A few weeks ago we published 5 Things Everyone Should Know About Money. Since there are a lot more than 5 things we should all know, we decided to do a follow up article with 5 more things everyone should know about money!
One of the most critical aspects of adult life is managing finances and paying bills. Yet, it is not uncommon that people graduate from school without any formal education on personal finance.
Luckily, it is never too late to learn! Without further ado, read on to learn 5 more things you should know about money!
- You need an emergency savings.
Emergencies happen, and they can be expensive. A major car repair, a trip to the emergency room, or last-minute travel expenses to attend a memorial service can cost hundreds, even thousands of dollars. Without an emergency savings to cushion for such expenses, you could rack up debt that takes you months or years to pay off.
It is a good financial practice to have at least 3 to 6-months of living expenses in emergency savings.
- The potential for high rewards means higher risks.
An investment with the potential of earning you a lot of money is inherently a risky investment. On the other hand, an investments that does not come with the potential of earning you much money is a safer investment.
For example, putting your money into a savings account with a 1% annual interest rate is a safe investment. Investing seed money into a startup business that issues you equity shares is risky, but if the business succeeds could be quite lucrative.
Classifying investments as either “safe” or “risky” is a simplistic way to look at investing. Just understand that if you choose to make a risky investment, make sure you are in a position where losing the investment will not ruin your financial health.
This leads us to our next point…
- Some investment risks can be mitigated with diversification.
You may have heard that it’s a good thing to “diversify your portfolio,” but what does that mean? Well, you can think of diversifying investments as not putting all of your eggs in one basket. Diversification means that investment are made in various financial instruments, across a number of different industries. Different types of investments and different industries will react differently to the same event. Diversification serves the goal of maximizing return, and also mitigating risk.
As an example, if you have a 401(k) account it is likely diversified. Some of it may be held in riskier investments with the potential for large returns, with the remainder held in investments known to be less risky, but with lower returns.
- You can set up automatic savings!
As we noted in our article Simple Ways to Save More you can and should automate your savings!
One of the simplest ways to save more is to put a percentage of your salary directly into savings as soon as you’re paid. The great thing about advances in banking technology is that you can even set savings up on autopilot! This can be accomplished in two ways:
- Direct Deposit: If your employer offers direct deposit, see if you can have a specific amount of your check deposited directly into savings while the remainder goes into your checking account.
- Direct Transfer: Many banks offer a service that automatically transfer a portion of your paycheck into savings. Check with your bank to see if they offer this service.
- Spending your money on experiences is more rewarding than buying stuff.
Money cannot buy happiness, but it can pay for experiences that bring joy and create cherished memories. In fact, studies have found that people who spend their money on experiences instead of material items are happier and felt the money was better spent.
The shiniest, newest gadget may be fun, but swimming with dolphins or whatever fun-adventure you’ve always dreamed of going on seems far more rewarding.
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