12 Important Personal Finance Lessons from the Experts

Maneuvering through personal finance can be a daunting task. Most of us even have problems managing our day-to-day lives, and we find it hard to plan for our future, like retirement or investing. Thankfully, a wealth of knowledge is available from financial experts that have made investment and money management their career. So sit back and discover the 14 important lessons learned from some of the best personal finance experts about budgeting, managing debt, and securing your future.

Lesson 1: Create a Budget and Stick to It

If there is anything more fundamental than a sound financial plan, it is a budget. It is like a GPS for managing your earnings and spending, cutting down unnecessary stuff and ultimately pursuing your financial objectives. Budgeting can also help point out areas where your money might be sliding through the cracks. Maybe it is all those daily lattes or other impulse buys online. 

According to a 2023 article by CNBC, 64% of Americans do not have a budget. This lack of awareness often causes overspending as a 2023 NerdWallet report revealed that 84% of Americans admit to regularly overspending.

Creating a budget doesn't have to be complicated. Some practical tips to get you started include using one of the many ways to budget, like the 50/30/20 rule (50% for needs, 30% for wants, 20% for savings or debt repayment) or zero-based budgeting. Find one that works for you.

Lesson 2: Build an Emergency Fund

Ever gotten a surprise medical bill from visits to Dr. Yap or had to replace an unexpected damage in your car, or worse, a job loss that you never saw coming? It is during situations like these that you wish you had an emergency fund to help you make ends meet.

Your emergency fund should ideally be 3-6 months of living expenses. This buffer allows you to stay afloat whenever financial surprises occur. Think about this: A 2022 Federal Reserve survey found that a troubling 34% of U.S. adults would not be able to pay for a $400 emergency with cash or savings alone. This stat just shows how critical it is to have an emergency fund to survive in a financially tumultuous time.

A few things you can do to start building an emergency fund is to set up automatic transfers from your checking account to your emergency savings account. Finding a savings plan that works for you is good because even small amounts saved periodically can add up over time. 

Lesson 3: Pay Yourself First

Paying yourself first is arguably one of the most important principles of personal finance. It turns the old way of spending what you have after the bills are paid on its head. Instead, you automate savings. You take money off the top of your income before a single bill is paid or extra pocket money is spent and put it toward your financial goals.

For example, you get paid, and rather than your paycheck hitting your checking account, the money is routed through a predetermined route to either a savings or investment account. This way, you avoid the temptation to spend money you know should be going towards your goals.

The main benefit of saving automatically is that it frees you from having to think about setting aside money for the future- which is an enormous stress reducer and allows you to concentrate on other things.

Lesson 4: Manage Debt Wisely

When managed right, debt can be a leverage. But it can become a liability when it stays out of control. It is in having a clear understanding of the different forms of debt and knowing how to best manage them, that we learn to overcome it.

Unfortunately, not all debt is treated equally. Good debt is a debt you take on that grows in value over time, like a home mortgage or student loan for a field where you will earn an income. These debts have lower interest rates and in the long run can help you build your wealth.

Whereas "bad debt" is eaten debt on depreciating assets or non improving expenses. These are things such as credit card debt with higher interest rates, vacation loans, or payday loans. With high interest rates tacked onto that debt, that can quickly balloon out of control and make it virtually impossible to meet those financial goals.

There are many tactics to help you get out of debt. Some of those tactics include the snowball and avalanche method - from smallest to largest balance of debt or highest rate of return to smallest. 

Lesson 5: Start Investing Early

Compound interest, known as the "eighth wonder of the world" as attributed to Albert Einstein, is certainly one of the most powerful - and important - strategies available for creating wealth. In personal finance, it's the most powerful tool you have, especially when you use it early and end up investing more over time.

The power of compound interest means the earlier you invest, the longer your money has to grow. For example, a study by Fidelity in 2023 looks at a person who invests $6k annually from their 20s at a return rate of 7%, leading to a nest egg in retirement over $1mil. By comparison, someone who doesn't start investing until their 30s but contributes the same and earns the same return can end up hundreds of thousands of dollars behind where they could be.

Lesson 6: Diversify Your Investments

Diversification involves investing your money in different asset classes - for example, in stocks, bonds, real estate, and commodities. If one asset class goes down, others may be doing well and will cushion a part of the losses across your portfolio. 

The perfect asset allocation varies by individual, based on your individual risk tolerance, investment objectives, and time horizon. But the general principle is to diversify your investments across multiple asset classes, with different risk profiles as well. For instance, equities offer higher growth potential but come with higher risk. In contrast, bonds tend to be lower in volatility but lower in return as well. Through effective fund allocation in a good mixture of asset classes, you can create a balanced portfolio that best serves your financial goals and helps in smart risk management.

Real estate as an asset class can also be a mode of investment to consider when diversifying your portfolio. It has its own pros as a capital appreciation, secured rental income and hedging to inflation. 

Lesson 7: Understand Your Risk Tolerance

Investing can be an exciting journey towards achieving your financial goals. But before getting started, it is important to know your risk tolerance. This is also a term used to describe how secure you are when you are taking on market losses. There are folks who are adrenaline junkies and speculators who like to invest in high-risk, high-return investments and there are some who are more conservative looking for stability before explosive growth. 

Risk tolerance forms the foundation of your investment strategy. The good news is you don't need a crystal ball to know how you'll react. There are various online questionnaires and resources that can assist you in determining your risk profile. These tools will ask you questions such as your age, investment goal, time horizon, and how risk-averse you are. Gaining clarity about your risk appetite will help you make sound investment decisions that are in sync with your comfort zone and thereby increase your well-being to create better long-term economic gain.

Lesson 8: Live Below Your Means

Financial freedom does not just appear one day. It is made over time by living below your means. A major tenet of financial security is to not live above your means, spending less than you earn, and to carefully direct portions of that surplus into savings and investments for your future. This helps you feel more secure and can help protect you from going into high-interest debt for unexpected emergencies or other situations. 

Lesson 9: Invest in Your Education

Investing in your own financial education is one of the most profitable investments you can ever make. There are a multitude of resources available that cater to all sorts of learning styles. If you are a bookworm - give classics like "I Will Teach You To Be Rich" by Ramit Sethi or "The Simple Path to Wealth" by JL Collins a go. 

There are so many resources out there, websites (like Investopedia or Concreit) with tons of info, and even podcasts (like "Planet Money'' or "The Financial Diet''). Your education in finance is an investment in your future. With the knowledge that you acquire, you will be in a position to make better decisions, overcome money anxieties, and hopefully one day reach your financial aspirations. 

Lesson 10: Avoid the Lifestyle Creep

Lifestyle inflation is another one of those human characteristics that may apply to many of us. Allowing your spending to balloon out of control can ruin your recent mindful financial intentions. Imagine getting a raise of $500 a month. Some of that may go into savings or paying off debt, for example. But then that new coffee shop you have been looking at turns into a daily fix. The idea of a larger apartment sounds wonderful. Just like that, the $500 misc extra is gone and you are further away from your financial goals. 

Some methods for keeping lifestyle inflation in check include the following: 

• Set interim spending limits: Establish caps on types of discretionary spending. Leave aside a specific amount for entertainment, dining out or hobbies. 
• Automate your savings: You can automatically set up to transfer money from your account automatically to your savings or investment account. 
• Save windfalls: When you get a bonus, tax refund, or unexpected income, save those as windfalls, do not blow them. 
• Learn to enjoy experiences (instead of stuff): Prioritize life-improving experiences that do not end up hanging you by the purse strings. 

Lesson 11: Protect Your Assets 

Life can be unpredictable. Unexpected events like accidents, illnesses, or job loss can throw your financial well-being off course. Having adequate insurance coverage acts as a safety net, protecting your assets and ensuring your financial security in the face of challenges.

Types of Insurance to Consider:

• Health insurance: Health insurance is key because it will cover the costs of medical care, keeping one episode of the common cold from bankrupting you.
• Life insurance: This can help cover expenses such as mortgages, education, or living costs.
• Disability insurance: This protects your income in case of an accident or illness that prevents you from working. 
• Property insurance: This safeguards your home and belongings against damage from fire, theft, or natural disasters. 

Having a detailed estate plan is vital in addition to insurance. An estate plan determines who will be responsible for handling your assets post-life. A will directs how your assets will be redistributed upon your death, or a trust and trust agreement manages assets for individuals or entities. Establishing an estate plan protects your property for the people who matter to you and lowers the likelihood of disputes or lawsuits. 

Lesson 12: Seek Professional Help When Needed

Preparing yourself with educational tools is a great head-start, but sometimes a professional financial advisor can provide much-needed help as you move forward. They are trained professionals who can provide guidance on personal finance generally. They can assist you with creating a full-fledged financial plan and put you in investment strategies tailored to your financial goals.. 

Meet with a financial advisor to craft an investment portfolio in line with your risk-tolerance and long-term objectives. But remember, financial advisors are not a replacement for your own financial education. When you have more knowledge, the less likely you will get taken advantage of when using the services of a financial advisor. 

The Bottom Line

The world of personal finance can feel like a confusing place, but with this knowledge in your toolbox, you have everything you need to start taking charge and building a secure future for yourself. Learn these 12 lessons from top experts so you can be better at managing your money and more confident on your financial journey. 

Remember, financial security is not a destination, it's a journey. Apply these lessons, focus on your purpose, and develop a growth-mindset to realize your financial potential. Stop procrastinating and get started today and build a life of financial success.