One of the most critical aspects of adult life is managing finances and paying bills. Though, it is not uncommon that people graduate from high school, even college, without formal education on personal finance.
Luckily, it is never too late to learn!
Further, it is never too late to implement better personal financial management practices. Every penny not spent can be a penny saved. And every penny saved really does count. Whether or not you’re currently facing financial struggles, it is always a good time, and a good idea, to learn about the best money practices and solid financial management.
Without further ado, read on to learn 5 things you should know about money!
Follow our blog for our upcoming article 5 More Things Everyone Should Know About Money!
- You must earn more than you spend.
We understand this one is obvious. We chose to include it on the list because as of 2016 the average American carries $3,600 in credit card debt. Moreover, for households that carry credit card balances forward, the average credit card debt is $16,048.
For many reasons, including the rising cost of living, incomes that do not increase with rising costs, unemployment, and many other factors, many people routinely spend more than they earn. Of course short-term loans or putting large, necessary purchases on a credit card to be paid off over many months (think tires for your car) is okay; however, a habit of spending more than you earn will lead to financial crisis.
- The sooner you begin saving, the more you will save.
While this one seems obvious, too, part of why it is true is not so obvious.
Saving early will help you save more because of compound interest. When your money earns interest, that interest is added to the principal sum. Moving forward, that increased principle sum earns interest. Compound interest is essentially earning interest on interest.
Thanks to the powers of compound interest, the earlier you save money the more will accumulate.
- Always hold your money in an interest-bearing account.
For your money to earn interest, and to benefit from compounded interest, your money must be held in an interest-bearing account.
Shop around for the best one. Regular interest-bearing savings accounts typically do not offer the highest interest rates. On the other hand, CD’s typically offer higher interest rates but tie your money up for a prescribed timeframe. Money Market accounts may offer more favorable interest rates than regular savings accounts, while still allowing you unfettered access to your money.
Yes, higher interest matters. Consider this: if you increase your annual interest rate from 1% to 2% on $50,000 in savings, your money will go from earning $500 in interest to $1,000 without you having to do a thing. These higher earnings year-after-year are added to the principal, creating significant gains in compounded interest over time as well!
Long-term Savings & Investments
For long-term savings (think retirement, not savings for a house down payment) make sure your money is invested wisely. If you choose to invest in riskier securities make sure that your portfolio is diversified to mitigate risks and ensure long-term portfolio growth.
- Insurance is a good thing.
Even though insurance policies come with annual premiums, having the proper and adequate coverage is wise financial planning.
There is no need to dwell on worst-case scenarios, but it is important to carry insurance policies with the appropriate coverage for renters’ or homeowners’ insurance, car insurance, disability insurance, and health insurance.
Before automatically renewing your annual policies, make sure to:
- Review the policy and make sure it offers the coverage you need.
- Shop around for the best price.
- It is critical that you take steps to protect yourself from identity theft and continually monitor your credit report.
Identity theft is a serious and growing problem in the financial sector. Carefully review your monthly account statements, check for expenses, charges, or changes you do not recognize or did not authorize.
Further, protecting your credit report is an essential step in protecting your ability to borrow money on favorable terms, including obtaining loans for a car or house. Everyone should keep an eye on their credit report. This is true even if you are not having financial struggles.
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