When it comes to money management, there’s so much more to the world of personal finance than just budgeting and saving. Almost everyone knows about the importance of maintaining a budget and spending less than you earn. But, there are many other benefits of personal financial literacy that countless people miss out on.
If spending more time on your hobbies, dining out, living without financial stress, or traveling, perhaps to see the seven natural wonders of the world, are on your bucket list, then you won’t want to miss these seven wonders of the personal finance world to help you afford your goals in life.
The 7 Wonders of the Personal Finance World
Many of us learned about compound interest in middle or high school math classes, but how well do you really understand compounding interest and how it affects your finances as an adult? Compounding interest works to your advantage when you reinvest interest back into your original interest-accruing asset. In a savings account earning 0.1% interest, you still get compounded interest, but it’s significantly less than what you could earn through stock market investments.
When it comes to loans and credit cards, compound interest works against you by multiplying the amount you’ll have to repay as a borrower. In other words, you must continually pay interest based on your total amount of debt until your debt is completely paid off. So, don’t risk lowering your credit score by mistakenly using a simple interest calculator to determine how much you should pay each month.
When you invest money into a mutual fund or general brokerage account with a variety of investments, your portfolio will have a target allocation for the type of assets you want, based on your aggressive or conservative investment strategy. When your portfolio veers off too much in one direction, you need some sort of mechanism for realigning your portfolio with your original target allocations.
This is why robo-advisors are great. They can automatically rebalance your portfolio by buying or selling certain investments to get you back on track to meet your goals.
Matching 401(k) Contributions
Not all employers offer matching 401(k) contributions, but if you’re among the lucky ones who get access to this next wonder of the personal finance world, then you should take full advantage of it by maximizing contributions to your employer-sponsored retirement account.
Employers typically offer between a 2-4% match on your retirement contributions, which is basically like free money for anyone willing to invest in their future!
Best of all, you can contribute up to $18,500 per year to your 401(k) account on a pre-tax basis, which means you don’t have to pay taxes on those contributions while you’re still working.
Want to get great returns on your investments? If your portfolio presently lacks index funds, then now would be a good time to revamp your investment strategy to include index funds because they’re one of the most stable options available to investors.
Just ask billionaire Warren Buffet, who thinks index funds are the best investments for growing wealth. It’s a truly passive form of investing based on major indexes like the S&P 500, so you get access to a broad range of investments at low trading costs.
Living Below Your Means
This “wonder” of personal finance is more of a mindset and financial management strategy. But, it’s also one of the more difficult things for wealthy and low-income folks to achieve. Saving money is easier said than done. That might explain why almost half of all Americans wouldn’t be able to deal with a $1,000 unexpected expense due to a lack of savings.
To genuinely live below your means, you must consistently reduce your debt until you reach zero, then switch your focus to increasing your income in other ways to ultimately escape the cycle of debt and achieve financial independence.
Tax-Advantaged Retirement Accounts
Why would anyone choose to invest in a Roth IRA, which has a $5,500 maximum annual contribution limit, when you could invest in a 401(k), which has an $18,500 maximum annual contribution limit instead?
Although Roth IRAs are funded by your post-tax income, this can be incredibly advantageous for anyone saving for retirement because your earnings on those initial contributions will not be subject to taxation. Whether you save for 10 years or 40 years, you will likely have significantly more money in your Roth IRA by the time you reach retirement age and withdraw tax-free and penalty-free.
Extra Loan Payments
If you have a loan with no prepayment penalties, then making an extra payment or two can save you quite a bit of money on interest.
For homeowners currently paying off a mortgage loan, just one extra payment per year could save you thousands of dollars in interest and shorten the lifespan of the loan. For college graduates with student loans, making extra payments, or paying for loans while you’re still in school, can similarly save you a ton of money on interest in the long run.