Understanding the essentials of money management

Published November 22nd, 2015 - 09:08 GMT
When growing your investments, there are always risks involved. (Shutterstock)
When growing your investments, there are always risks involved. (Shutterstock)
Few things affect your quality of life more than financial literacy. It entails knowing how to make a wide variety of financial decisions throughout your life. Understanding and applying these financial basics to the money you earn is likely to make you wealthy. Not having a grasp of them can leave you in a perpetual financial bind.
Here are the 8 essential financial basics:

8. Credit cards

In today’s world of credit, it’s vital to understand credit card basics. Credit cards can be an asset or a liability depending on how you use them. Learning the basics of how credit cards work, and how you can use them to your advantage, while not using them when they aren’t to your advantage is one of the most important financial lessons that you can master to ensure that your finances stay in order.

7. Compound interest

To grasp the full potential and power of investing, you need to understand how compound interest works and what it can do over time. Save $150 a month (approx $5 a day) without compound interest, and in 30 years you’ll have $54,000.

Save the same amount with a return of 5 per cent compounded interest and you’ll have nearly $125,000 after the same 30 years. When you understand the fundamentals of compound interest and time working together, you see how saving even small amounts for your retirement years can have a huge effect.

6. Risk

When it comes to finances and trying to grow the money you have, there will always be risk involved. Understanding that risk is part of investing, and you can greatly increase your wealthy by taking calculated risks to correspond with different points in your life. At the same time, being too risk adverse or taking huge risks with your money in an attempt to get rich quick will likely leave you in a worse position.

5. Retirement vehicles

Make sure that you plan for your future and put some money aside on a regular basis. Understanding how to build your wealth and save money is an essential part of basic financial literacy.

4. Property and mortgages

It is important to understand the basics of property and how mortgages work. As the number of different mortgages available to borrower’s increases, understanding how these new mortgages work becomes even more essential. It’s important to remember that housing prices don’t always go up, and that you need to make sure that mortgage debt is not only affordable on a monthly basis, but also affordable over the life of the mortgage loan.

3. Depreciating assets

Not everything you purchase is an investment, and it’s therefore important to understand the difference between an appreciating asset and a depreciating asset. Many of the things that people buy, such as cars, will decrease in value over time. That does not mean that they are bad purchases to make, however, it does mean you should be purchasing these at the best price you can and not buying more than you actually need.

2. Emergency fund

Life will always throw unexpected curves into even the best laid plans, and realising that this is likely to happen and being prepared with an emergency fund is an essential part of your financial literacy.

1. Budget

There isn’t anything more important than knowing where the money that you earn is going. How you budget is not nearly as important as that you actually keep track of what you earn and where you spend that money in some way or form.

Until you understand where you spend your money and ensure that you are spending less than you earn, you are not in a position to use any of the other financial information that you have gained as part of your financial literacy.

By James Thomas

© Al Nisr Publishing LLC 2019. All rights reserved.

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