what personal finance classes can t teach you
personal finance education is a great idea for consumers especially people starting out who want to learn investing basics or about credit management however understanding the basic concepts is not a guaranteed path to financial sense human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg these three key character traits can help you stay on track one of the most important tenets of personal finance is systematic saving for example say your net earnings are 60 000 per year and your monthly living expenses housing food transportation and the like amount to 3 200 per month there are choices to make surrounding your remaining 1 800 in monthly salary ideally the first step is to establish an emergency fund or perhaps a tax advantaged health savings account hsa to be eligible for a health savings account your health insurance must be a high deductible health plan hdhp 29establishing an emergency fund takes financial discipline without it giving in to the temptation to spend rather than save can have dire consequences in the event of an emergency you may not have the money to pay the expenses leading you to finance them through debt once you have your emergency stash you ll need to develop investing discipline it s not just for institutional money managers who make their living buying and selling stocks average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market timing can be crucial for instance imagine you re three years out of college have established your emergency fund and want to reward yourself a jet ski costs 3 000 but you want to start investing also investing in growth stocks can wait another year you say i have plenty of time to launch an investment portfolio however putting off investing for one year can have significant consequences the opportunity cost of buying a personal watercraft can be illustrated through the time value of money the 3 000 used to buy the jet ski would have amounted to nearly 49 000 in 40 years at 7 interest a reasonable average annual return for a growth mutual fund over the long haul thus delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65 doing tomorrow what you could do today also extends to debt payment if you were to put the jet ski on your credit card the 3 000 credit card balance would take 222 months 18 5 years to pay off if you only made minimum payments of 75 each month and don t forget the interest you re paying at an 18 annual percentage rate apr it comes to 3 923 over those months so if you were to plunk down the 3 000 to pay the balance rather than let it compound you d see substantial savings nearly 1 000 personal finance matters are business and business should not be personal a difficult but necessary facet of sound financial decision making involves removing emotions from a transaction making impulsive purchases feels good but can significantly impact long term investment goals so can making unwise loans to family members your cousin fred who has already burned your brother and sister will likely not pay you back either the smart thing to do is decline his requests for help you re trying to make ends meet also the key to prudent personal financial management is to separate feelings from reason however when loved ones are experiencing real trouble it pays to help if you can just try not to take it out of your investments and retirement many people have loved ones who always seem to need financial help it is difficult to refuse to help them if you include planning to assist them in real emergencies using your emergency fund it can make the burden easier breaking personal finance rulesthe personal finance realm may have more guidelines and tips to follow than any other although these rules are good to know everyone has their own circumstances here are some rules prudent people especially young adults are never supposed to break but can break if necessary an ideal budget includes saving a portion of your paycheck every month for retirement usually around 10 to 20 however while being fiscally responsible is important and thinking about your future is crucial the general rule of saving a given amount for retirement may not always be the best choice especially for young people just getting started for one thing many young adults and students need to consider paying for their biggest expenses such as a new car home or postsecondary education taking away 10 to 20 of available funds would be a definite setback in making those purchases additionally saving for retirement doesn t make much sense if you have credit cards or interest bearing loans to pay off the 19 interest rate on your visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over finally saving money to travel and experience new places and cultures can be especially rewarding for a young person who s still unsure about their life path the rule of thumb for young investors is that they should have a long term outlook and stick to a buy and hold philosophy this rule is one of the easier ones to justify breaking adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard earned savings shrink short term investing has its advantages at any age common investing logic suggests that because young investors have such a long investment time horizon they should be investing in higher risk ventures after all they have the rest of their lives to recover from any losses that they may suffer however you don t have to take on undue risk in your short to medium term investments if you don t want to the idea of diversification is an important part of creating a strong investment portfolio this includes both the riskiness of individual stocks and their intended investment horizon at the other end of the age spectrum investors near and at retirement are encouraged to cut back to the safest investments even though these may yield less than inflation to preserve capital taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles but at age 60 or 65 you could have 20 30 or even more years to go some growth investments could still make sense for you frequently asked questions