When I was in school, the most we learned about personal finance was how to write and check, how to balance a checkbook, and how compound interest works. Did you know that as few as 13 states require high school students to take and pass a personal finance course to graduate? I know that some of these may seem pretty basic, but you would be surprised the number of people who don’t know or understand these personal finance basics. Here are five personal finance basics everyone should know.
1. How To Budget
I was well into my twenties before I learned how to budget and I am not ashamed to say that. Budgeting is as simple as learning to prioritize. The best way to decide where your money goes is to create a monthly budget. First, calculate how much money you have coming in. Next, identify your needs, i.e. food, shelter, insurance, transportation. Finally, add those up and subtract from your monthly income. You may want to add your monthly savings to your needs, just to make sure that you are making saving a priority. Once this is done, you will know how much you have left over for discretionary spending. If you need help with setting a budget, you may want to participate in my beta test for the new Money Makeover Planner.
2. The Time Value Of Money
Saving a small amount each day can do a world of good for your finances. Instead of spending that $8-10 a day on lunch try putting that amount in an interest-bearing savings account and let it sit. This concept is something that is beneficial to all ages but can be super beneficial to younger people, who can accumulate a lot of money over the years from learning simple steps to cut their daily expenses.
3. Checking Account versus Savings Account
Okay, I know this is super basic but I am going to cover it anyway. A savings account is an account in which you deposit money into and watch it grow to accumulate interest. Some banks may require you to have a minimum balance in order to keep the account open. Since you won’t be using this money daily it can grow. Daily use money is to be kept in a checking account. You can use the checks to pay for expenses such as bills. You can also get a debit card to go with the checking account so that you can make purchases or withdraw money from the ATM.
I understand some debt is unavoidable. Accumulating massive amounts of debt such as with student loans, credit cards or car loans can wreak havoc on your personal finance and credit score. The average household carries $16,000 in credit card debt. If you miss a payment on any of your debts it may be hard to recover.
A high credit score makes businesses like auto lenders, banks, and insurance companies view you as a trustworthy risk. When you are just starting out, opening a checking or savings account enables you to show lenders that you can manage money. Keeping your credit score high also helps with qualifying for that dream job you want, as many employers check your credit before hiring you.