Financial literacy isn’t typically taught in schools, and parents don’t think it’s an important lesson despite the importance of money in life. Unfortunately, a lack of financial expertise and planning causes several young adults to rack up credit card debt. They live paycheck to paycheck and aren’t able to save enough for retirement.
That said, the good news is that these issues can be resolved by knowing a few personal finance basics. We’re talking about stuff you’ve never learned in high schools, like why budgeting matters and how you can reduce your debt.
So, without further ado, here are a few personal finance basics that can help you get your finances in order.
The foundation of financial success is a strong budget. In simpler terms, when we create a budget, we create a plan of spending our money. Creating one allows you to allocate money for different needs. When you’re budgeting, you need to identify your different sources of income and be clear about what you want to spend your money on.
Your needs refer to the things you need to survive, like food, water, and shelter. On the other hand, wants to describe your desires like going on a vacation, buying decorative items, and eating out. Lastly, you also need to accommodate emergencies and know your short-term and long-term goals. Once you’re aware of these two aspects, you’ll know where to invest your money and how much you need to save.
Make sure that your budget is realistic. Once it’s complete, keep reviewing it periodically.
There’s no way you can know when your car will break down or when you’ll have to take your pet to the vet. If you don’t have money saved for what life’s going to throw at you, you may rack up high credit card debt since you’ll be defaulting on all your bills.
To avoid this particular instance, start putting some money aside every month for an emergency fund. One rule of thumb is to keep at least four to six months of living expenses set aside in a savings account. We’d recommend choosing an account that gives you a high-interest rate and is easily accessible. Some good options can be a:
· Cash management account
· High-yield savings account
· Online savings account
If you’re making late payments or missing your bills entirely, your creditor may impose a late payment penalty on you. If you delay your payment for a long period, your account may go into delinquency, or it may also be sent to collections.
These late payments may also affect your credit score adversely. The people who lend you money will look at your credit score to help assess your payback ability. While most people may not know this, their payment history accounts for 35% of their credit score, so if you have a history of late payments, your credit score may take a huge hit.
A poor credit score makes it difficult to get loans. Even if you get them, they’ll have a high-interest rate. To ensure you never miss any of your bills, you can set up automatic payments or make a list of all of your bills and their due dates.
Investing is essential to grow your savings and build a pool to address your long-term and short-term goals. You can invest in market-linked and fixed-return products. In the latter, you get a fixed return, but the returns depend on how the market performs in the former. Company deposits, recurring deposits, and bank fixed deposits are examples of instruments that give you fixed returns.
On the other hand, other financial instruments like bonds and stocks give returns based on the market’s performance. When you’re investing, consider the amount of risk you can take and the money you can invest. Then based on these two considerations, select the instrument you want to invest in.
Seems obvious, right?
But most Australians fall into this trap pretty easily without even realizing it. If you don’t live within your means or pay close attention to your spending habits, you may accumulate debt quickly or have a small amount of savings. Almost every financial publication preaches this message, but few people can grasp it even though it may seem simple.
Being responsible with your money requires basic skills that many of us were never taught in an educational institution. Fortunately, it’s still not too late to educate yourself about money management. Start today; set your goals (like buying a BMW X3) and start crushing them one by one!
The feeling can be immensely rewarding!