Learning about personal finance is the basis for success! If you are looking for a class at your local high school or community college, you will probably be disappointed. Online classes are somewhat limited although there are many books written about the subject. You can find such diverse subjects online as accounting, corporate finance or other college business classes. Does it mean that there is no demand for it?
There are so many ways to control your finances such as credit cards, credit limits, credit scores, debit cards, cash, savings accounts and just plain financial responsibility. With all these controls, why do you need to know much about personal finance? You need to understand personal finance because you use it every day! You earn, spend and use money in a variety of ways and you should know something about it so you can do it well.
Basic Earnings
You get your first job in high school just because you want to buy a car. Buying the car is a goal and it requires earning money to reach it. In order to reach that goal, you get a job that pays you an hourly wage. You need to understand gross and net pay! Gross pay is an individual’s total (weekly, biweekly, semi-monthly or monthly) pay before taking taxes or deductions into account. In other words, your hours worked times your hourly wage equals your gross pay.
Net pay or take-home pay is the remaining amount of an employee’s gross pay after deductions such as taxes and retirement deductions are made. The remainder is what you actually have left for groceries, rent/mortgage, clothes etc. Understanding your personal finances including where you spend your money is an important part of managing your money. There are many axioms about personal finance such as pay yourself first or live within your means which are ignored daily.
Frankly, I don’t understand why managing money is so difficult! It gets down to simple arithmetic, you should not spend more than you earn. If you earn fifteen ($15) dollars an hour and work forty (40) hours, you would have a gross of six hundred ($600) dollars. You cannot spend that much because you probably will have one hundred ($150) dollars in various taxes. Therefore, you can only spend the remainder ($450). I realize this is pretty basic, but why do so many people spend more than they earn?
Basic Spending
Some of you will blame the credit card company or all the advertising that entices you to spend more than you earn. That is a little like blaming the car salesman for buying the car you cannot afford. When you become an adult, you are responsible for your own decisions right or wrong. You can make better decisions if you learn more about personal finance. Start with a spending diary and you will learn a great deal about your spending habits. Why bother with this exercise? It is the first step to preparing a budget.
Budgets are excellent ways to control your spending. It is also a great way to take control of your spending. Budgets have been maligned over the years, but the budgeting process is still an excellent way of taking control of your spending. It is a good way to review your priorities and help you establish your financial goals. You should look at every expense item and make a conscious decision about the appropriateness of the dollar amount of the expense.
You should ask yourself, is there a better way I can spend my money whether it is rent, groceries, entertainment etc. For example, your rent or mortgage payment should equal to one week’s (gross) pay. If you exceed that amount, you should consider a change! You can consider a lower priced apartment, increase your income, reduce some other expense or consider a roommate. If you spend the time to make conscious decisions about every expense, you will have a budget that will work for you.
Saving and Investing
Part of every budget or personal finances should be saving and investing. Just because you are in your twenties or thirties does not exempt you from this goal. It should be part of your financial goals! When you are in your twenties and thirties, you think you have many years to save and catch up. Compound interest is not just for simple bank accounts! Compounding is the process of generating earnings on an asset’s reinvested earnings. It requires just two things, reinvestment of earnings and time!
If you start early, it makes a huge difference. For example, person A starts investing at twenty-five (25) years old and person B starts at thirty-five (35) years old. The investment is the same contribution and return on investment, but the difference is the number of years. Person A earned about forty (40%) more than person B by fifty (50) years old. Reinvestment of earnings and time made a huge difference! The difference between person A and B is just ten (10) years, but the result is dramatic.
Final thoughts
If you are not aware of it, I just gave you the five (5) minute personal finance class. I just covered the most important parts of personal finance. I hope you will dig into this further. After all, you have to deal with your money and other aspects of personal finances every day. Learn these things well when you are young and you can avoid a great deal of problems in the future. Understanding personal finance is the key to happiness.
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