Starting from scratch.
Americans tend to score poorly on financial literacy tests, but it’s not entirely their fault: School systems don’t generally require personal finance classes, and many parents feel ill-equipped to pass on big lessons about spending, saving and investing to their kids. Here are ten basic tenants you should know in order to navigate today’s financial world:
You have to earn more than you spend.
At the end of the day, you have to earn more than you’re spending in order to come out ahead. Sure, short-term loans and credit card debt can get you through a crunch period, but on average, you have to bring in more than you’re shelling out to stay solvent.
Saving early will help you save more.
You probably remember hearing about compound interest back in elementary school. The gist is that the earlier you start putting money away — for retirement, a house or just an emergency fund — then the more will accumulate, thanks to the growing powers of compound interest. Just make sure the money is in an interest-bearing account, or, if it’s in the stock market, that you can handle the inevitable ups and downs in the short term.
Higher rewards mean higher risk.
If you want to keep your short-term savings in a safe spot, like a bank account, then you’ll sacrifice higher returns in order to do so. If you’re willing to take on more risk in the stock market, you will probably earn more over the long term. That’s why bank accounts and more conservative investments are best for short-term savings, and riskier securities (via a diversified portfolio) are better for longer-term savings.
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