The main reason for most financial issues is a plain lack of financial literacy. Then again, not everyone can be a financial expert. But every person should master some personal finance basics─ no matter their education level.
The finance category can be pretty broad. Yet there are basic checklist items you should master for a healthy financial future. Here are the 9 most important things about personal finance that everyone should know.
1. Understand How Income Taxes Work
It’s crucial to get a grip on taxes even before you receive your first paycheck. As an employee working for a company, you need to know how to calculate whether your take-home pay meets your financial goals and obligations.
The good thing, there are many online calculators you can use to determine your payroll taxes. These online tools will show you the gross salary and net pay.
2. Set Clear Financial Goals
Without a set goal to work towards, it can be an uphill task finding the drive or passion for saving. Carefully setting your goals and crafting a savings plan can help you achieve your targets. This doesn’t matter if you’re saving for retirement or a new home.
As you set financial goals, you want to make them SMART goals─ specific, measurable, actionable, realistic and time-bound. Establishing goals with these guidelines in mind can help ensure you’re working towards something achievable within a specific time.
3. Always Have Emergency Savings
Life can be unpredictable. You never know when you might get sick, lose your job or something unfortunate happens that impacts your income. If you get into financial troubles and don’t have savings, you run the risk of taking on debt.
To avoid the disastrous effects of unexpected hits, have an emergency fund with up to six months’ worth of living expenses. You should open a savings account to keep that money. That way, you can be sure cash will be available to you at a moment’s notice.
4. Know How Interest Rates and Credit Cards Work
Understanding how credit cards and interest rates work can save you from a lifetime of financial stress. Credit is useful when paying it back monthly. But remember the interest it accrues can work against a borrower carrying a hefty balance.
The lessons you learn about credit don’t have to be complicated either. At the very basic, you should know that interest on credit piles every day when you carry a balance. Interest on credit might be a huge contribution to your bills if you don’t pay off your monthly charges completely.
You also need to be aware that you’ll need to pay back all dollars you charge. Use credit wisely and avoid buying things you can’t afford. These simple tips can go a long way to helping you build a solid financial future.
5. Importance of Reducing Big Expenses
The biggest expenses will likely be housing, transportation and food for most people. Saving money on these three alone is a good starting place.
As for housing, try to find a cheaper place to live. If you aren’t married, consider sharing an apartment with friends or even continue living with your parents. For transportation, figure out if it’s cheaper to take public transport.
As for food, plan your meals, buy in bulk and don’t shop when you’re hungry. Consider also cutting out frivolous spending and too many unnecessary expenses like monthly subscriptions.
6. Save for Retirement Early
Many young people aren’t concerned with saving for retirement (and that’s a mistake). To take advantage of compound returns, for example, you often need to start saving as early as possible.
Take a look at 401(k) and find out if you can contribute to one. Don’t know where to start?
Numerous companies provide wealth building and well management advice to both young adults and seniors. They coach these audiences about retirement planning and offer finance tips that can help eliminate financial worries that might get in the way.
7. Understanding Risk Tolerance
Risk tolerance is one of the crucial finance concepts for anyone in charge of their money. It refers to understanding the swings happening in both bull and bear markets. It’s about knowing the “lows” and “highs” of the financial markets and how comfortable you are risking your investments.
Risk tolerance goes beyond emotions. It depends on your future earning potential and how much time you have to invest. It also includes the assets you have that are not invested.
8. Importance of Sleep
Lack of sleep coupled with high levels of stress can negatively affect your life. Getting enough sleep will help you make sound, less risky financial decisions. It also helps maintain willpower, which you’ll need to stick to plans.
The American Academy of Sleep Medicine advises adults to sleep for at least 7 hours. Getting enough sleep is vital to your health.
Individuals who sleep for less than the recommended nighttime hours are at higher risk for health issues like obesity and cardiovascular disease. Remember, fewer illnesses mean lower medical expenses.
9. There’s No One-Size-Fits-All Strategy
Although the concepts we share so assuredly above, keep in mind that personal finance basics are personal. Golden rules don’t apply to everyone. Even personal finance experts disagree on many things. For instance, if you should use credit cards or pay your mortgage off early.
Different people have different financial goals and budgeting strategies. So, learn as much as you can and fine-tune the knowledge to fit your situation.
Start Applying These Personal Finance Basics to Your Life
Many people don’t understand how to make sound financial choices. But that’s not entirely their fault. Schools tend not to teach personal finance and graduates feel unequipped to share lessons about saving, spending and investing.
To most individuals, creating a financially secure future seems like an overwhelming task. Having some understanding of finance basics can help you navigate today’s economy and plan a better financial future. For more tips and advice on finances, check out the rest of our blog.