One of the most important lessons that you can learn in life is how to manage your finances. The following are some startling statistics to prove this point. 4 out of 5 Americans live from paycheck to paycheck. If they were to lose their jobs, they would be in big trouble. On the other hand, 26% of the population doesn’t have an emergency savings account. On average, most households have $6,929 in household debt.

What People Should Know About Personal Finance

1. How Credit Cards Work

A lot of people fall into the debt trap by having false beliefs about how credit cards work. You will hear some people say that you should take your time to pay off your credit card debt since it has a long maturity period. If you listen to such advice, you risk paying off a lot more than you had borrowed. This is because credit card debt accrues more interest the longer you take to clear it off. Therefore, clear your credit card debt early, and you might not have to pay interest.

2. How to Manage Big Purchases

Sometimes, you may want to pay your child’s tuition fees or purchase a car. These are expenses that cost thousands of dollars. It would be impractical and unsafe to use cash payments for such purchases. You may be tempted to use your credit card instead, but the interest rates may be too high. The best payment method for such transaction is a check. The charges aren’t much, and it’s safer than other methods.

3. They need a Budget

You may think that you know how much you spend every month, but you don’t especially if you don’t have a budget. It’s actually pretty simple to prepare a budget. All you need to do is write down an income and expenses column in your budget book. Then, make sure that you write down the amounts that you bring in and those that go out of the business. Write down the expense amount and the type of purchase. That way, you will know what you spend your money on. At the end of the month, you can calculate how much you’ve spent and what you have saved. It is here that you get to decide what expenses you want to reduce as you go into the next month.

4. Emergency Funds are Essential

You may think that you are healthy and don’t need an emergency fund because you’re unlikely to get sick. However, accidents can happen at any time, and you have to be prepared. What happens if you accidentally break your leg as you are fixing the roof and you don’t have the cash? You will have to use your emergency fund. Alternatively, what happens if you get robbed? You will have to use your emergency fund to buy and install a new doorbell camera and change locks so as to improve your home’s security.

5. Learn How to Invest your Money

Apart from saving money for emergencies, you should also learn how to invest your money so that it grows into something more. The time value of money changes due to inflation. This means that what $1,000 can buy today will be very different from what it can buy in the future. You can look into stock investments or real estate trusts. This is because such investments gradually increase in value overtime. When you invest your money into a good venture, you are increasing your future’s purchasing power.

Conclusion

The best way for you to protect yourself from an uncertain future is to use your money wisely and invest in assets that increase in value. You should also avoid using your credit card all the time, and try as much as possible to clear the credit card debt early.

by: Donna Jo