Basic Money Lessons Not Taught in Schools
Let’s be honest, schools lack financial literacy education. You probably graduated high school without ever being taught basic money lessons. Not that many states currently require high school students to take a personal finance class and it was far less not that long ago. If someone graduated high school without learning the fundamentals of money management, even some of the basics can help you avoid issues and create a better financial picture.
The key to budgeting is learning how to prioritize. You have to decide where your money should go and that is a budget. There are two parts to the budget. First, calculate how much money you have coming in from all sources. Second, identify your expenses. Some of your budget will be things you have to pay; others will be things you choose to pay or spend money on. Add those expenses up and subtract the total from your monthly income. You’ll want to get in the habit of saving a percentage of your income, so deduct that amount as well. After everything is accounted for, you will see how your cash flow looks and then ways to improve going forward.
Time Value of Money
Saving even small amounts of money on a regular can do wonders for your portfolio in the long term. For example, not spending $5 a day on something can have a big impact on a person’s financial future. Taking that money and then reallocating to savings and investments over time can reap huge rewards over 10, 20, 30+ years. This concept is particularly valuable for younger people, who can accumulate a lot of money over the years by taking simple steps to cut daily expenses.
How Credit Works
A high credit score means businesses like auto lenders, banks, and insurance agencies view you as credit and trustworthy. The more established credit and higher score means when you do need to access debt, it is not nearly as expensive as it would be with worse credit. When you’re just starting out, opening a checking account and a savings account enables you to show lenders that you can manage money. Then, once you’re able to qualify for a credit card, make your payments in full each month so that you earn good credit. Remember, you got the card to show you can manager credit and payments, do not abuse the credit and create a debt management issue.
The Ramifications of Too Much Debt
Accumulating excessive amounts of debt whether that debt is classified as good or bad debt can wreak havoc on your personal finances. Debt can come from student loans, auto loans, or credit cards, etc. and the average American households as a total face more than $1 Trillion in Student Loan and $1 Trillion in Credit Card debt. If someone is not able to service the debt for a period of time it becomes harder and harder to catch up. If you miss payments on your debts, you could also tarnish your credit score, and it may be hard to recover from that.
The Difference Between Saving and Investing
Saving and investing can often be used to mean the same thing for many people but there is a huge difference. Saving is setting aside money for a future purpose or to create an emergency fund. Investing on the other hand is putting your money to work to try and grow your money and make more. Once someone has an emergency fund fully funded, outside of future purchases they might be saving up for, investment is the next step in the financial plan. When considering how to invest money, you need to understand your risk tolerance. The goal is to find an appropriate balance; one that generates some gains, but still allows you to sleep at night.
Start with some basics, grow your knowledge and learn how money works in order to create a financial future you actually want. Money is like any other skill, it can be learned.