When you think of school subjects, you probably first think of classes like math and social studies. Financial literacy courses aren’t usually part of the general coursework in most schools. As a result, many students graduate high school (and even college) and don’t learn the personal finance lessons with the financial skills they need to succeed in the real world.
Concepts like budgeting, investing, and starting an emergency fund are all crucial for financial wellness. Fortunately, it’s never too late to learn. Keep reading for our top finance lessons that likely weren’t part of your high school curriculum.
Personal finance lessons that aren’t taught in school
Here are 5 personal finance lessons that you don’t learn in school:
1. How to create a budget
Creating a budget is key for saving money and tracking your expenses. Following a budget can help you avoid wasting money on discretionary expenses and move you closer to your financial goals.
Budgeting can be especially important if you’re trying to reduce debt, such as if you’re using a loan payoff calculator with a debt repayment plan to save money. Here’s how to create a budget:
- Jot down your post-tax monthly income.
- Write down a complete list of your monthly expenses. Include both fixed expenses that remain the same every month—like your rent or mortgage— and variable expenses that fluctuate every month, like gas, groceries, and car maintenance.
- Take a hard look at your income versus your expenses. If you’re spending more than you’re saving, it might be time to adjust your spending.
2. How to build a strong credit score
Your credit score is a three-digit number that shows lenders how strong of a lending prospect you are. The most well-known credit score is the FICO score. It ranges from 300 (very poor) to 850 (excellent). Here are the five components that make up your FICO score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Payment history makes up the largest portion of your score. By making your card payments on time, you’re already setting yourself up for credit success.
It’s also important to keep your credit utilization ratio down—in other words: just because you have a high credit limit doesn’t mean you need to use all of it every month. The amount of credit you use makes up 30% of your credit score.
3. The importance of emergency funds
An emergency fund is a pot of money that you put away to act as a financial buffer should the unexpected occur, such as a medical emergency. It is recommended to save around three to six months of living expenses for the fund, although a year is ideal. By having a fund in place, you won’t need to deplete your savings to pay for surprise bills.
4. Why interest is important
Your interest rate is a percentage of the principal amount that a lender charges you to access capital. Most credit cards charge interest if you carry a balance.
By not paying your bill in full each month, you can easily accumulate large interest fees relatively quickly. Even if you use a 0% APR card, which doesn’t charge you any interest for a designated period, you’ll eventually owe interest if you carry a balance once the promotional period is over.
5. How student loans work
Many students ironically don’t realize how student loans work. In fact, over half of the students who take out loans didn’t figure out their future monthly payments before taking them on.
Student loans are funds borrowed from a private lender or the government to help you pay for college, and because it’s a loan, you’ll need to pay the full sum back in addition to all of the interest that accrues over time. If you don’t pay your loans, your balance and interest will continue to grow, and your debt could be placed into collections.