Finance plays a significant role in everyone’s lives. Most of the time, we require money; whether we need to eat, want to marry, have children, or travel, depends on our money management, a skill most young people just out of school lack.
The educational system does not prepare anyone for meeting the demands required to ensure that they manage their personal finances. Even finance graduates and majors know very little about personal finances when leaving college, despite learning about investing and the qualities to look for in a good asset.
Painful Consequences of Having No Financial Knowledge
One of the biggest causes of stress is terrible financial decisions that lead to growing debt, no savings, and bankruptcies. Besides, financial problems often lead to divorce, depression, and poor health.
Recently, CNBC reported that two-thirds of the U.S. population lives paycheck to paycheck because of the surging cost of living. However, statistics also indicate that some basic knowledge can help the nearly 50% of Americans with no emergency fund and the vast number of households with excessive credit card debt to understand better how to manage their money.
Another huge problem faced by the U.S. is the combined debt of millennials – believed to stand at over $1.52 trillion as they begin their careers after their studies.
Most Americans need at least $1 million for retirement. Still, as many as 33% have made no savings toward this, and they do not know the importance of starting early to cash in on compound interest rates.
What I Learned About Finance
I worked in finance for nine years, and during this time, I realized the importance of personal finance. This is what I have learned about the importance of financial knowledge and money management skills so far:
1. Invest Your Money Often From as Early As Possible
The best approach is to invest in assets like stocks and property that can grow in value over time. Sometimes, the initial investment may yield losses, but the idea is a long-term strategy. Of course, some money in the bank is essential for emergencies, but you shouldn’t leave all your money there because of inflation which gradually diminishes its value.
Remember, the best strategy is to find your investment risk type before deciding on the types of investments– high-growth stocks can yield bigger rewards and more significant risks. On the other hand, dividend stocks remain safer while also proving the dividends for ready cash.
The sooner you begin to invest, and the more often you invest, the more your rewards, thanks to the compounding nature of most investments.
2. Keep Track of Income and Expenditure
I have learned that it is crucial to keep track of your financial state. Use a spreadsheet to track everything you earn and spend. Understanding your current income and expenses can help you understand your future financial needs. It will also help you realize where you can take measures to spend less and where you can try and increase your income streams.
3. Only Take Debt You Can Pay Off
Most debt cripples your finances, especially credit card debt with high-interest rates. However, I learned that some debt is good. For example, with mortgages, if you get an asset at a reasonable price with an opportunity to beat the interest rate with a good return later.
If you have a credit card or student debt, make their repayment your priority, and avoid getting into this type of debt. In addition, lessons about student debt would be helpful at school since many young people end up at expensive state universities that require many years to pay off. They could start their studies at a community or cheaper college to avoid this debt and finish them at a more expensive college, saving themselves quite a bit of money.
4. Live Frugally
Having worked in finance, I have seen that most people with lots of money don’t buy expensive homes or drive flashy cars that lose their value quickly. Instead, living frugally and not beyond their means has helped them accumulate a nest egg that gives them financial freedom.
Buying a smaller house or a used car makes financial sense to ensure you have enough money to increase your investments and grow your portfolio.
Not everyone understands finance since schools don’t prepare us. Unless you work in finance, it can sometimes take many years to learn how to understand and manage your money. These tips can help you, but if you want to learn more, read this article to help you find a suitable finance book that can help you make better spending and investment decisions.