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As I reminisce back to my college days, I wish I’d have invested more time learning basic finance. The challenge most of us face is that finance lessons are not taught conventionally in a classroom. It is one of those areas you learn from experience. The disadvantage of this is that it could lead to a lack of retirement planning, lack of participation in the stock market, and poor borrowing behavior.
What ails many of us is a lack of money and a lack of knowledge on managing it. Alan Greenspan affirms that financial illiteracy is a major problem facing today’s generation. This article aims to bridge the gap by providing basic finance knowledge.
What is Basic Finance?
Finance is a broad term that refers to the management of monetary resources. At a personal level, basic finance refers to how you handle your money on a day-to-day basis. As children mature into adulthood, they must learn how to manage personal finances.
A parent’s greatest joy and a child’s greatest achievement is when the child becomes a financially independent and responsible adult. Being finance savvy prepares you for adulthood and ensures that you are well informed in making important financial decisions, such as which mortgage plan best suits you.
Fundamentals of Basic Finance
- Budgeting: All financial decisions should begin with budgeting. Financial author, Scott Gamm, compares spending money without a budget to driving with a blindfold on. Eventually, you’re bound to have a financial disaster. Budgeting enables you to be conscious of your spending habits so that they do not exceed your income. It also ensures that you get to prioritize bills. With recent technology, there are apps that you can use on your smartphone to simplify this process.
- Saving: If there is anything this pandemic has taught us, it is that we need to have savings because the future is unpredictable. A good way to start saving is to automatically deduct 10% of your income into your savings account. By so doing, in case of a deficit, you will need to adjust your spending rather than your savings.
- Investing: Shocking statistics indicate that 7% of Americans do not have bank accounts. Rather than keeping money under a mattress, banks offer security and solidity. Saving in a bank will also ensure your money gains interest over time which is one way of investing. Other modern ways of investing include using investment apps like TD Ameritrade and Webull, which are alternatives to Robinhood.
- Understanding credit/managing debt: It is crucial to know the difference between a debit and a credit card. A debit card is a plastic card issued to you by the bank provider that enables you to make transactions using the money in your check or savings account. A credit card allows you to make purchases on credit (using the bank’s money) with the agreement to pay it later. Each credit card has a limit that the user should not exceed. Most young people fall into the trap of thinking that credit cards offer free money, which is a myth. Every coin spent using the credit card must be paid back. To avoid a large credit card balance, ensure that you have the cash to pay back at a later date.
- Paying bills: This is technically what marks the beginning of adulthood. The ability to manage your bills without any help. Failure to do so has dire consequences. It is advisable to prioritize your bills and clear them as soon as you get paid to avoid any temptation to misuse the money.
Benefits of Basic Finance Knowledge
Even without going to a finance class, one should be able to have a simple conversation without seeming oblivious. A 2020 survey carried out in schools in the USA indicated that the majority of the high schools did not put enough focus on financial literacy. Below are the benefits of having basic financial knowledge, especially in our formative years.
Make Smart Financial Decisions
In the digital era, where everything can be purchased with the touch of a button on your smartphone, one can easily misuse one’s money. This may lead to acquiring large credit card debts, which may take years to clear. People must learn how to budget, save and manage their money effectively from a young age so that they may break this pattern and achieve financial freedom early in life.
Understand The Time Value of Money
In finance, the value of money decreases over time. The value of 1 dollar today will decrease in value ten years from now. This is one of the basic principles of finance that is important, especially in making investment decisions. Therefore, it is wise to ensure that you maximize your profits in the early stages of your investment before it begins to decrease in value.
The knowledge of this principle guides us in making apt investment decisions. One is advised to ensure that the Return on Investment is always higher than the inflation rate to compensate for any loss incurred by the inflation rate in the future.
Achieve Financial Independence
A good foundation of financial education guides you in making successful financial decisions. The basic finance concepts, if followed, ensure that you safeguard your financial security by spending less than you earn and investing the rest.
Have A Good Credit Card Score
You will be cautious of purchasing items with your credit card through basic finance knowledge unless you have cash on hand to clear it. This prevents you from accumulating a large credit card balance which you may be unable to clear. This could lead to a poor credit card score, thus jeopardizing your financial future.
Maximization of Wealth
The diversity principle in finance states that you should not risk all your money in one investment. It is better to have multiple sources of income since by doing so, you not only increase your profits but also spread your risks.
The importance of financial literacy cannot be overemphasized. Statistics indicate that more people have been focused on their finances during this pandemic. Perhaps, like the great depression, the corona pandemic may push millennials to invest more in financial literacy. As Mac Duke, the strategist, said,” financial education is more valuable than money.”