Financial decisions you make in your early twenties will set the tone for how you make it out in the real world, and even set the tone for future decisions.
Understanding and applying proper financial basics to your hard-earned cash will likely make you richer, not just in the sense of having more money, but also having the freedom to make better choices and wiser investments. On the other hand, not having a good understanding of it can leave you in a financial rut.
Here are ten necessary finance basics to consider, especially when you’re a student or new graduate.
Credit Cards – Never Purchase Something That Will Take You a Very Long Time To Pay Back
You know how to use it – you buy something, you swipe your card. You pay your dues before the time is up, or else, you’re charged interest. In many ways, having a credit card teaches you to exercise discipline and temptation. Learning how to control impulse buying is by far one of the best financial habits you can practice.
Compound Interest – Compound Interest and Time Work Hand in Hand Even When You Save Small Amounts
It will have a huge effect, especially if you’re saving up for your retirement fund. To unlock the full potential and power of investing, you need to understand fully how compound interest works and how it can benefit you over time. For example, if you save $200 a month for 30 years, you’ll get $72,000 without compound interest.
But then, if you save the same amount with a return of 9% in compounded interest, you’ll have close to $350,000 after 30 years.
Risks – Risks Are Always Present Whenever Finances and Growing Your Money Comes Into the Picture
Some risks are worth taking, and understanding that risk is part of the investing work. You can double your wealth when you take calculated risks. Calculated risks taken at different points in your investments are what can benefit you. But then, be cautious. In the attempt to strike gold and get rich quick, never take huge risks without understanding the commodities and market conditions because this might leave you poor.
Retirement Funds – Take Advantage of These Schemes as They Are Mostly Tax-Free
Governments in every country have different retirement schemes that allow a person to invest their money with tax advantages, all for saving money for your retirement. In the US, you have 401ks and IRAs. In the UK, they have occupational pensions. In Australia, you have the regulated Superannuation Fund. In Malaysia, you have the Employees Provident Fund (EPF). These schemes can mean the difference for anyone between not being able to retire and retiring in the lifestyle you’ve been dreaming of since the day you started working. This is an essential part of your financial literacy and something you need to do as soon as you land your first job.
Index Funds – Stock Index Funds Are Straightforward and Cost-Efficient for Novice Traders To Get Into the Stock Market
One of the most basic strategies in investing is understanding how stock index funds work. Learning about stock index funds is part of the fundamentals of using the stock market to grow your wealth. Over time, you’ll eventually learn other methods and means of investing, but to get a kick-start, stock index funds are the way to go. This is great for someone without a lot of money or time to spend on investing. Stock index funds also allow you to take advantage of compound interests.
Housing and Mortgage – Before Signing up for One, Understand How New Mortgages Work, and How It Can Work To Your Advantage
All of us are bound to want to purchase our dream home. While some consider themselves lucky to have bought at least one property, purchasing another house or land or another asset-related investment can triple someone’s wealth. Nobody wants to be caught in the mortgage crisis. There’s a variety of different mortgages available to borrowers. While prices of property generally appreciate, some don’t, so you need to make sure that the mortgage debt isn’t only affordable for your monthly commitment, but it should also be affordable over the life of the loan the mortgage covers.
Depreciating Assets – Not Every Purchase Is an Investment
While there are appreciating assets, there are also depreciating assets, and knowing which is crucial when investing your money. Cars, for example, are depreciating assets as they decrease in their value over time. However, purchasing a car isn’t a bad investment. It can ultimately lead to your overall earning potential. When buying depreciating assets, get the best price you can for it, and don’t buy more than you actually need, unless, of course, you have excess cash.
Emergency Fund – It’s Wise To Start an Emergency Fund as Soon as You Start Working
Being prepared with an emergency fund is extremely crucial. If you haven’t already, start now. Because life is unexpected, anything can happen at anything. Set an account that’s separate and one that you can’t withdraw as and when you want, like an ATM. A fixed deposit is a great emergency fund to use as it keeps your money there, and you can’t withdraw it anytime you feel like it.
Taxes – Understanding the Basics of Taxes Can Help You Save Money in the Long Run
You can make calculated purchases, determine what documents and receipts you need to keep, and you can keep track of your expenditure to reduce your taxes over time.
Budgeting – Making a Budget Is Easy. Keeping It Is What Makes It Hard
Ah… budgets. Financial literacy, of course, begins with creating a budget for your money, so it goes seamlessly well with your expenditure. Making a budget as a student and keeping track of what you earn and what you spend on are two different things. The rule of thumb is to spend less than what you earn. Until you understand these elements, you’re in no position to use any other financial information you’ve accumulated in your financial literacy.
Young graduate student using a laptop -DepositPhotos