There are many aspects to personal finance and your financial knowledge can always grow. Below are a few basics that you should take into consideration as you start your personal finance journey.
CREDIT AND DEBT
- Understanding credit and debt is important because it is one of the key foundations to understanding personal finance. You should know how debt and credit can work for you or how it can work against you. Debt: is the amount of money that is borrowed by one party from another party. When you are paying off debt, missing a payment can negatively affect your credit score which can take a long time to recover from. Credit: is the ability of a customer to be able to receive a product or service before they make a payment. Credit is based on mutual trust between the two parties that the borrower will make the payment in the future. The borrower agrees to be able to make the payments at a specific date with interest. Credit score: is based on the credit history of an individual. The credit history can include the amount of open accounts, repayment history, total debt as well as other factors. Lenders will use this score to determine the likelihood an individual will be able to repay their loan in a timely manner. Credit scores will fall between 300 and 850. These numbers show the creditworthiness of the individual with the higher the score the better the borrower looks to the lenders.
INTEREST
- There are two sides of interest. Either interest is working for you or it is working against you. Compounding interest: is when there is accruing interest earned and then gets added to the principal. This can either work against you if you have accruing interest on your debt or for you if you have accruing interest on your investments. Interest on debt: interest on debt is interest that is working against you. It is the money that is paid on a regular basis at a particular rate. Interest is accrued on repayment of money lent or to pay off debt for repayments that have been delayed. Interest on investment: when you invest your money you can receive interest on your investments. This is a periodic inflow on your investment which could be a government security, bank account, bond or other financial instrument that can earn you interest. These interest payments to you can be monthly, quarterly, bi- annually, or annually. Starting sooner is always better because you are able to better take advantage of compounding interest.
THE VALUE OF TIME
- I mentioned this a bit when it came to compounding interest. It is better to start saving or investing earlier on. The earlier you are able to start investing in your retirement or saving, the better results you will have. An example done by JP Morgan Asset Management company showed 3 different people and how when they started saving affected their end results. Susan invested $5,000 annually between the ages of 25 to 35. In total, she was able to invest $50,000 in that 10 year span. At the age of 65 Susan has a total of $602,070 saved. Bill started investing $5,000 annually between the ages of 35 and 65. During those 20 years, he was able to invest a total amount of $150,000.At the age of 65 Bill has a total amount of $540,741 in savings. Chris invests $5,00 annually between the ages of 25 and 65 with a total investment of $200,000.At the age of 65 Chris has a total of $1,142,811 saved. (JP Morgan)
INFLATION
- Inflation: is the general increase in prices and the decrease in purchasing power money has. The money you earn today may not be worth as much in the future.Inflation can eat away at your purchasing power which can be dangerous if your money stays stagnant and you are not able to keep up with inflation. In an article by Tim McMahon, the average inflation rate from 1913 through 2020 has been around 3.10% with lows of -1.80% and highs of 9.80%. As of November 2021 inflation has hit a high of 6.8%. Inflation has not been that high since 1982. Rate of return: “is the net gain or loss of an investment over a specified time period, expressed as a percentage of the investment's initial cost.” Depending on the inflation rate will affect your rate of return because inflation can decrease your purchasing power. If your interest rate on your account or investment is less than the inflation rate, you are not receiving a positive rate of return on those accounts or investments.
IDENTITY THEFT AND SAFETY
- Identity theft: is when a person's identity or private information is fraudulently required and usually used for financial gain. In this day and age where most transitions are done over the internet or accessible over the internet, it makes it very important to know that your identity is secure. Make sure that you are protecting your financial and personal information and make sure that you have strong passwords for your accounts. Anyone can be affected by identity theft including children. There are several ways that you can see if your identity has been stolen. A few to mention are to make sure to check if you are billed for items you didn't buy, debt collection calls for accounts you didn't open, or if you have been denied for a loan application.If you believe your identity has been stolen you can contact the Federal Trade Commission (FTC) online at IdentityTheft.gov or by phone at 1-877-438-4338.
