While money may not be the only thing you need to live, it is much easier to live when you have all the money that you need. Fortunately, there are several easy steps that you can take to become a master of your financial future. Better yet, you can pass along this knowledge to your children and grandchildren, which will help them to be fiscally literate as adults.
Understand the Difference Between a Want and a Need
People need to stay hydrated to survive. However, there is no need to spend $2 on a bottle of water when tap water is usually perfectly safe to drink and is much less expensive. When you know the difference between what you want and what you need, it becomes easier to create a budget that allocates only what is necessary to meet your needs. The rest should go toward an emergency fund to meet future needs before you start spending on things that you merely want.
Know the Difference Between Price and Value
We often assume that paying a higher price for an item means that we are getting a better product. While higher priced items tend to be of better quality, this is not always the case. This is why it is important to understand the value that you get from a product. Value is what you actually get for your money regardless of how much you spend. For instance, if you spend $100 on a pair of shoes that you only wear once, that may represent less value than spending $50 on shoes that you wear everyday.
Consider the Overall Cost of a Loan
It is easy to look at the monthly payment when determining whether the cost of a loan is affordable or not. However, it is important to look at the term of a loan as opposed to how much you pay every 30 days. This is because a longer loan term equals more interest paid to a lender. Whether you borrow to buy a car, a home or any other item that you cannot afford to pay for with cash, make sure to make off the loan in as little time as possible.
Know the Value of Compounding Interest
If you put $100 into an account that returned 7 percent interest per year, you would have $107 at the end of 12 months. However, at the end of the second year, that $7 would also earn interest. Therefore, after two years at a return of 7 percent per year, you would have $114.49 instead of just $114. By putting more money into a taxable or retirement portfolio, you get even greater compounding. This is why you should avoid paying interest on a loan for longer than necessary. Even putting a few dollars a week into your stock portfolio can yield large gains going forward.
Get Into the Habit of Saving
Like anything else in life, saving money is a learned skill. While some people are naturally better at it than others, it generally takes a few weeks or months of consistent deposits before it starts to become a part of your routine. Ideally, you will aim to save about 10 percent of each paycheck, but you benefit even if you save $5 or $10 a week.
Know When Debt Is a Good Thing
While you never want to borrow money just because, there are times when doing so can actually benefit your long-term finances. This is because putting money in stocks or other investments may be more than the interest that you pay on a loan. Let’s say that you had $100,000 in cash that you wanted to spend to buy a house.
If you were to take out a 30-year mortgage at an interest rate of 4 percent, you would spend $171,870 to pay off your house. However, if you were to put that money into the stock market, you would have over $2 million in your account at the end of 30 years. This assumes that the market continues to return 11 percent per year as it has historically, and that amount is also before income taxes and brokerage fees.
Don’t Worry About Keeping Up With Others
You may feel a need to have the fanciest car in the neighborhood or a house that is larger or more expensive than others in your family. However, the best thing for your physical, mental and fiscal health is to simply live within your means. While having a luxury car or a large home is nice, the ability to send your kids to college or retire by age 65 is a much better feeling.
While you want to give your kids the best in life, it doesn’t mean that you have to give them designer clothes or buy them new computers for Christmas. By giving them the gift of fiscal literacy, you teach them how to get the things that they want in life on their own. Ultimately, this makes it easier to manage expectations today while ensuring that your kids won’t be asking you for money when it comes time to retire or otherwise move onto the next stage of your life.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, where you can get personal checks and business checks.