Building a solid foundation in personal finance starts with learning the fundamentals of how money works. The sooner you begin, the more confident you become, boosting your chances of financial success later in life. While it is never too late to start learning, the advantages compound when you start early. To begin your journey, cultivate awareness of the importance of financial education and develop good money habits as you learn. 

Every financial decision we make regarding banking, budgeting, saving, investing, and managing debt forms the pillars that support our financial well-being. With this in mind, this guide serves as an excellent starting point for personal finance tips. Today presents an ideal opportunity to begin your journey into financial literacy. Continue reading to learn what financial literacy entails and how it can benefit your life. 

Key Takeaways 

The ability to understand and apply various financial skills is known as financial literacy. 

People with higher financial literacy are more likely to save more money, build emergency funds, and open retirement accounts than those with lower financial literacy. 

In everyday life, banking, budgeting, handling debt and credit, and investing form the basics of financial literacy and its practical application. If you do not understand what personal finance is, we recommend you continue reading this article for more knowledge. 

Financial Literacy Defined 

The ability to understand and apply various financial skills, including personal finance, budgeting, and investing, is called financial literacy. It also signifies understanding specific financial principles and concepts, such as the time value of money, compound interest, debt management, and financial planning. 

Achieving financial literacy helps you avoid making poor financial decisions. Literacy can help you become self-sufficient and achieve financial stability. The crucial steps to achieving financial literacy include creating a budget, tracking expenses, paying off debt, and planning for retirement. 

Learning about these matters also requires grasping the principles of money management, formulating and achieving financial targets, being aware of unethical or discriminatory financial practices, and navigating the financial challenges life presents. 

How Important Is Financial Literacy? 

Studies by the Financial Industry Regulatory Authority (FINRA) on the National Financial Capability Study found that Americans with higher financial literacy were more likely to achieve financial goals by spending less of their income, building a 90-day emergency fund, and opening a retirement account than Americans with lower financial literacy. 

Making educated financial decisions is more essential than ever. Consider retirement planning. Earlier, many employees relied on pension plans to fund retirement. In those days, the financial burden and decision-making for pension funds were the responsibility of the companies or governments that sponsored them. 

Currently, few employees receive pensions; instead, some are offered the option to participate in a 401(k) plan, in which they must set their own contribution levels and investment choices. When the subject of managing expenses comes up, later-life contributions to a 401(k) may not be sufficient to afford a comfortable retirement. Employees without employer-sponsored options, therefore, need to open individual IRAs and other tax-advantaged retirement accounts. 

Additionally, people’s increasing life expectancies result in longer durations, ensuring Social Security benefits barely support basic survival, complex health or other insurance options, savings and investment instruments, and a plethora of options from banks, credit unions, brokerage firms, credit card providers, and more. 

The above indicates that financial literacy is an essential requirement for making thoughtful, informed decisions; avoiding unnecessary debt; helping family members navigate complex decisions; and ensuring adequate income during retirement. 

Personal Finance Fundamentals 

The realm of personal finance encompasses the concept of financial literacy in individual financial decisions. How do you manage your money? Which savings and investment vehicles do you use? 

Personal Finance is about making financial goals and achieving them. Whether you want to purchase a home, help members of your family, set money aside for your children’s education, support causes that you care about, plan for retirement, or anything else. 

Among other topics, financial literacy encompasses banking, budgeting, handling debt and credit, and investing. Let us look at the basics to help you get started. 

Understanding Bank Accounts 

Typically, a bank account is the first financial account you will open. Bank accounts hold and build the money you need for significant purchases and life events. Here is some background on bank accounts and why they are considered the first step in creating a stable financial future. 

Why Do You Need A Bank Account 

Although most Americans have bank accounts, 6% of households still don’t. Why is it important to open a bank account? Bank accounts are safer than keeping cash at home because bank assets are harder to steal. In the United States, bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This means that you will always have access to your money even if the bank experiences problems. 

Additionally, many financial transactions make it essential for you to have a bank account to: 

• Use a debit/credit card. 

• Use payment apps such as Venmo and PayPal. 

• Write a check 

• Use an ATM 

• Purchase or rent a home 

• Receive paychecks from your employer. 

• Earn interest on your money. 

Conventional Vs. Online Banks 

Do you picture a building when you think of a bank? Traditional banks have physical branches where you can manage your bank accounts in person or online. Some banks operate only online, without physical branches. These online banks offer services like those of their brick-and-mortar counterparts without requiring you to visit in person. 

Which Type Of Bank Should You Prefer? 

• Retail Banks: The most common type of bank is the retail bank. Retail banks are for-profit companies offering savings accounts, loans, credit cards, and insurance. Retail banks have physical branches you can visit or provide online services. Most offer both. Retail banks’ online technology tends to be more advanced, and they often have more locations and ATMs, similar to credit unions. 

• Credit Unions: Credit unions provide checking and savings accounts, disburse loans, and offer other financial services. However, they are not-for-profit organizations owned by members. Credit unions typically charge lower fees and pay better interest rates on savings accounts and loans. Credit unions are also known for providing better personalized customer service, though they typically have fewer branches and ATMs. 

Please note: assets held by credit unions are insured by the National Credit Union Administration (NCUA), equivalent to the FDIC. 

Which Types Of Bank Accounts Should You Consider? 

As an average person, there are three types of bank accounts you can consider opening. 

1. Savings account: An interest-bearing deposit account held at a bank or financial institution. The interest rate on savings accounts is low, but their safety and reliability make them a sensible option to save available cash for short-term needs. 

Savings accounts usually have some limitations on how frequently you can withdraw money. However, they are also flexible, making them ideal for building an emergency fund, saving for short-term objectives such as purchasing a car or going on a vacation, or storing extra cash that is lying unused in your checking account. 

2. Checking account: A checking account is held at a bank or other financial institution and allows you to make deposits and withdrawals. Checking accounts are flexible, meaning they allow numerous transactions each month, unlike the limited access you get with savings or investment accounts. Additionally, checking accounts do not earn any interest. 

You can deposit money into checking accounts at the branch, at ATMs, or by direct deposit using other electronic transfer methods. Account holders can withdraw funds from the banks and ATMs by writing checks or using debit cards associated with their accounts. 

If you are fortunate, you may be able to find a checking account that charges no fees. Others have monthly charges, and others have facilities such as overdrafts or charges to use an out-of-network ATM. The fees are based on whether the account is connected to a direct deposit paycheck or an automatic withdrawal mortgage payment, and on the balance you leave in the account. 

If you confront challenges in qualifying for a traditional checking account, some banks can offer you a lifeline and second-chance accounts. 

3. High-Yield Savings Account: High-yield savings accounts typically pay higher interest rates than standard savings accounts. However, they require you to deposit larger amounts and have higher minimum balance requirements, along with higher fees, in exchange for the higher yields they offer. 

Please note: while you have the option of opening a high-yield account with your current bankers, online Banks offer the highest interest rates. 

Emergency Funds Defined 

Emergency funds are not your typical bank account but a source of cash you save to help manage financial hardships such as job losses, medical bills, or car repairs. Here is how they function: 

• Most people have an emergency savings account. 

• The account should eventually have enough money to cover 3 to 6 months of expenses. 

• Emergency funds are off-limits for paying regular expenses. 

An Overview of Credit Cards 

Everyone knows them as plastic cards in most people’s pockets. Credit cards are accounts that allow you to borrow money from the credit card issuing company. Of course, you need to repay the money over time. 

You get charged interest on any money you don’t repay in full at the end of every month. Note: Some credit cards, known as charge cards, require you to pay the entire outstanding balance each month. However, these cards are not as common. 

Differences Between Credit and Debit Cards Explained 

Debit cards withdraw money directly from your checking account. Debit cards don’t allow you to borrow money, meaning you must limit your expenditure to what you have in the bank. In addition, debit cards don’t allow you to build your credit score or credit rating. 

Credit cards permit you to borrow money without pulling cash from your bank account. They are helpful for large and unexpected purchases. However, not repaying the money you borrowed in full and carrying a balance each month will make you liable to interest charges from the credit card issuing company. Therefore, if you want to learn how to start saving, it is best to ensure you repay your credit card balances in full every month. 

In the second quarter of 2025, Americans owed $1.21 trillion in credit card debt, making it essential to be careful when spending with your credit card. Debt tends to build up quickly and becomes difficult to pay off. If you want a live example, consider the ongoing American government shutdown and the numerous furloughs resulting from the government’s inability to pay wages due to its indebtedness. 

However, if you use your credit card judiciously and pay all bills when they are due, it helps you establish a credit history and have sufficient money on the card available when important expenses in life show up unexpectedly, and you don’t have sufficient cash in your checking account to pay for them. Therefore, credit cards have introduced much-needed convenience into the lives of people in America and around the world. 

The differences between countries that do not adopt credit cards are clearly visible. Discipline is essential when using credit cards to ensure you repay outstanding balances promptly. As for building your credit through credit cards, it is important not only to qualify for the best cards but also to secure car loans, personal loans, and mortgages. 

What is APR? 

The annual percentage rate is called APR. The APR is the interest rate you pay on your outstanding credit card balance. You must pay close attention to this number when you apply for a credit card. Higher APR numbers can cost hundreds or thousands of dollars if you carry large outstanding balances over time. As of August 2025, the median APR stands at 24%. However, your rate may be higher if your credit ratings are low. Interest rates can also vary according to the type of credit card you hold. 

Choosing Credit Cards 

Your credit scores impact your chances of getting approved for credit cards. Before applying for credit cards, it helps to understand which score range your score falls into, so you can narrow your options. Apart from your credit score, you must also decide what perks best suit your lifestyle and spending habits. 

If you have never applied for a credit card or have bad credit, you will likely have to apply either for a secure credit card or a subprime credit card. Using one of these cards and repaying balances on time can improve your credit score and help you access credit at better interest rates. 

If you have a good credit score, you can choose from a variety of credit card types, such as: 

• Travel rewards cards: these cards offer points redeemable for travel, including rental cars, hotels, and flights, on every dollar you spend. 

• Cashback cards: If you are not a frequent traveler or do not want the hassle of converting points into real-world perks, a cashback card is the best option. Every month, you receive a percentage of your spending back in cash or credit on your statement. 

• Balance transfer cards: If you have other credit cards charging you high interest rates, you can use a balance transfer card to transfer your balance to a credit card charging you a lower interest rate to help save money, pay off balances, and improve your credit score. 

• Low or no APR cards: If you regularly carry a balance every month, switching to a credit card with low or no APR saves hundreds of dollars every year in payments. 

It’s helpful to be aware of your protections under the Equal Credit Opportunity Act (EC QA). Ensure you receive the best rates for your credit history and financial situation by researching credit options and available interest rates. 

How Can I Create A Budget? 

Creating a budget is simple and the most effective way to control your spending and save money. You cannot improve your financial situation if you don’t know where your money is going. Therefore, start tracking your expenses against your income to set clear goals. Use an Excel sheet, a budgeting app on your mobile phone, or any other method that comes to mind. Keep in mind that you are aiming to set the best financial goals 2026 and promise yourself not to waver from the budget you created. 

When creating a budget, ensure that you clearly lay out the following: 

Income: List all sources of money you receive every month. The money includes paychecks, investment income, alimony settlements, income from additional jobs, etc. Ensure that you mention the dollar amounts of the money received. 

Expenses:  

Split your expenses into two categories and list every purchase you make in a month. The two categories you create should be fixed and discretionary expenses. Review your bank, credit card, and brokerage account statements to ensure you capture them all. Fixed expenses must cover all purchases you make each month. The amounts of fixed purchases don’t change or change only slightly, but they’re essential. They can include rent, mortgage payments, loan payments, and utilities. Discretionary expenses may include non-essential spending on restaurant meals, shopping, clothes, and travel. Expenses will also include tax planning because the taxman won’t give you a break. 

Savings: If you are creating a budget for the first time, it is an excellent opportunity to learn how to start saving. Record the money you can save every month, whether in cash deposited into your bank account or any funds you add to retirement accounts such as an IRA or 401(k) if offered by your employer. 

Deduct your total expenses from your income to derive what’s left at the end of the month. After getting a clear indication of the money coming in and going out, and the money you save, you can identify which expenses are unnecessary and start cutting them down. 

If you don’t have an emergency account, arrange to open one, deposit the extra money in your hand into it, and continue doing so for at least 6 months for emergencies. Remain determined to never use the money you put in the emergency account. It is crucial to keep the money safe and grow it for times when your income decreases or stops.