At the end of the day, most people don’t know a lot about banks and personal finance. Just because you understand how checking, savings and credit accounts work doesn’t mean you understand banks as well as you should. Whether you want to eventually start a business or you simply want to keep your personal finances in order, it’s important to have some basic knowledge about finance, banks and the economy. If you’re looking for a quick rundown of some of the most important things to understand, we’ve got you covered with easy-to-understand explanations.
How Credit Scores Work
Perhaps the most important thing to understand when it comes to personal finance is what your credit score is and how it’s determined. Lenders use your credit score to determine the risk factor of offering you a credit card or loan. This score is determined by your credit history, including how often you pay on time, how much debt you currently have and the average age of your lines of credit. The most common and important credit score is compiled by FICO, and it’s what most companies will pull when checking your credit.
Keeping your credit score high means not exhausting all your available credit, paying on time and building a long credit history. It’s important to remember that your credit score will take a hit if you are sent to collections by a company, so it’s also important to pay your bills on time to maintain an optimal score.
The Importance of an Emergency Fund
No matter how hard you try to prepare for every situation and prevent accidents, you never know when disaster will strike. Even for experienced financial experts like Richard Isava, having an emergency fund is the best way to remain prepared for any situation. Whether your vehicle needs repairs or you’re temporarily out of work, having a little bit of money stashed prevents you from having to go into debt. The importance of having an emergency fund has been highlighted with the COVID-19 crisis. While the government scrambled to figure out how to provide financial support for millions of people, many were left with no job and no money to keep things afloat while waiting for stimulus payments. Simply having a couple of thousand dollars in the bank can give you the support you need to remain stable for a couple of months.
For a lot of people, saving seems to be the most important part of financial success. While doing what you can to cut back on spending and save more is always a big help, your money goes a lot further if you find smart ways to invest it. While keeping your money in a savings account will earn you a little bit over time, the low interest rates make it difficult to generate a substantial amount of money that way.
The stock market is probably the most commonly known way to invest, although there are lots of other methods. The important thing when it comes to investing is that you do plenty of research and work with a professional to get the most out of your investment. While investing can make you a lot of money when you do it right, you can also lose thousands if you make a bad investment or manage your investment wrong.
The ultimate goal for most people is to eventually retire and live a peaceful, worry-free life. While this used to be a common way of living, it’s becoming increasingly difficult to fully stop working even at retirement age. Making the most out of the retirement your employer offers is the best way to ensure you have a nest egg to rely on when you’re no longer able to work.
Employer-sponsored retirement plans are a simple way to invest some of your money in the future. Instead of receiving a paycheck and having to invest a small amount yourself each week, you can decide how much you want to be withheld from your paycheck to go toward retirement. The more money you put toward retirement and the sooner you start, the faster your money will grow and the more you’ll be rewarded for it in the future. If you aren’t familiar with the retirement plan offered by your employer, talk to them as soon as possible so you can get started as soon as possible.
There are a lot of little things to learn when it comes to mastering personal finance. The good news is, there are also tons of resources to help you learn about and master those subjects, including websites that offer free basic financial courses that teach you about money. At the very least, you should understand how credit scores and retirement plans work so you can create a successful financial future for yourself.