By Arjun Chandrasekar.
Personal finance can be a vast, complex topic, especially in the US where the majority of adults don’t understand how to properly budget their savings. According to the NFCC, their 2019 Consumer Financial Literacy Survey indicated that “fewer than one in five U.S. adults” feel confident about their saving habits. And even more so in third world developing countries, the majority of people just don’t seem to understand this concept of personal finance. So to clear that path, we’ve created this introduction as a 101 guide.
One of the most common misconceptions about debt is that all of it’s bad and you need to make sure to get rid of any outstanding debt. This is in fact not true as there can be good debt and bad debt, so let’s clear this up.
Bad debt is of course, the result of purchasing assets that won’t increase in value or stream income, which is called depreciation. Some examples of expenditures that result in bad debt including vehicles, expensive clothing, and multiple credit cards. These items are depreciating expenditures that provide no financial value to you as a consumer.
Good debt on the other hand comes as a result of purchasing assets that allow a future stream of income and appreciate your financial situation. This also includes investing in your future, through various ways such as education, creating a start-up, or buying a house. These purchases will set yourself up for a successful future and allow you to actually gain more income with this financial stability.
So now that we know the difference, how can you get rid of the bad debt? Well, the simplest, yet most effective way is to not use multiple credit cards as it can be hard to track and budget spendings for all of them rather than only one or two. Another way is if you’re expecting to use loans to pay off expenditures such as buying a car, mortgage, etc, then instead of taking out multiple loans, take one larger one to use for all spendings as this will help you pay off your balances faster.
The ordinary person will experience a situation where emergency savings come into play and would be ideal to minimize or resolve it, for example a car crash, injured loved one, medical expenses, job loss, etc. These are unprecedented situations where you can’t prepare, so having some backup savings ready is key. Our advice to you is to put any amount of money you can aside in a bank account, envelope, or anywhere safe for you. When you get a job, you’ll likely receive more income based on salary, which enables you to keep aside more and more. One way to receive even more money besides the amounts you put in yourself is to create a savings account through a high-interest bank plan, allowing you to compound your own money which will increase your savings and better prepare you for these emergency circumstances. This is another form of wise budgeting which we suggest to everyone reading this. The downside of not doing this is that during these unexpected situations, you will be forced to borrow or loan out large sums of money, thereby increasing your bad debt and creating a worse financial status for you.
Saving up for insurance coverage is equally as important as for emergency funds. For areas in life, health, disability, home-ownership, or auto insurance, having a back-up monetary plan is a great idea. Many cities and states have different rules on insurance, and the amounts necessary to cover the costs, so it’s best to be prepared for unexpected situations. Most advisors recommend you save up to 6-10 times your annual salary for insurance coverage, so if you’re making 70K a year, your savings account should hold about 560K. However, if you don’t currently have a job or a steady source of income, our advice is to put down how much ever money you can currently and when eligible or able, go seek a job to provide this stream of income.
Retirement is probably the big picture idea for most people, get a job, save up, and retire peacefully and luxuriously. But to maximize the amount of savings you have in return for your future, you need to plan it out early and suitability. Start by creating a budget plan for retirement, and when setting up an account remember that inflation, return rates, taxes, and fees all come into play. So research a ton and find the best savings plan for your financial situation and future ideals. Then, just like for emergencies and insurance, putting in as much money as possible into a savings account will allow a more profitable return in the future for your retirement. The average age for retirement in the U.S. is 65 years old, so irrespective of your current age, it’s best to start as early as you can. Once you build a routine and start following a budget/savings plan for this, you’ll get that retirement vacation you always wanted.
Now that we’ve covered all the important topics about personal finance: debt, emergency savings, insurance coverage, and retirement, you’re set to build a financial plan for yourself and become a personal finance master. We hope this blog helped in any way and if you’d like to learn more about stocks and personal finance, be sure to check out the other blogs!