Why is it important to learn personal finance?
Personal finance, simply put, is all about managing your money. It’s about earning, spending, saving, investing, insuring, and everything in between. It’s about setting financial goals and creating and carrying out plans to meet those goals. It’s about making rational financial decisions throughout life. To say that learning personal finance is important is an understatement. It is the key to a secure and successful life.
Unfortunately, a lot of people fail to recognize the importance and relevance of personal finance education. Some believe that it is reserved only for those who have too much money to handle. Others assume that they are already in perfect control of their financial affairs. Then there are those who simply hate the very idea of any form of financial education!
If you are still unconvinced of the merits of acquiring money management skills, here are ten reasons you need to know why it’s important to learn personal finance.
1. Increase income
Learning personal finance opens up plenty of opportunities for you to increase your income and build wealth. One such opportunity is investing.
Investing is one – if not altogether the best – way to build wealth. Warren Buffet, widely renowned as one of the greatest investors in history, amassed his multibillion dollar fortune largely through investing. George Soros is another successful investor, as well as John Templeton, John Bogle, and William Gross, among others.
However, most people deliberately avoid investing, either from a lack of knowledge of it, or from a lot of misconceptions. Because of this, they miss out on a highly lucrative opportunity to raise their earnings.
Investing can be seem very confusing and quite intimidating if you don’t know much about it. But once you begin to understand its concepts, you start to appreciate its benefits.
In turn, you begin to look at investing in a favorable light. Stocks, bonds, and money market instruments like treasury bills and certificates of deposit, among other investment vehicles, are not so confusing or intimidating anymore. In fact, you are now more inclined to invest your money.
While it is true that there is no guarantee of financial gain from investing, putting in some effort on your part can improve your odds of success. To temper the inherent danger of investing and actually turn a profit, mastering the principles of risk management is key.
The more you improve your understanding of investing, the more you increase your likelihood of making – and multiplying – profits from investing. You can better choose what investment vehicles are most appropriate to your financial goals, and what risks are worth taking.
Moreover, you can easily identify, and so steer clear of, investment frauds and scams that others without knowledge of investing are likely to fall unwittingly into.
Financial education can help you earn more from employment. Some of the highest paying careers are within the finance industry, itself one of the more lucrative industries in many economies.
Knowledge of personal finance can be helpful if you are looking for ways to raise your income from your current job. Working longer hours is one, but there are better and more efficient ways to earn more, like learning how to negotiate.
Negotiating a salary raise or asking for a promotion are easier said than done, but you will feel more empowered when you are aware of your true value to the company.
When you know how to back your request with well-researched data, like presenting the salaries your company’s competitors are offering for your position, then you are more likely to make gains on the negotiation table.
Besides, just knowing that your wages simply will not – will never – suffice to meet your financial goals is already motivation enough to make the request!
Mastering money management skills also opens up numerous opportunities for you to raise your revenues beyond your nine-to-five. Taking up a second job is one. Engaging in side hustles and paying gigs is another. Selling things you don’t use anymore, or renting out stuff, can bring in additional cash. Or why not start your own business and let your entrepreneurial spirit be put to the test?
2. Avoid overspending
When you learn personal finance, you learn that keeping track of your expenses, and creating and sticking to a budget, enable you to maximize your income and avoid overspending.
Tracking your expenses makes it possible for you to see where your money is going. By having a clear picture of your spending pattern and the nature of your expenses, you can make more prudent decisions on managing your income.
You can easily distinguish between essential and nonessential expenses, and so know where to make the necessary adjustments and by how much. Moreover, keeping track of your spending is necessary before you can create a budget.
A budget is essentially a plan for how and where you want to spend your money. It allows you to make the most out of your income by ensuring that every dollar is being used how you want it.
A budget enables you to direct your income according to your financial goals, ensuring that you always have money for the things that matter most. An ideal budget puts priority on fixed and essential expenses, allocates money for debt payments, ensures that you never neglect saving, and helps you avoid overspending on unimportant things.
Budgeting is one of the most important skills you can learn. It is key to taking control of your finances. Unfortunately, the vast of majority of people fail to understand its value. There are those who just hate the thought of budgeting, believing that it restricts their fun and freedom with their money.
But if you learn personal finance, you learn to appreciate budgeting and its many advantages. A budget does not restrict spending; on the contrary, it actually gives you freedom to spend your money on things that really matter. Besides, an ideal budget is not too strict nor too austere – it allows for enough wiggle room, and some fun money, too!
Knowledge of personal finance empowers you to make prudent decisions with your purchases. It teaches you effective strategies to prevent yourself from impulse buying. It encourages you to put in the time and thought to every purchase you make, so that you avoid overspending and save yourself from buyer’s remorse.
Overall, personal finance education promotes a frugal lifestyle. That means living below your means by keeping costs down as much as possible. Forgo the fancy, flashy, and frivolous for now. Develop thrifty spending habits instead. The more money you retain, the more you have for saving and investing.
Keep in mind, however, that thrift is not tantamount to deprivation. Being thrifty does not mean that you have to stop enjoying your life. It only means that you have to understand costs and know what expenses must take priority. So don’t be too harsh on yourself – if you are, you’re only setting yourself up for failure!
3. Build up savings
Saving is one of the key principles of personal finance. It is one of the first and most critical steps to achieving financial security and success. When you learn how to manage your money, you learn the importance of saving, and why it is crucial to save as early as possible and as often as you can.
Saving essentially means preparing for the future – from having enough funds to cover unplanned expenses, to having money set aside to fulfill your goals in life.
When you learn personal finance, you learn that saving is more meaningful and motivating when you have a specific goal or purpose for the money you are setting aside.
A prudent saving strategy starts with an emergency fund. It will help secure yourself from financial contingencies, be it illness, loss of income, or simply when something essential needs purchasing, like a new roof for your house or a new battery for your car. That way, you do not have to resort to debt.
From there, you can decide what other worthwhile goals to save for. Short-term goals include setting aside money for a new smartphone, a car, or vacations. Long-term goals include saving for a mortgage deposit, your child’s college education, or retirement.
Saving for retirement, a long-term goal, takes full advantage of compound interest. It’s earning interest on interest over time. The more time you allow your savings to grow, the more you accelerate your earnings. So saving for retirement as early as possible is always wise.
There are numerous types of savings vehicles. Learning personal financial skills allows you to distinguish between the different types, determine their respective advantages and disadvantages, and decide what is most appropriate to your goal.
When you appreciate the importance of setting aside money or future use, you make sure that you never neglect on saving, and that you always make it a priority. Most people regard saving as an afterthought. They spend first, then save only what is left over. Unfortunately, most of the time, there is really nothing left over to save!
Having personal financial education, however, ensures you save first, and always. Every time you receive money, a portion of it goes straight to your savings. When you create a budget, saving is always one of your priorities.
Saving can sometimes be a struggle. There are a lot of people who, despite being convinced of the merits of saving, either find it difficult to start, or once started, to sustain the habit of saving.
But if you learn personal finance, you learn ways to expedite saving. There are different strategies that take the work out of saving and make the process automatic, such as direct deposits and scheduled transfers. There are also plenty of apps to help you make saving easier and faster.
4. Improve credit score
Not all debt is bad. A good kind of debt is one that helps you increase your income and build wealth. For this reason, a good debt is considered as an investment that might become profitable in the future.
A good debt is usually incurred when you have a clearly defined purpose for the money you are borrowing, and a workable plan for paying it back as quickly, consistently, and cheaply as possible.
Borrowing money to pay for a technical or college education is considered a good debt. Education after all, is an investment. The better education you have, the more you increase your earning potential. Taking out a student loan to pursue a carefully chosen degree program – one that guarantees employment in a well-paying professional field – from a reasonably priced college ensures that you never have difficulties in getting a job and earning a steady paycheck.
Another instance of a good debt is when you apply for a mortgage loan to purchase a house, live in the house for some years, and then sell it at a profit. Or when you take out a loan to finance your small business, and your business eventually does well and ends up being worth ten times its original value.
When used wisely, debt can be a wealth-enhancing tool. But your ability to borrow money is largely determined by your credit score.
A credit score is a three-digit number that indicates how likely you are to repay your debt on time. It helps lenders – banks, credit card companies, even car dealerships, among others – determine the risk associated with lending you money, and so decide whether or not to offer you credit and what the terms of the offer will be.
Your credit score is calculated using different factors, among which include your credit payment history, outstanding debts, credit mix, and the frequency of your applications for new credit.
Credits scores generally range from 300 to 850. A high score can indicate to creditors that you make better credit decisions, and so have a higher likelihood that you will repay your debt as agreed.
Credit scores are very important. Having good credit determines whether you can get a loan to pay for your tuition, or purchase your new home, or finance your small business. It can also determine whether you are able to get a credit card, rent the apartment you want, get a cell phone service you need, qualify for savings on discounted insurance premiums, or even be hired for the job you applied for.
Knowledge of personal finance enables you to appreciate the value of good credit and its impact on your financial well-being. It encourages you to develop prudent financial habits to build a solid credit history and improve your credit score.
When you learn personal finance, you learn plenty of ways to improve and maintain your score. You know how crucial it is to make loan payments on schedule and for the correct amount, to use your credit card responsibly and pay your credit card balance in full each month, and to pay your bills on time.
5. Become debt-free
The bad kinds of debts are those incurred for no real financial gain. Bad debts are those that are spent on things that will lose value over time, and will neither generate you income nor help you increase your net worth. Bad debts are also those incurred without any realistic repayment plans.
Using a credit card to finance a lifestyle beyond your means is bad debt. Taking out a personal loan to pay for a luxury holiday is another. Resorting to a payday loan to tide you over until your next paycheck is also bad debt because of the unreasonably high interest rate involved. Even the debts you make out of good intentions can become bad and turn into financial burdens.
Being in debt is difficult, and getting out of it is not without its challenges. Knowledge of personal finance, however, can help you eliminate debt once and for all, and ensure that you never fall into debt traps ever again.
Effective budgeting skills enable you to direct your income to eliminating your debt. By prioritizing allocations for debt payments in your budget, you ensure that you are on track to becoming debt-free.
Personal financial education teaches you several strategies to paying off debt. One strategy is known as the debt snowball method. This method prioritizes settling debts according to their size, beginning with the smallest balances first, while making minimum payments on the larger ones. By paying off smaller loans first, you can clear several loans early on, and then proceed to make full payments on the larger balances. Seeing your payments “snowball” as you clear your debts from the smallest to the largest is psychologically rewarding.
In contrast, the debt avalanche method prioritizes paying off the debt with the highest interest rate first while only making minimum payments on the rest of your loans. Once you’ve paid off your highest interest rate debt, you settle the debt with the next highest interest, and so on and so forth. With this method, you can pay off your debts faster while reducing overall interest rates.
When you learn personal finance, you learn to develop good financial habits that will help you avoid getting entangled in debt. Budgeting empowers you to make the most out of your income by prioritizing essential expenses, and streamlining nonessential ones, ensuring that you do not have to rely on credit cards or loans to cover spending gaps.
Knowledge of personal finance encourages you to use your credit card responsibly to avoid overspending. Saving ensures that you do not have to resort to debt to pay for emergency expenses. Practicing thrift and frugality enables you to avoid becoming mired in debt to finance a lifestyle beyond your means.
6. Reduce stress
Do you stress over how to make your paycheck last long enough until the next one?
Does fretting over your debts keep you up at night?
Does brooding over your state of finances give you terrible headaches?
Worrying about money is not an uncommon thing at all. Almost all people get stressed over their finances almost all the time. It’s very common. But it’s awful. And it’s not healthy.
Learning personal finance empowers you to take control of your finances and ensures that you worry less – even worry no more – about money.
Financial literacy opens up plenty of opportunities for you to increase your income, such as opportunities in investment and employment, among others. You can worry less when you know you are making enough not only to pay for your day-to-day living, but also to meet your goals in life.
Effective budgeting skills allow you to manage your income and make the most out of it. You can worry less when you know that you have an efficient budget that takes care of your needs before anything else, and makes sure that you are always on track towards your financial goals.
Good spending habits ensure that you are never wasteful with your money. You can worry less when you know that you never overspend, and that you never have to rely on debt to cover spending gaps.
A prudent saving strategy affords you safety and security from emergency expenses that would otherwise take a toll not only on your finances, but also on your physical, emotional, and mental well-being. You can worry less when you know that you have enough funds to cover several months of your expenses should you get sick or lose your job without having to resort to debt.
Besides, having reliable insurance – life, health, auto, homeowners, and otherwise – can ease the effects of unexpected financial difficulties. You can worry less when you know that you have insured your car, your house, your ability to make a living, and should you die, the financial future of those you leave behind.
7. Raise standard of living
Learning personal finance not only enhances your financial well-being, but is critical to raising your standard of living. While it does not necessarily guarantee you a luxurious life, it can help you attain a certain level of comfort.
Financial literacy affords you access to numerous opportunities in investment, employment, and otherwise, to increase your income, build wealth, and enhance your level of comfort.
Prudent budgeting and spending practices enable you to spend your money in the most efficient manner to provide for your needs, guarantee you the most possible comforts, and fulfill your goals in life.
Saving not only provides you a safety net for financial emergencies, but also allows you to plan for large expenses without having to rely on debt and disrupting your overall financial position. Moreover, a smart saving strategy enables you to build enough wealth to ensure a comfortable retirement.
Knowledge of debt and how to manage it makes it possible to employ debt to generate income and increase your wealth. Maintaining good credit helps you reach the important milestones in life – like buying a car or a house – faster and with far less difficulties.
8. Retire early
Saving for retirement is undoubtedly one of the most important financial goals you will ever have. Setting aside money now for a retirement plan ensures that you have enough funds to enjoy a comfortable life when you finally stop working. Unfortunately, a lot of people delay saving for retirement simply because retirement seems a long way off.
When you learn personal finance, you understand the benefits of saving for retirement as early as possible, and know how much you need to save for a comfortable retirement.
Saving for retirement relies on the miracle of compound interest. Its interest earned on money that was previously earned as interest. By earning interest on interest, your retirement savings account grows increasingly faster over time. The more time you allow your savings to grow, the more you accelerate your earnings.
Because of this, the younger you start saving for retirement, the better. The longer time you have to save, the smaller the amounts you need to put aside to reach your retirement goals.
More important, a combination of savvy investing decisions, prudent saving practices, and thrifty spending habits can help you achieve financial independence at a younger age and enjoy an early retirement!
9. Achieve life goals
What are your goals in life?
Become a billionaire?
Travel the world?
Retire at 35?
Whatever your goals are in life, you need money to make all of them come true, or at least most of them, anyway. Money can’t buy happiness per se, but it can buy many of the things that give you happiness.
The whole point of learning personal finance is to teach you how to manage your money in the most effective and efficient way to achieve your financial goals.
Your success in fulfilling the financial goals you have set beforehand depends on how well you understand and use the opportunities afforded by personal financial education, from selecting investments that match your needs, recognizing the benefits of a prudent saving strategy, to taking full advantage of the power of compounding to build your retirement fund.
Remember that sound financial decision-making has far-reaching consequences, and your day-to-day choices about your money will affect your entire life. Knowledge of personal finance empowers you to make prudent decisions with your money, which, in the end, will decide whether you realize your goals in life.
10. Set an example for the next generation
There are habits that children learn best by example. Good personal financial habits are among them.
People who have little to no knowledge of personal finance management, those who are financially illiterate, are likely to raise their children with similar behavior. When children see their parents constantly struggling with their finances – neglecting budgeting, spending out of impulse, disregarding saving, always borrowing money to cover spending gaps, unable to get out of debt – they are likely to repeat that behavior as adults.
It is important that you learn personal finance and set a good example to your children. When they see first-hand the benefits of your financial literacy to your and their lives – such as having sufficient income, maintaining an optimal level of readiness for emergencies, being debt-free, and enjoying an improved standard of living, among others – they can better appreciate the importance of learning personal finance.
Teaching your children the values and virtues of personal financial management is one of the most crucial things you can do as a parent to ensure their success. It empowers them to make wiser decisions with their money, which enables them to achieve financial independence. In turn, they will pass the knowledge to their children, and so on and so forth.
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