Of all the classes North Hollywood High School has to offer, you might notice that personal finance is not one of them. Financial education is an essential skill, the absence of which can cause significant harm later in life. This guide will break down the most important areas of personal finance.
The main areas of personal finance are goal setting, income, spending, saving, investing, and budgeting.
Goal Setting: What do you want to do with your money and when do you want to do it?
Your goals drive all other areas of personal finance. Common long-term financial goals include paying for college, buying a house, buying a car, and paying for a wedding. Day-to-day financial goals include paying rent, buying food, and affording entertainment and time with friends. Efficient goal setting means you must consider the cost of your goals and where the money will come from.
A SMART goal is one that is specific (well-defined and unambiguous), measurable (with specific criteria), attainable (possible), relevant (useful), and time-bound (set to a rough schedule). Financial goals should be SMART because you will be your budget on your goals and goals can be used as guidelines.
Income: the cash inflow you receive and use to support yourself and your family.
Knowing where your money comes from is step one of the financial planning process. You can get income from salaries, bonuses, hourly wages, pensions, dividends (money paid by companies you own stock in), and your parents. These income sources provide cash that you can spend, save, or invest.
Spending: all expenses related to buying goods and services.
Your spending is paid for by cash or credit (borrowed money). The majority of most people’s income is spent. Expenses include rent or mortgage payments, taxes (most people pay 40% of their income to state, federal, local, sales, payroll, and property tax), food, entertainment, travel, insurance, credit card payments, and loan payments. Good spending habits are central to good personal financial management, as you generally have more control over your spending than your income. If your expenses are greater than your income, you are running a deficit and may go into debt.
Saving: excess cash kept for future investing or spending.
If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings. Managing savings is a critical area of personal finance. You can save money as physical cash, in a savings account (you cannot withdraw money), in a checking account (you can withdraw money), or as money market securities (bonds). Most people have some amount of savings, but having too much can be a bad thing since you could earn more money investing than having your money sit in a bank.
Investing: the purchase of assets (things you own) that are expected to generate a rate of return with the hope that, over time, you will receive more money than originally invested.
All investments involve the risk of losing money, but different investments can give vastly different rewards. Investing is the most common area of personal finance that people seek help with. Common investments include stocks, bonds, mutual funds, real estate, commodities, and art.
Budgeting: planning income and expenses over a period of time.
Budgeting involves setting goals, executing those goals, and comparing results to them. Budgets must be realistic, can be based on past years, and span over the time period most relevant to you (weekly, monthly, etc.). When making a budget, it is important to consider all sources of income and expenses, including unexpected events (like major surgery).
With an adequate knowledge of personal finance, you can live a comfortable life and meet many long- and short-term goals.