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 significantly impact your finances over your lifetime by saving you thousands of dollars in costs and helping you make better financial choices.
If you don’t have a solid foundation in personal finance, you could get into long-term debt that you can never get out of.
With just some basic knowledge, you can make smart financial decisions that positively impact 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 incredibly high interest rate, 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 your personal finances.
Financial management has its own language.
You need to understand the basics to take out loans and compare financial products responsibly.
Let me give you a quick example.
Would you rather have…
A. 15-year mortgage at 3% interest
B. 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 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 knowledge.
Bookmark ‘How to Money Podcast’ for later—it’s worth it!
What is the purpose of Personal Finance?
There are a lot of essential factors that make personal finance critical.
Let’s look at a few of them.
Once you stock up on personal finance knowledge, 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 manage your income easily.
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.
Personal finance is important and can help you avoid difficult personal finance situations.
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 your financial future.
Remember, your school or your job isn’t going to teach you personal finance skills.
So you better take control.
You can do that 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.
Offering Financial Security for Your Family
Financial security is something that most people would love to have for their families.
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 having personal finance strategies is vital.
You’ll also be able to pass on the knowledge to your children and their children.
Do you think it’s a coincidence that the wealthy tend to stay wealthy through generations?
It’s because they have mastered personal finance and have passed these skills on.
Related Reading: What Is A Good Salary – Get The Insights Here.
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.
According to the Bank of America, having a higher credit score can significantly affect your mortgage and loan interest rates.
For example, a person with a higher credit score may save $70,000 over the life of the loan!
If you don’t already use it, Credit Karma is an excellent 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 entirely off, you have used debt wisely as leverage.
Of course, many argue that homes are a terrible 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 adequately afford those items.
Most people tend to increase their lifestyle when they have an increase in income, but they’re often upgrading their lifestyle faster than their income.
This leads to more debt and more problems!
So get educated and take control of your personal finances.
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 need to make more cash (who doesn’t?!), I’ve got plenty of ideas in multiple articles.
I share ideas like how to make an extra $1000 a month.
Related Reading: The Best Ways To Build Credit From Square One – Click Here To Learn More.
How To Become Better Educated in Personal Finance
Why you should become financially literate is evident.
So, how do you move further along your financial journey?
Here are some ways you can improve your financial literacy:
Listen To Financial Podcasts
While doing chores, running errands, or walking the dog, podcasts can be a fantastic way to keep up with financial news.
Please turn to the US News and World Report for the top personal finance podcasts to listen to.
You could be multitasking, all while beefing up your financial education.
Follow The Right People on Social Media
Follow financial professionals on Twitter or LinkedIn, or join a personal finance Facebook group using your favorite social media channels!
If you’re on social media, you might as well learn something valuable while you’re at it.
Consult a Financial Pro
A financial pro can help you with your financial questions, whether they are about fundamental day-to-day money matters or more complex long-term concerns.
These individuals could also review your current circumstances, assist you in developing a financial strategy, and keep you on track moving forth.
If you’re on square one, consulting a pro can help you build your core personal finance principles.
Sign Up For Some Financial Newsletters
Try subscribing to financial newsletters from reputable sources for free financial news in your mailbox.
The majority of them are aimed to assist you in taking your financial journey to the next level by providing expert financial and lifestyle guidance.
Hit The Books
If you want to learn about personal finance through books, there are plenty to choose from.
To get started, look through Insider’s list of the greatest personal finance books.
You’ll undoubtedly find some excellent resources there.
If you’re not a fan of books, you can always prowl personal finance blogs for valuable takeaways.
Observe Your Own Financial Habits
All of the greatest advice in the world won’t help you if you don’t know where your money is going each month.
Determine how much you spend on bills, health insurance, and other frequent expenses.
Using a basic spreadsheet or internet application, start tracking your spending and creating a budget for your financial goals.
Related Reading: Does The Envelope System Really Work? Read The Full Post here.
How To Properly Organize Your Spending and Savings
Speaking of budgets, here’s how you can tidy up your financial life so you can work afresh:
Organize Your Files
Consider using an online site like Mint to help organize your bills and financial documents.
You may also use standard file folders or stackable drawers.
Make a point of keeping older financial records apart from those that are due right now.
Create a spreadsheet or document with each bill’s monthly or annual due dates if necessary, and keep it in a secure location where you’ll see it frequently.
Compile all tax-related information in a “Taxes” file throughout the year.
You don’t want to be stressing over a year’s worth of paperwork in minutes before you file your tax return.
For instance, tax and estate planning is a nightmare if you’re not organized.
Create a System for Paying Bills
Many banks offer automatic bill payment services, which take payment cash from your account regularly.
Nevertheless, this isn’t an entirely “hands-off” strategy.
You must ensure that your bank accounts are always adequately funded to cover all automatic withdrawals.
Please determine if there are any additional fees before signing up for automatic bill payment.
If you prefer to manage all of your bills on your own, set aside a day and time each month for bill paying.
You’ll be able to meet all of your deadlines and meet financial goals with the help of a well-organized timetable.
Remember to factor in time for postal delivery if it is required.
Dispose of Old Financial Documents
Shredding outdated documents can help you get rid of a lot of clutter.
As a general guideline, if your ATM or credit card receipts match your monthly bill and you don’t need them for tax purposes, you can destroy them.
Once you’ve received your annual W-2, you won’t need any more pay stubs.
Returns that are over seven years old can be shredded.
Old credit card and loan offers should also be discarded.
Sit Down and Form a Budget
It’s critical to keep track of and document how much money comes in and how much money leaves.
This will allow you to detect and change your monthly spending habits so that you can achieve your financial goals.
There are several iterations of budgets out there.
It’s time to do some research and choose the right one!
Related Reading: 7 Best Budget Planners To Help You Manage Your Finances – Learn More Here.
Review Your Statements and Bills
We should never avoid the fine print.
All financial paperwork should be checked for errors, fraud, or term modifications.
If you’re having trouble understanding credit card accounts, have a look at this instructional on how to read a creditor statement.
If you have any issues regarding your statements or bills, always contact customer support for a thorough breakdown.
Types of Personal Finance
We’ve been talking about personal finance as one all-encompassing thing.
It’s not.
Personal finance can be broken down into types and can be managed in different ways.
Banking
“Banking” encompasses the basic banking functions of account management and transaction support within an institution.
Loans & Mortgages
“Loans and mortgages” refer to the support and services that allow a person to leverage and get an asset in order to achieve a goal.
For example, obtaining a home loan or an education loan is considered such.
Investments
“Investments” are made by weighing all of the options and selecting the best path that allows for the acceptance of a given level of risks, such as real estate, stock market, and fixed deposit investments.
Consultations & Counseling
Counseling can be obtained for the purpose of studying the proper perspective of a financial situation.
It also acts as a guide and provides the most up-to-date information so you can make the right moves.
Related Reading: How To Get Most Out Of The Dave Ramsay Budget – Click Here To Learn More.
Gaining That Coveted Financial Freedom
Financial freedom typically entails having enough savings, assets, and cash on hand to live the life we want for ourselves and our dependents.
It encompasses amassing savings that let us retire or continue our chosen vocation without being constrained by yearly earnings.
In financial freedom, our money works for us rather than against us.
How Much Money Is Required For Financial Freedom?
To achieve complete financial freedom, there is no minimum or maximum range.
Someone might have $40,000 in his retirement account and be well on his way to financial independence.
On the other hand, someone with $5,000,000 in their retirement account may be far from it.
If you live a frugal lifestyle, you can retire at any time with as little as $40,000 in your account.
You’ll need to focus on accumulating more wealth if you want to live more lavishly.
You’ll figure out the number if you keep improving your personal finance education and solidifying your financial planning game.
Related Reading: Frugal vs. Cheap: Does It Mean The Same Thing – Read the Full Post Here.
What is the 4% Rule?
The 4% rule is a typical retirement planning rule of thumb that can assist you in avoiding running out of money in retirement.
It claims that you can withdraw 4% of your savings in your first year of retirement.
Then you adjust that amount for inflation every year after that for at least 30 years without running out of funds.
Retirement planning is crucial, and this is a solid way of doing it.
Personal Finance Products
In essence, financial goods are contracts that are purchased and sold in a marketplace.
This is a broad definition because financial products, also known as financial vehicles, are diverse and come in a variety of shapes and sizes.
As you improve your financial literacy, here are the ones you’ll probably deal with:
Securities
Securities are financial instruments that can be used to fund enterprises, banks, public institutions, or governments directly.
Securities, in essence, represent a right to something, such as an asset or a contract.
Securities can be thought of as a form of promise in this way.
A security holder is promised a payout according to the number of securities they own.
Securities can be short-term or long-term, and the money used to buy them is used to fund various companies directly.
The most common types of securities are bonds, stocks, and mutual funds.
Derivatives
A future is a sort of derivative in which two parties agree to buy and sell an asset at a specified price on a specific date.
Individual A, for example, can purchase a future that binds firm B to sell its shares at $50 per share by date X.
If the stock price rises over $50 by date X, A can profitably sell the futures contract.
Individual A is offsetting their risk by assuring that they can buy shares at a specific price even if the price of the stock rises.
The most common types of derivatives are swaps and options.
Commodities
A commodity is a financial instrument that represents ownership or a portion of a physical good or raw material.
Commodities trade typically involves precious metals or natural resources, although it can also include ‘soft’ commodities such as agricultural products or cattle.
For example, if an investor feels the price of gold will climb, they can invest in gold and potentially profit if the price rises.
The logic behind any other type of commodity is the same.
Oil commodities are bought and sold in response to changes in the price of oil, among other factors.
Currencies
Currencies aren’t typically thought of as a separate asset class or financial instrument.
However, I have to include them because they can be exchanged on the market.
Currencies are traded on international exchanges (also known as crypto exchanges) and allow people to convert one currency into another.
Different countries and entities from other countries need to deal with one another.
Therefore currency trading is practically a must.
Conclusion: Why is Personal Finance 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 in personal finance?
Why is personal finance important?
Personal finance is important since money plays a part in almost every aspect of our lives.
You’ll need to manage your funds with excellent personal finance skills in your arsenal.
The more educated you can be with money, the more secure your financial future will be.
