What Is Personal Finance?

Personal finance is how you manage your money to build the life you want. It’s budgeting, saving, borrowing, and more—steps you can set up to work smoothly over time, so you’re free to focus on what’s important. A house, a family, a business—whatever your goals, personal finance means the practical steps to get you there.

Related: Get the lowdown on how Freedom Debt Relief helps clients win at personal finance

Personal Finance: What It Is and Why It Matters

Personal finance is the way you organize your money. Budgeting, borrowing, saving, insuring, and building credit are the pieces that fit together to keep things running.

These steps shape your future. A plan that’s easy to follow—like putting your savings on auto pilot or tracking expenses—helps you stay on course no matter what’s going on.

Start with a Plan

What if you don’t know where or how to start? It’s perfectly normal to feel some confusion. The truth is, you know more than you think. 

A good place to start is by making a list of your own goals and hopes. 

Write down what you’d like to accomplish—a down payment for a house? A kid’s college tuition? To pay off your credit cards? 

Next, write down how you can accomplish these. For example, you might take a close look at your spending or cut some expenses.  

You don’t need to be a math wiz to manage your money. Budgeting apps or debt calculators can crunch the numbers. What matters is finding a way to stick with it—say, setting up a simple plan to save or pay off debt, then checking it regularly so you stay on course. Also, charting your own progress can motivate you to keep going. 

Find what works for you by trying different approaches in a basic budget or a debt repayment plan. Then, adjust as you go. Start small and experiment so you can see what feels right. 

Budgeting Basics

A budget helps you know where your money goes and plan what’s next. 

It’s a real help if you want to get a grip on your personal finance. List your income and expenses on paper, a spreadsheet, or an app. You might start with the 50/30/20 budget rule. This popular budgeting method has you set aside:

• 50% of your income for needs like rent and groceries

• 30% toward wants (entertainment, eating out, hobbies)

• 20% for savings or debt repayment

Check it monthly and tweak it to make it fit your circumstances.

Budgets can be simple or detailed. Whatever budget hacks you decide on, you’ll feel more confident when you know where your money flows so you can spend on the important things without stress.

Understand Your Credit Score

Your credit rating impacts your life in many ways, from your ability to buy a house to what you pay for insurance, and even your employment in some industries. So it’s smart to establish a solid credit history, earn a good credit score, and protect it as best you can. 

Note that even if your credit score is low today, you can start improving it right away. 

Credit reporting agencies give recent activity much more weight than older history when calculating your credit scores. Some strategies can raise credit scores very quickly.

Here are some ways to build your credit score:

• Pay your monthly credit card balance in full

• Don’t carry a balance that’s more than about 30% of your credit limit

Become an authorized user on the account of a good friend or family member with excellent credit. Your credit score is like a dating profile for lenders—when your score is good, they swipe right. Following through on credit building strategies is straightforward. And good news, credit bureaus emphasize your most recent behavior, so you can boost your score fast.

Read: How to check your credit score

Borrow Sensibly

Living debt-free is an admirable goal, but most of us have to borrow for things we need: houses, cars, college, businesses, and emergencies. Smart borrowing means finding cheaper loans, borrowing only what you can afford to repay, and not carrying debt for unnecessary items. 

You can pay much less for auto loans, mortgages, personal loans, and credit cards by maintaining a high credit score, shopping for the best lenders, and paying off your balances as quickly as you can. Understanding the ins and outs of how to borrow is a basic building block of personal finance. 

Here’s what you need to look at when you’re shopping for a loan or comparing credit cards:

• Annual percentage rate (APR). The yearly cost of borrowing, including interest and fees.

• Term. How long you have to pay back the loan.

• Variable vs. fixed rates. Variable rates can shift with the market, while fixed rates never change. 

Manage Your Debt

There are times in life when debt gets the better of you. If you hit a point where your debt feels unpayable, know that you can get help. 

Debt relief strategies like debt consolidation, credit counseling, bankruptcy, and debt settlement are all legitimate ways to get rid of debt—or give you breathing space to figure things out.

What’s important is knowing your options. Lenders, the government, and third parties (like counselors and professional debt settlement companies) can work with you to make things right.

Tip: Try the snowball method to create momentum when paying off multiple debts.

Have a Savings Plan 

Handling your money means knowing how to save—and why you’re saving. The reason? You spend money in different ways and at different times. 

That means you need a savings or checking account for current expenses like groceries, rent, and everyday life. You also need an emergency fund. And it’s a good idea to save something for retirement, even if that’s decades away. You’ll typically have three separate accounts for these funds:

• Regular savings. You might want to use a local brick-and-mortar bank or an online bank. Shop around for a bank that doesn’t charge stiff fees and that gives free checking. 

• Emergency fund. Keep this money in a high-yield savings account, and don’t panic about the advice to save up six months’ worth of expenses. Even $250 or $500 is a solid start. 

• Retirement savings. If you have a 401(k) plan at work, save that way—even 2% of your income will help you build up a nest egg. If possible, save enough to get the employer match if one is available. An individual retirement account (IRA) is another way to get a tax break while saving for retirement if you’re self-employed.

Learn About Insurance

Life, health, pet, auto, and home insurance all give you a financial safety net. Insurance is always a game of risk. In return for monthly payments, you could potentially receive a large sum to cover the expenses of a difficult event. 

Insurance is a big part of your personal financial risk management. It can guarantee: 

• A cap on how much you spend for an emergency

• Specific coverage as detailed in the policy

• Financial protection for you and your loved ones

Key to navigating insurance is being clear-eyed about what you want, and when insurance gets you that. Some plans offer narrow coverage, or charge extra for specific protections. The right plan aligns with your needs, fits the budget, and does what it’s supposed to.

Tip: Request a quote from an insurer (Geico, Progressive) to see if you can reduce your insurance payments. Quotes are free and don’t hurt your credit score.