Are You Under-Educated about Finances?
National Bureau of Economic Research
There is more bad news according to a recent survey done by the National Bureau of Economic Research. The survey, titled “Financial Literacy among the Young” showed that fewer than 33% of young adults from 20 to 30 years of age have a basic knowledge of interest rates, inflation and how to control investment risk. The survey showed that though people are willing to learn, they are not educated on basic financial issues.
If you count yourself as one of the millions of Americans who has a lot to learn in terms of finances, then do your own research. Here are some tips about managing your finances. A basic understanding of each could make a huge difference in your future economic health.
Your budget is key
You may be tired of hearing about the budget, but the budget is Number One when it comes to finances. You have to know how much money you bring in, how much you put out, and the surplus or deficiency that generates every month. The easiest way to do this is to either write everything down in a notebook or find some online software that can help. Mint.com is one example of a website where you can keep track of your own budget. Once you figure out whether or not you have a surplus or a deficit at the end of your accounting period, you can start cutting back on unnecessary items.
Build up savings
Your parents were right: Cash is king. Parents of earlier generations knew that money had to be stashed away. Somewhere along the way, we forgot the value of saving and became enamored of credit. We started spending money we don’t have. How do you fix that? Start saving again, just like your parents did. The best thing to do is take a percentage out of your paycheck and set it away before spend money on anything else.
It’s not always wise to use credit
Credit-card debt is a huge expense for a lot of families, and it can cause enormous problems. The best thing to do is have credit cards, but use them only occasionally for small purchases. Then pay them off right away. The cost of credit is just too great to hold a balance for any length of time. Even if you have a relatively low interest rate, you are still paying much more than you would if you paid with cash.
Plan for retirement
The Roth IRA is a great retirement-planning tool. It’s a flexible and tax-free retirement plan. Normally every workplace has some type of IRA available and you should always take advantage of company matching. If your company doesn’t match your IRA, then stay with your own Roth IRA.
For anyone with young children or other dependents, life insurance is a necessity. A general rule of thumb is to have enough life insurance to cover eight to ten times your current annual income. That may sound like a lot, but it isn’t. Once you die, your loved ones, especially young children, will need money to sustain themselves. If you make $80,000 a year, for example, you should buy $800,000 of coverage. If your family has to live on that money for 15 years before they are old enough to manage by themselves, that’s only $53,333 a year.
Managing finances wisely
If we’ve learned just one thing from this recession, it is that wise decisions are key to surviving a tumultuous economic market. Although things are on the upswing right now, that doesn’t mean that things are back to normal. People who were mired in debt before the recession hit don’t have the luxury of waiting to sort out their finances. It’s best to get into the hard work of picking apart spending habits and changing them as soon as possible. Your financial future depends on it.