Let's Learn about Personal Finance
The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If the blog, book, course, or podcast is boring or difficult to understand, keep trying until you find something you can click on.
Learning the basics shouldn't stop your education. The economy is changing and new financial tools like budget apps are always being developed. Find resources you value and trust and continue to hone your financial skills through retirement.
What Classes Can't Teach
Personal finance education is a great idea for consumers, especially beginners, who need to learn the basics of investing or credit management. However, understanding basic concepts is not a guaranteed path to financial understanding. Human nature can often thwart the best of intentions aimed at getting good credit or building a sizable nest egg for retirement. These three key personality traits can help you stay on track:
Discipline
One of the most important principles of personal finance is systematic saving. Let's say your net income is $60,000 per year and your monthly living expenses — housing, food, transportation, and the like — are $3,200 per month. With the remaining $1,800 of your monthly salary, you can make decisions. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged health savings account (HSA)—to be eligible for one, your health insurance must be a high-deductible health plan—to meet out-of-pocket medical expenses. Let’s say that your friends like to go out several times a week, eating away at your spare cash. Lacking the discipline required to save rather than spend could keep you from saving the 10% to 15% of gross income that could have been stashed in a money market account for short-term needs.
Then, once you have your emergency stash, there’s investing discipline; it’s not just for institutional money managers who make their living by buying and selling stocks. The average investor would do well to set a target on profit taking and abide by it. For example, imagine that in February 2016 you bought shares of Apple Inc. bought for $93 and promised to sell when it crossed $110 like two months later. Unfortunately, when it happened, you broke that vow and kept the title. It returned to the downside and you exited the position in July 2016 for $97, giving up earnings of $13 per share and the opportunity to profit from another investment.
A sense of timing
Three years into your studies, you've created the emergency fund and it's time to reward yourself. A jet ski costs $3000.
Investing in growth stocks may have to wait another year. Don't have enough time to start your investment portfolio? However, delaying an investment for a year can have significant consequences. The opportunity cost of buying a private vessel can be explained by the value for money mentioned above. The $3,000 spent on the jet ski would have amounted to nearly $49,000 at 7% interest over 40 years. This is a long-term growth mutual fund. Therefore, delaying the decision to invest wisely may delay your ability to reach your goal of retiring at age 62. Doing tomorrow what you can do today extends to paying off debt. A $3,000 credit card balance will take 222 months (or 18.5 years) to retire if the minimum payment is made at $75 per month. And don't forget the interest you pay: at an annual rate of 18% (APR), that's $3,923 in those months. Dropping $3,000 this month to clear the balance is a significant savings, nearly $1,000 more than the cost of the jet ski.
Emotional separation
Personal finances are business and business should not be personal. A difficult but necessary aspect of good financial decision-making is to get rid of emotions from a transaction. Impulse buying feels good, but it can have a significant impact on long-term investment goals. For example, you can take an unwise loan to your family. Your cousin Fred, who has already burned your brother and sister, will probably not repay you either-so the wise answer is to reject his plea for help. The key to wise personal financial management is to separate emotions from reason. However, that shouldn't stop you from offering much-needed loans — or even gifts — to help out, especially in times of real trouble. Just try not to withdraw it from your savings and investment fund.
Breaking the Personal Finance Rules
The personal finance field may have more nifty tips and tricks than others. Although it is good to know these rules, each person has their own situation. Here are some rules that the wise, especially the young, should never break - but should consider breaking anyway:
Save or invest part of your income
The ideal budget is to save a portion of your salary each month for retirement, usually between 10 and 20%. While being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a given amount each period for your retirement may not always be the best choice, especially for young people just getting started in the real world. For one thing, many young adults and students need to think about paying for the biggest expenses of their lifetime, such as a new car, home, or postsecondary education.
Taking away potentially 10% to 20% of available funds would be a definite setback in making those purchases. Additionally, saving for retirement doesn’t make a whole lot of sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card probably would negate the returns that you get from your balanced mutual fund retirement portfolio five times over. Finally, saving some money to travel and experience new places and cultures can be especially rewarding for a young person who’s still not sure about their path in life.
Long-term Investing/Investing in Riskier Assets The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Being able to adapt to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age. Now, if you are no longer married to long-term investment ideas, you can insist on safer investments.
The rationale was that young investors should invest in high-risk ventures because the investment period is very long. After all, they have the rest of their lives to recover from the losses they could inflict. However, if you don't need it, you don't have to take undue risk with short and medium-term investments. The idea of ​​diversification is an important part of building a strong investment portfolio. This includes both the single security risk and the expected investment term. On the other side of the age group, near retirement and at the time of retirement, investors are encouraged to cut back on safer investments, even if they can invest less than inflation-to preserve capital. It's important to take less risk because the time you have to make money and recover from a bad financial situation is getting shorter. Some growth investments may still make sense.
What resources can I learn about personal finance?
There are many books and ebooks in public libraries that should be free. You can also listen to podcasts, read popular online finance blogs, and sign up for free online courses. Choose a book, blog, podcast, or course that interests you and makes you want to learn.
What personal qualities help you manage money?
Putting away retirement money over the years, getting out of debt and avoiding overspending takes discipline. Plus, managing your finances when you need to deal with them can help you reach your goals over time. And a bit of emotional detachment is helpful to stay focused and avoid making any relative's rescue request.
How to prepare budget smartly?
One way to consider is the 50/30/20 budget rule. Fifty percent of your income should be spent on essential living expenses – rent/mortgage, food, utilities, etc. Another 30% should go to discretionary spending, such as restaurant food and clothing purchases. And the last 20% should be used to pay off your loans and invest in your future retirement.