Personal Finance Essentials: Budgeting, Credit & Investing

Spend about 50% of after-tax income on needs, 30% on wants and 20% on savings and debt payoff.

Fixed expenses stay the same each month (rent, a car payment). Variable expenses change (groceries, gas, entertainment).

Gross pay is what you earn before deductions. Net pay (take-home pay) is what's left after taxes and other deductions.

Move money into savings automatically as soon as you're paid, before spending on anything else.

Commonly 3 to 6 months of essential expenses, kept somewhere safe and easy to access, like a high-yield savings account.

Simple interest is earned only on the original principal ( I = Prt ). Compound interest is earned on principal plus past interest: A = P\left(1 + \frac{r}{n}\right)^{nt} .

Divide 72 by the annual interest rate to estimate how many years it takes money to double. At 8%, about 9 years.

APR is the yearly interest rate without compounding (used for loans). APY includes compounding (used for savings), so it is higher than the stated rate when interest compounds.

300 to 850; higher is better.

Payment history: 35% Amounts owed (utilization): 30% Length of credit history: 15% New credit: 10% Credit mix: 10%

The share of your available credit you're using. Keeping it under 30% (lower is better) helps your score.

The rest of the balance keeps charging high interest, so payoff can take years and cost much more than the original purchases.

Avalanche: pay off the highest-interest debt first (saves the most money). Snowball: pay off the smallest balance first (quick wins for motivation).

You fill out a W-4 for your employer to set how much tax is withheld. Your employer sends you a W-2 each year showing your wages and taxes withheld.

Each rate applies only to the income within that bracket. Moving into a higher bracket does not raise the tax on the income you earned below it.

Premium: what you pay regularly to keep coverage. Deductible: what you pay out of pocket before insurance starts paying. Copay: a fixed fee for a service, such as a doctor visit.

It can be negative early on, for example with student loans.

Up to $250,000 per depositor, per insured bank, per ownership category.

A stock is a share of ownership in a company (higher risk, higher expected return). A bond is a loan to a company or government that pays interest (usually lower risk and return).

A fund that tracks a market index like the S&P 500. It gives instant diversification and usually has a low expense ratio (yearly fee).

Diversification

Dollar-cost averaging

An employer-sponsored retirement account funded from your paycheck. A match is extra money from your employer, effectively an instant return on what you put in.

Traditional: contributions may be tax-deductible now, and withdrawals in retirement are taxed. Roth: contributions are made with after-tax money, and qualified withdrawals in retirement are tax-free.

It lowers purchasing power: money earning less than the inflation rate loses real value over time.