change Your Adjustable-Rate Loan To A Fixed-Rate Loan- Adjustable-rate mortgage interest often goes up according to the present home finance policy and other relevant factors. In contrast, fixed-rate loan interest rates remain the same irrespective of market conditions and government policies.
The Six-Step Process To Refinance Your Mortgage
The mortgage refinance process typically consists of six steps which are as follows:
Decide What You Want To Achieve With The Refinance- Mortgage refinance begins by determining what you intend to achieve with the same. For example, you need to decide whether you want to cut down on the loan term, decrease monthly payments or dispose of FHA mortgage insurance necessities.
Look For The Best Rates and Fees- The next thing to do is to compare the various refinance rates offered by different lenders along with the associated fees. Of course, you want to opt for the best offer.
Apply For Mortgages With 3–5 Lenders- It will be prudent for you to submit your mortgage applications to at least 3–5 lenders. Here’s a Pro-tip; make sure to offer all applications within a 14 day or 2-week period. This will ensure that your applications have minimal effect on your credit score.
Decide On Your Lender of Choice- To arrive at the best mortgage offer, you must carefully scrutinize and compare the Loan Estimate document. Each lender will provide you with one upon application. This document will also make you aware of closing costs.
Lock Your Mortgage Interest Rate- Locking an interest rate simply means agreeing that neither party can change the interest rate for a specified period during that duration. Therefore, it is only natural that both borrowers and lenders try to close the loan before this locked rate period ends.
Close The Loan- When you are finished repaying the amount you borrowed to buy your home, you need to pay closing costs. These are specified in the Closing Disclosure and Loan Estimate documents. For the most part, refinance and purchase loan closures are more or less the same.
Home Equity
The difference in the present value of your home and the amount you still owe the mortgage lending institution is what the term home equity refers to. For example, a home worth $100,000 with a due amount of $40,000 gives you a home equity of $60,000. You can boost your home equity by paying more of your mortgage. If real estate prices rise and your home acquires greater value, your home equity will also witness an increase. The best blogs on personal finance also inform you that home equity needs do not necessarily rise at all times. For example, sometimes, the price drops at faster rates than the value you add to your home equity through repayments of the principal balance.
Use of Home Equity
· It is precious and lets you borrow cash against it, which you can use for renovations and other costly purchases or opt for alternative debt repayment.
· The credit lines and loans granted against home equity usually have lower interest rates than other personal loan types.
· The sums granted to you through a home equity loan are lump sums with a fixed interest rate.
· On the other hand, credit lines issued against home equity are revolving or work like a credit card and can be used per need and distribution.
Foreclosure
The term refers to the legal process a lender follows to recover the amount they owe a borrower when that latter defaults on loan repayments. It is accomplished by first taking ownership of the property through a due legal process and then selling it. The mortgage document determines the situations and conditions when a lender might proceed with the same.
Taxes
Almost all of us know about taxes, and we pay them even if our Income doesn’t come under the taxable bracket. Taxes are another common personal finance blog theme. Everyday goods that we buy include taxes within their prices. Here is some essential tax information.
· All governments collect mandatory taxes.
· In the US, the IRS is responsible for collecting federal income taxes.
· Taxes are present in a variety of forms. Most taxes come in percentages of monetary exchanges, like when you earn or sell a product.
· Other taxes such as property tax are determined as the assessed value of an asset you hold.
Federal Taxes
Now let’s briefly go through federal taxes:
· The Federal Government has federal income tax as the largest revenue source.
· The Federal government spends this Income for a wide range of public interest purposes. Such purposes include creating and managing existing infrastructure, improving education, providing relief during natural disasters, and public transportation.
· Don’t confuse income tax with federal income tax. Nine US states don’t have separate income taxes.
· Through proper understanding of tax triggers, people can keep taxes at a minimum.
Property Tax
The last aspect of taxes without which a discussion of the same remains incomplete is Property Tax. The must-know parts of such taxes are as follows:
· Many state and national governments impose a tax on personal property distinct from income or capital gains taxes.
· Real estate is not personal property and is considered to be real property. Valuable items that you own, like cars and boats, are what we refer to as personal property.
· The state and local governmental bodies that impose property taxes use it for public welfare purposes like funding roads and schools.
· The taxed property and the tax rates vary according to location.
Tax-Related Investments
It is more important for people who fall under higher tax brackets to pay greater attention to tax-efficient investments. The general rule of thumb is taxable accounts are where you want to make tax-efficient investments. However, suppose your Investment is without any significant tax savings. In that case, it is financially more beneficial to put them in tax-exempt or tax-deferred accounts. Let us discuss investment accounts in a little more detail.
· Investing Accounts
Investment accounts are primarily of two types:
Taxable Accounts- The most typical example of a taxable account is a brokerage account. Such accounts do not have any particular tax benefit, but they are incredibly flexible and have few restrictions. Unlike tax-advantaged accounts like an IRA or a 401(k), you can withdraw money at any time, irrespective of the reason. And doing so will not result in taxes or penalties. Like the best blogs on personal finance point out, keeping investments in such accounts is desirable. It is so as it comes with long-term capital gains tax rate, which might be 0%, 15%, or 20% according to the tax slab your Income falls under. In case the duration of Investment is held less than a single year, the tax rates are the same as your ordinary IncomeIncome. In such cases, the people refer to it as short-term capital gains.
Tax-advantaged accounts- The typical example of a tax-advantaged account is a tax-deferred account like a standard IRA or a 401(k) plan. They provide a tax break up front and allows deductions from your contribution to such an account plan. Thus, the tax is deferred as you do have to pay for it. In such accounts, only do you do so when you retire and withdraw your money.
The other type of tax-advantaged account is a tax-exempt account. Both of the standard Roth 401(k) and Roth IRA work in different ways. You contribute to such funds with after-tax money, meaning there is no upfront tax break. But it comes with the considerable advantage of growing your investments free from taxes. When you retire and withdraw these funds, they remain tax-free.
Note that there are yearly contribution limits to tax-advantaged accounts like IRA and 401(k).
Tax Efficient Investments
If you are talking about stocks, then ETFs and specially tax-managed funds exhibit more efficiency in saving you tax money. The tax efficiency results from the fewer capital gains they trigger.
In contrast, funds that are managed actively make a greater number of buying and selling securities, which translates to greater capital gains distribution and higher tax amounts.
One also needs to consider bonds, especially municipal bonds. Such bonds display high levels of tax efficiency as the interest they provide falls outside the scope of the federal taxable IncomeIncome. In many cases, they are tax-exempt at the local and state level as well, earning them the epithet-m “triple free.” Therefore, you want to keep bonds in taxable accounts due to their existing tax efficiency. Series I savings bonds and Treasury bonds are also very attractive from a tax point of view. They are exempt from local and state income taxes. In contrast, you should keep corporate bonds in tax-advantaged accounts as they don’t come with tax breaks by themselves.
Well, that was quite a bit of information, wasn’t it? As we stated at the outset, Personal Finance is a vast subject, and this post acquaints you with the fundamental and essential aspects of the same. You don’t need to read entire books just to get a basic idea of the topic, as reading the best blogs on personal finance would by itself works like a charm. Keep a watch on this blog as I continue my exploration of personal finance basics and make you aware of making sagacious personal finance decisions. I also particularly intend to explore the cryptocurrency part of personal finance blog themes. See you in the next post!
