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Three Reasons to Understand Personal Finance

Updated on January 13, 2011

Why is Personal Finance Important?

Understanding personal finance is something that is immensely important for everyone no matter what stage they may be at in life. It is important to learn how to control and understand your finances as early as you can, because you will need these skills throughout your entire life. There are several reasons why it is so imperative that individuals need to learn about personal finance, and I will share with you some of those reasons below.

1. Retirement

In my opinion, one of the most important reasons to learn more about personal finance is retirement. If you live to be 65, and hopefully you will, it is imperative that you understand personal finance and the whole retirement aspect of it. If you do not want to be working until the day you die, you need to think about your retirement and how you will support yourself during that period of your life. Some people mistakenly think that their Social Security benefits will be more than enough to provide for them at this time in their lives. Sadly, it might only be barely enough, if enough at all for a frugal individual, and the odds that social security benefits will even be around for another ten years or so is unfortunately slim to none. This means that saving money for your retirement is vitally important and the sooner you can start saving, the better off you will be. Beginning to save for retirement young can have a huge impact on how much you will have by the time you retire. For example:

A 20 year old invests $150 a month at 8% interest paid quarterly

A 30 year old invests $150 a month at 8% interest paid quarterly

By the time they each are 65 the 30 year old will have $341,919.40, but the 20 year old will have $782,514.90!

Even though the difference invested in the ten extra years that the 20 year old had was only $18, 000, the difference at the age of retirement is an astounding $440,595.50! Why is there such a large difference? Compound interest is the answer. Even if the 30 year old doubled his monthly investment to $300, he would still fall short of what the 20 year old had made, and end up with $683,838.80. This example proves how extremely important it is to start investing and saving for retirement as early as possible. The sooner you start, the more you will end up with when you retire.

2. College Savings

Whether you are saving for yourself to eventually go to college, or for your children or grandchildren to go to college, college savings is definitely an important aspect of understanding personal finance. Saving money for college ahead of time can help you to avoid having to take out a student loan that you will be paying back up to several years after you have already graduated. Here is another example for you on how saving money for college can benefit you:

If you save $285 a month at 5% interest for 18 years, by the end of the 18 years you will have $100,000, or $25,000 a year to spend on college tuition.

If you aren't wanting to save quite so aggressively, saving $114 every month at 5% interest for 18 years will leave you about $40,000, or $10,000 annually on college tuition.

If you get a late start on saving for college and decide to save the last four years before entering college, saving $525 a month until college at 5% interest will earn you $7,000 annually towards college tuition which will help out a lot towards paying your school bill so not as many student loans are needed.

Regardless of how much you decide to save or when, any money set aside for college will ultimately help you to pay off your tuition that much more quickly.

3. Knowing How to Avoid Debt

Obviously, some debt is almost unavoidable, such as home mortgage loans, student loans, and some car loans. The debt that you should definitely try to avoid at all costs is credit card debt and other high interest debt you may incur while buying items that you do not particularly need. Here in America, many people want what they want, and they want it immediately. If they do not have the money saved up or the cash on hand, most people will simply charge it. Although they may feel great for a time while enjoying their new purchase, in the long run this is not an ideal way to live at all. It is understandable that some people may have an emergency come up that requires them to use a credit card, but this also brings up the point that it would be a much better idea to have an emergency fund set up just in case such financial emergencies did happen to come along. This is just one of many reasons why it is so important to understand personal finance - and finance in general - to better your every day life and be able to live it to the fullest.

Do you think that understanding finance is important?

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    • Donna Janelle profile image

      Donna Janelle 7 years ago from Oklahoma

      Thank you Simone Smith! And thanks for commenting!

    • Simone Smith profile image

      Simone Haruko Smith 7 years ago from San Francisco

      Those are three very important reasons! Thank you for sharing :D