How are you doing with your finances? Do you consider yourself financially stable? If you do, then good for you. If not, you are not alone. Most people are having problems with money because only a few are financially literate. Most of us have to learn financial lessons the hard way. Just imagine all the things that you could have done differently if only you know a thing or two on personal finance. Here are some more money lessons you wish you had learned in school Part 2 (click here to read part 1):
1. Basic Investing Skills
A lot of people are scared of investing. This is just natural; after all, who would not be scared of losing their hard-earned money. You probably heard stories of people losing all their money through bad investments.
However, savings alone are never enough. You need to invest your money too. This is where your knowledge on Investment Basics will come in handy.
True, investing involves risk but it is also a great way to increase your wealth. You can minimize investment risks through financial literacy. Familiarize yourself with the different investment vehicles available out there. For beginners, you can learn about bonds, funds and stocks. Depending on our risk tolerance, you can try for the more advance type of investing such as cryptocurrencies, foreign exchange and stock options trading. It is only through Investing will you be able to slowly build your passive income.
2. The Power of Compound Interest
Out of all the items listed here, compound interest is one topic that was surely discussed in school. Unfortunately, since a lot of people hate math, compound interest is nothing more than a numerical value calculated from a math problem. You probably forgot the formula on how to compute it by now. Big mistake!
Compound interest is probably the most important concept of personal finance. If used to your advantage, it can give you vast wealth. However, it is a double-edged sword. It can either make you or break you. If it works against you, it can lead to your financial downfall. Do you know of people who are buried in credit card debt? That is a clear example of compound interest working against them.
Compound interest is the eighth wonder of the world. He who understand it, earns it…He who doesn’t pays it.– Albert Einstein
3. Time Value of Money
The time value of money is one the most important concept for investors. It simply state that the value of your money today is worth more than your money tomorrow. To put it simply, it means it is better to have your money with you now than at a later date.
This concept involves time. Time is literally money. The sooner you earn or have money in your hand, the faster you can have money work for you. If this concept was discussed in school, making decisions in life would have been a lot easier.
For example, a buyer wants to buy your property at the prevailing market price. You declined the offer hoping that somebody else with a bigger offer will approach you later on. There is no assurance when the next buyer will come. What if the next buyer comes after a year or two? Is it still worth the wait?
Another example is let’s say the luxury bag that you have always wanted to have is on sale. You decided to buy it to take advantage of the sale. You use your credit card for the purchase. Unfortunately, you were only able to fully pay the item after a few months. With the interests incurred during those amounts, you ended up paying more for the bag.
The time value of money is also at work in investing. The younger you start investing, the more money you will have in the future. This also applies to other things such as your health. Choosing the right food and exercising today will keep you healthy. This will save you money on medical expenses later in your life. In practical terms, don’t put off what you can do today for tomorrow.
4. Building Good Credit
Do you pay your bills on time? Establishing a good credit is probably one of the most important things that you can do in your life. A good credit history will make your life a lot easier. Whether you are buying a house or a car, applying for a loan or a credit card or even getting a job; a good credit score will come in handy.
A credit report is an explanation of your credit history. It shows if you have an existing loan, if you are applying for one and your balance. It also shows your capacity to pay and whether or not you are paying your bills on time.
This is very important in your financial life. A good credit history will make it easier for you to get a loan. It can also qualify you for a higher credit limit and lower interest rates.
5. How Credit Card and Interest Rates Work
Do you understand how credit card and interest rates work? Do you even know how to read your credit card statement? So many people do not understand how credit card and other consumer loans work. As a result, they end up with an enormous credit card debt.
Credit card can be good or bad depending on how you use them. Credit card is a financial tool that you can use as leverage. However, it is never a good idea to use credit cards to purchase goods that you cannot afford in the first place.
The bottom line is that financial literacy can help us make better monetary decisions in our lives. It will help us achieve financial freedom and avoid bad debts.
Teaching personal finance in school can help our children have a better future.
First published in Pinoy Smart Living on 09.18.2019