Why is personal finance important? Having basic personal financial skills is a very important part of your life and can help you feel more secure as well as happier and healthier. Understanding personal finance can have a huge impact on your finances over your lifetime by saving you thousands of dollars in costs and help you make better financial choices.
If you don’t have a solid foundation of personal finance, you could get into long-term debt that you can never get out of. With just some basic knowledge, you can make decisions that will have a positive impact for both yourself and your family.
You must invest time in understanding basic concepts about spending, investing, and understanding how money works and operates.
For example, what’s the difference between revenue and profit? You must know.
Another example: do you believe that credit cards are good or bad for you to use?
The answer is that it depends on how you use them!
I prefer to use credit cards for all transactions because they are safer.
And because I pay my balance in full each month, I actually make hundreds of dollars every year just by using credit cards. (I talk about this in my top personal finance rules).
But you can also use credit cards on the wrong purchases, have an interest rate that is incredibly high, pay only the minimum payment, and actually be in a position where it’s impossible to pay off the credit card balance.
See the difference here?
Just a little bit of basic knowledge and you can make a huge difference.
This is why personal finance is important!
What is Personal Finance?
What does the term even mean?
I define it as understanding how money works and putting that information to good use.
From personal banking, to loans, to credit cards, and investments.
All of these fall under personal finance.
Personal finance has its own language.
And you need to understand the basics to be able to responsibly take out loans and compare financial products.
Let me give you a quick example.
Would you rather have…
a 15 year mortgage at 3% interest
A 30 year mortgage at 3.5%
Which is better?
Of course, it depends.
What are the loan origination costs?
What is the down payment required?
How long will you be living at the home?
Is mortgage insurance required?
These are all questions that you may not have even thought to ask.
But if you have a basic understanding of these items, you can look at financial situations with more confidence and understanding.
What is the purpose of Personal Finance?
There are a lot of important factors that make personal finance important. Let’s look at a few of them.
Once you feel comfortable with some of these personal finance items, you should also start looking at ways to make some extra money.
In this article, I give you some ideas on how to make an extra $1,000 in a month.
Or in this one, an extra $100 a day.
Meet Your Financial Needs
Some of the personal finance topics that you should understand are:
How to create and manage a budget
Bills and paying them on time
Managing Loan Options
Net Income vs. Gross Income
Saving for retirement
Credit cards and credit scores
Easily Manage Your Income with a Budget
If you don’t plan a budget and set some goals, it’s hard to know if you are overspending or not. With a financial plan in place you will be able to easily manage your income.
How do you know which bills you should pay off first?
Can you save more? How would you know?
How much can you spend each month on eating out?
These are all questions that you should be able to answer with a personal finance budget active and in place.
Just because you make plenty of money doesn’t mean you don’t have to budget.
You can make $30,000 a year and run a tight financial ship and do just fine.
Or you can make $100,000 a year and be in debt because you’re not tracking your spending and saving.
Personal finance is important and can help you avoid difficult personal finance situations.
Related Reading: Best Budget Planners for Your Budgeting
Control Your Own Financial Future
Dave Ramsey stated it well, “Don’t spend more money than you earn!”
By mastering personal finance, you can control the future of your finances.
Remember, your school or your job isn’t going to teach you personal finance skills.
So you better take control.
One way that you can do that is with apps that give you cash back when shopping at places you already shop.
One that is super easy to use is Ebates.
You can get a bit more info on how Ebates works in my article here (you’ll even get $10 for free if you choose to use it).
I just installed the chrome extension and any time I shop at a store that is tied to Ebates, I’ll get money back from that without doing a thing.
I’ve made over $1,200 with Ebates simply by clicking a button before I buy.
Related: Learn about the Venmo Business Model
Offering Financial Security for Your Family
Financial security is something that most people would love to have for their family. Everyone wants to know that they provide for the needs of their family.
No one wants their family to suffer due to a lack of money.
With basic knowledge you can avoid this.
This is why personal finance is so important.
You’ll also be able to pass on the knowledge to your children and their children.
Do you think it’s coincidence that the wealthy tend to stay wealthy through generations?
It’s because they have mastered personal finance and have passed these skills on.
Lower your Cost of Money
What do I mean by this exactly?
Did you know that something as simple as improving your credit score can save you thousands of dollars over your life?
The lower your credit score is, the better interest rates you will get for all loans.
We’re talking about thousands and thousands of savings over the years.
Look at this image from Bank of America and what it shows about how having a higher credit score can greatly affect your mortgage and loan interest rates. In this example, the person with the higher credit score saved $70,000 over the life of the loan!
If you don’t already use, Credit Karma is a great solution for monitoring your credit score.
Keeps You Away from Bad Debt
Debt isn’t necessarily bad, although it can be uncomfortable.
Getting debt is basically a way to leverage money.
For example, if you borrow money to get training or education in a field that will allow you to make more money and then pay back those loans, it’s a good use of debt.
If you use debt to purchase a home, stay in it for 20 years, and then pay that loan completely off, you have used debt wisely as leverage.
Of course, many argue that homes are a bad investment, but that can be debated on both sides and it’s quite an advanced investing lesson to save for another day.
Avoid overspending or spending more than what you earn. Unfortunately, this is one of the main problems with American society. We want to have items now instead of waiting until we can properly afford those items.
Most people tend to increase their lifestyle when they have an increase in income, but often they’re increasing their lifestyle at a faster rate than their income.
This leads to more debt and more problems!
So get educated and take control of your own finances.
You’re not going to get the training in school and if your family didn’t have the education then you’re going to have to obtain this personal finance knowledge on your own.
To Grow Your Assets
Do you know the difference between assets and liabilities?
Do you know what net worth means?
These are more reasons why personal finance is important.
Your goal over time is to increase assets and decrease your liabilities.
The difference between these 2 is your net worth.
If you’re needing to make more cash (who doesn’t?!) then I’ve got plenty of ideas for you in multiple articles. I share ideas like how to make an extra $1000 a month.
Conclusion: Why Personal Finance is Important
Personal finance is not taught in our school systems. But if you are willing to learn and master it, you will be better off for it.
Do you even have to go to college to become an expert at personal finance? Not necessarily.
Being able to feel comfortable with financial conversations as well as making responsible decisions is important.
Why is personal finance important?
Because money plays a part in most every aspect of our lives.
The more educated you can be with money, the better off you will be.