There is a lot of personal finance info out there. With information overload it can get confusing and hard to decide what to pay attention to.
I want to make it easy for you. Here are five financial concepts you need to know now. Armed with these five concepts, you will be ready to take on your finances once and for all!
The Power of Compound Interest
When it comes to your money, it’s important to start now so you can give the power of compound interest time to work its magic. The sooner you start saving, the sooner your money starts earning interest, and then earns interest on that interest.
For example, let’s say you have a dollar that earns 10 percent interest*. In one year, thanks to the power of compound interest, you would have $1.10 comma and the next year, that $1.10 earns another 10 percent and grows to $1.21. The cycle continues and you earn more and more on your savings. Just because you don’t have a lot to save doesn’t mean you should wait to get started. Even small amounts make a difference!
Treat Your Savings as an Expense
You might have noticed that you don’t have money leftover each month to save. When we wait to see what’s left in our account before saving, that’s usually what happens.
Instead, you should treat your savings as your most important expense, like your rent or cable bill. Decide what you can afford to save each month and have it transfer automatically to your savings account so you don’t have the opportunity to spend it.
Pay yourself first! I recommend using an online, high interest savings account so you can earn a little interest and reap the benefits of compounding interest at the same time. I love my Capital One 360 account because of the higher interest rate (0.75%) and because you can create buckets for your goals. Barclay’s also has a great high yield account with an interest rate of 1%.
Protect Yourself with Insurance and an Emergency Fund
Building wealth is a wonderful thing, but you also have to protect it. Emergencies happen, and if you don’t have an emergency fund and insurance in place, you might have to take on debt to finance the situation.
There are various types of insurance that can protect you in the case of an emergency or a high expense situation. Beyond health insurance, you should be investing in life, disability, and renters insurance. For more on insurance, see this article.
While insurance can be a lifesaver in the case of a big medical, home or car expense, there are situations where insurance doesn’t protect us. This is where an emergency or rainy day fund comes in. Have a few months of expenses put away in case you lose your job, are unable to work or any other emergency situation occurs.
Avoid the Most Expensive Debt Out There
Credit cards are the most expensive debt out there, since a 20 percent annual percentage rate or interest rate is not uncommon.
Think about it. If you don’t pay off your credit card in full, you pay 20 percent in addition to the cost of the item you bought. It’s the opposite of getting something on sale. Stick to spending within your means and you will save on interest and it will benefit your credit score.
Put Your Money Where Your Heart Is
At this moment in time, we all are earning a certain amount of money. I call this our pie. We have the opportunity to use this pie of money in any way we wish. When we use this money in one area, we lose the opportunity to use it for something else. This is the opportunity cost of our spending.
Getting the most out of your spending means putting your money where your heart is. It’s about spending on things that are important to you and saving up for your dreams. Really take a look at your spending to see if you are using it in ways that make you the happiest. For example, I used to get a $4.30 latte from Starbucks every morning. I loved my morning latte but when I looked at the cost of my habit on an annual basis (over $1,500!) I realized I could take a trip to Europe instead. I decided the trip would make me a lot happier than the daily latte so I switched to drinking coffee at work the next day and planned a trip to Barcelona!
Ashley Feinstein Gerstley is a money coach and founder of the Fiscal Femme where she demystifies the world of money and personal finance. Get her exclusive how-to guide “30 Days to Financial Bliss“ – free for GoGirl Finance readers.