There are some key financial lessons that every adult needs to master. The world of personal finance may seem daunting. But everybody needs to spend some time to learn and understand some basic money-management skills. It will help give you confidence to make smarter financial decisions and achieve your long term financial goals.
In this post we will list some of the key financial lessons everybody needs to learn to master personal finance. The earlier these are learned the better, but it is never too late to start.
12 Financial Mastery Lessons
These 12 tips for financial mastery below will help you in making smart financial decisions and help you to master personal finance, increase net worth and achieve your financial goals.
Budgeting
One of the first financial lessons to master is budgeting. Anybody can set up a budget but actually sticking to it is another matter. Knowing what you have coming in and going out each month and what’s left over is essential to know. It will give you peace of mind knowing all essential bills are covered and allow for better financial planning and making smart financial decisions.
Setting up a budget can be done with excel sheets or even on paper. But one of the simplest ways to set up budgets and track spending is through a budgeting app. There are many dedicated budgeting apps that allow you to connect to your bank and credit card accounts. This allows one central location for easily tracking and reviewing expenses.
Seeing everything that comes in and goes out each month will give you the power to make smarter financial choices including cutting out unnecessary spending and allocating more to saving.
Making Your Money Go Further
Once you’ve set up your budget and are regularly monitoring spending it is easier to see where all that money is going. You can now take action to make your money go further.
Start by reviewing your bills – is there any unnecessary spending like subscriptions you don’t need? Cancel them. An easy way to do this is through personal finance apps.
Then check if you could be getting a better deal on your essential bills – things like mortgages, insurance, utilities etc. Shop around for better deals by using price comparison sites like Supermoney.
Another useful skill to learn is haggling. Many people don’t shop around for new service providers or even ask their current provider for a discount. This customer apathy often leaves people worse off. From paying higher tariffs on energy bills to earning low rates of interest on their savings accounts.
The point is many companies are happy to give you a better deal if you haggle with them or threaten to leave for a competitor. Of course it doesn’t always work but what’s the harm in asking? It could potentially leave you thousands of dollars a year better off.
One of the simplest ways you can make money go further is by switching to cheaper brands when shopping for things like food and clothing.
Additional you should make use of cashback programs. These will pay you back a percentage of your spend on all of your shopping, effectively reducing the price you pay. There are many ways to earn cashback including debit and credit rewards cards and cashback sites and apps. Read more here about how cashback works.
Debt
It’s hard to get through life without accumulating some form of debts; loans, credit cards, mortgages and more. Debt can be useful in the right situations such as taking out a mortgage to purchase your own home, providing you have the means to pay it back.
Likewise a credit card is no bad thing if it used responsibly. Using a credit card for regular purchases and then repaying the balance in full each month will ensure you don’t pay any interest and could help to build up your credit score. In fact rewards cards can actually pay you for using them. Learn more about the different types of credit cards.
But you should be careful not to become reliant on debt for everyday living. Once you start accumulating debts on credit cards and loans, interest payments can soon start to snowball due to compounding. Which can make it harder and harder to pay off.
If you are struggling with credit card debt there are apps available to help. If you have current debts then you should look to start paying them off as soon as possible. It will reduce interest payments and give you some breathing space. The cash it frees up can then be put towards savings and investments.
Before taking on any debt, first ask yourself if this is really necessary. Then reassess your budget and see if you could find the money by cutting back somewhere else. Controlling debts is one of the keys to financial mastery. View these top credit and debt apps that can help you manage your debts more effectively.
Good Credit Scores
Credit scores are another of the very important financial lessons to master. They can help determine the types of credit you have access to, credit limits and interest rates. This includes when using credit for loans, mortgages and credit cards.
FICO scores are the industry standard for assessing creditworthiness and are used by 90% of the top US lenders. Learn more about the importance of a good credit score.
When applying for credit your credit score is taken into account alongside your credit report. There are a number of factors that can affect your credit score including how much you borrow and if you repay on time. Generally speaking the higher your credit score the better and the more likely you are to be accepted for credit, although there are no guarantees.
If you ever plan on taking out credit such as a mortgage on your first home then you will first require a credit history. Taking out a credit card to use for everyday spending and repaying in full each month is a good way to build up your history. Apps like BestCreditCard use AI technology to help find credit cards tailored to you.
Credit scores are not fixed and can change over time. If you have a poor credit rating or no credit history then there are many ways to rebuild including specialist credit builder and repair cards like Self.
Saving
After you have budgeted for all your essential expenses each month you should be aiming to save some of that remaining cash. This could be through a high yield savings account, money market account or a certificate of deposit account.
Now cash doesn’t make for the best investment, especially with low interest rates and high inflation eroding it’s value (more on that later). Keeping all of your cash in a savings account won’t make you rich. But everybody needs some cash set aside as unlike investments it is at least secure and doesn’t fluctuate.
One of your first priorities should be to create an emergency fund. This is a savings fund made up of cash or other liquid assets that can be easily accessed at short notice. Money saved in an emergency fund is used to create a financial safety net to protect you against any future unforeseen change in circumstances. This could include job loss, medical bills or unexpected home maintenance costs etc.
How Much To Save?
You should aim to have enough cash in your emergency fund to cover a minimum of 3 months worth of expenses if you are working, or 3 years if you are retired. These are just advisable minimums, it is wise to have more saved. That way you can avoid selling off investments or taking on extra debt to raise funds.
An emergency fund should be just that – there in case of emergencies, so resist the temptation to take money out unless absolutely necessary. This is your lifeline that can cover expenses that are unplanned.
A money market account is a suitable option for an emergency fund. These accounts generally offer good rates of interest with some of the benefits of checking accounts. Some of the top providers include CIT Bank and Quontic Bank.
There are additional savings products you can use including high yield savings accounts, certificate of deposit and more. Learn more about the different types of savings accounts.
For more money saving see our post; how to save money at home.
Investing
One of the greatest ways to significantly grow your money over time is by investing it. There are many different types of investment. The more traditional investment assets are stocks, bonds and mutual funds which should make up a large part of any investment portfolio.
Additionally there are alternative assets which includes pretty much any other type of investment asset. This includes cryptocurrency, real estate, peer-to-peer investments, commodities, alcohol, art, collectables and more. These types of assets may be deemed riskier, could be more volatile and may have a smaller market. But they are often a good way to add further diversity to a portfolio.
Short Term Vs Long Term Investing
It is important to note the difference between investing and speculating. Investing should be over a very long time horizon to allow your money to grow at a moderate pace. Whereas focusing on the short term and trying to capitalise from short term price movements is speculation. Some people actively make money in the short term such as day traders that profit from daily price swings. This can be profitable for some but is riskier and could incur more trading costs.
By investing for the long term you don’t need to worry about short term price movements and which way the markets are going each day. All of these bumps will be smoothed out over time. Costs can be kept to a minimum by not frequently trading. There are trading apps like Public that offer commission free trading.
And the earlier you start investing, the longer time you have for your money to grow. Particularly in the stock market, great wealth can be generated over the years through the compounding effect. Compounding is another of the essential financial lessons to know which will be discussed further below.
There are many investment platforms to choose from. Some are general investment platforms offering access to many different assets whereas others specialise in the trading of one particular asset. Click here to view some of the top investment sites and apps.
Understanding Inflation
Inflation is the rise in prices and decline in purchasing power over time. As inflation rises, money you have today will buy less in the future. It can effect everything from the cost of living to the value of savings and investments.
Although soaring inflation is generally a bad thing, some inflation can be seen as either a positive or negative depending on your allocation of assets. Currency denominated assets like cash and bonds will see their value eroded by higher inflation. Whereas gold, commodities and real estate can be held as a hedge against inflation.
See this post for a better understanding of monetary inflation.
Understanding Lifestyle Inflation
Over time you may well find your standard of living improving due to better jobs, higher wages or even through inheritance. But with this usually comes more expenses with people often failing to adjust their budgets accordingly to account for this.
Let’s say you earn $25,000 and manage to save $5000 per year. This means you are saving 20% of your current salary. After a few years and a few promotions later you are now earning $100,000 per year and continuing to save $5000. You may still be saving $5000 but this now only equates to 5% of your current income rather than the 20% previously.
Generally speaking, with higher wages comes higher standards of living i.e bigger house, better car, luxury brands etc. This means higher costs on mortgages, insurance, maintenance and discretionary spending. If you were to lose your main income source, your savings may not be able to cover this higher expenditure unless you adjust the amount you save to reflect higher outgoings. This is why you should save as a percentage of your income rather than a numerical figure.
If you wish to master personal finance then ensure you do not fall victim to lifestyle inflation like so many individuals often do.
Setting Financial Goals
Whatever you want to achieve it is always best to write down your goals and set a plan for how to achieve them. Putting something in writing makes it more likely you are to stick to a plan and make it a reality.
Goals can be set for anything such as saving for your retirement, saving for a house deposit, paying off debts or saving for some other event like a vacation.
Once your goal is identified you can then create a plan of how to get there. You may find you need to make adjustments to your budget, reduce spending in some areas and increase savings etc.
When planning for retirement it can often prove wise to consult a financial adviser. They will be able to provide expert advice tailored to your circumstances and could help with estate and tax planning.
Understanding The Power Of Compound Interest
Compound interest is one of the essential financial lessons to understand. Interest is the amount charged for borrowing money, usually expressed as a percentage. Whether you are a borrower, saver or investor, interest is essential to understand. There are two main types of interest – simple and compound.
Simple interest is only calculated on the principle amount (or the amount remaining) and does not compound. It is usually applied to things like most personal loans, auto loans and bonds.
Then there is compound interest – understanding compounding could be one of the most important financial lessons to master. Compound interest is interest paid on both the principle amount borrowed plus the accumulated interest from previous periods. Interest can quickly start to grow when compounded as it is accumulating interest on interest. The rate of compounding is affected by the frequency that interest is applied.
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
Albert Einstein
How Compounding Affects Your Finances
As a borrower, interest repayments can quickly start to increase on compounding loans such as with credit cards. This is why it is important to pay these off in full otherwise debts can quickly build up.
But for saving and investing, compounding can be a major factor in growing substantial wealth. As an example, cash deposited into a savings account that earns interest will benefit from compounding. Interest is applied to your initial deposit and on the interest already accumulated.
It is perhaps when investing in the stock market through shares and funds over a long time horizon that the full benefit of compounding takes effect. This is through dividend compounding. Where the regular re-investment of dividends increases ownership in the same shareholding. As you then own more of the same shares you will receive more dividends next time. If you leave this cycle to keep repeating over many years then your initial investment could grow substantially in value.
Any asset that pays you interest can be re-invested to take advantage of the power of compounding. This includes shares, funds, bonds, cash and more. View some of the top investment sites and apps to kick-start your investment journey today.
Make smarter financial decisions, view our complete guide to these 21 types of investment assets to grow wealth.
Create Passive Income Streams
Passive income is money earned in a way that requires little ongoing active involvement – where you could literally earn money while you sleep. The importance of generating passive income can be best explained in the below quote from legendary investor Warren Buffett, somebody we can all learn financial lessons from.
If you don’t find a way to make money while you sleep, you will work until you die.
Warren Buffett
Creating passive multiple passive income streams gives you many different sources of income without the active effort. It is a way of working smarter not harder.
Some examples of passive income include rental income, dividend income, interest payments and royalty payments. There are also a great variety of online businesses that can be set up to generate ongoing passive income such as from affiliate marketing, advertising and more. Read this post for 14 passive income ideas.
Don’t Rely On Others
If you want to master personal finance, then it is important to make your own financial provisions. Never rely on others, whether that be relatives or the government.
For example, never bank on a potential inheritance to fund your retirement. Relatives may promise to leave you something in their will. But what if they live longer than you were expecting or change their mind about what they leave behind? Then how would you fund your retirement if you didn’t plan for it?
Likewise governments change rules on things like pensions and taxes with each new administration. Don’t assume that policies in place now will continue into the future. When it comes to finances, the only person you can truly rely on is yourself. You should aim to be self sufficient and financially independent.
Keep Learning Financial Lessons
Last of the financial lessons is to never stop learning and adapting. Changes happen over time that can affect personal finances. From changes in government policy to new investment fads and changes in personal circumstances. There is always something that can have an impact on your finances. You should keep up to date with new developments and adapt as necessary in order to continue on your path to financial mastery.
Learn more on how to master personal finance with our list of the best books to read for financial success.
Financial Lessons Conclusion
By learning these financial lessons early the more time you have to benefit from them, saving pain in the future. For example, the earlier you create a financial plan for retirement and start saving for it, the longer time your investment has to grow. And the more likely you are to meet your goals and have financial freedom.
If you’ve found this financial lessons post useful, view our blog for more articles like this to help master personal finance including;
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