3 Easy Money Concepts That Are Essential to Master

Our experts answer readers’ investing questions and write unbiased product reviews (here’s how we assess investing products). Paid non-client promotion: In some cases, we receive a commission from our partners. Our opinions are always our own.We should all strive to be good with money. Money is involved in nearly every aspect of our lives, and not understanding how to use it as a financial tool can lead to financial strain and debt. That can leave you without the resources that you need to take care of your bills and expenses and move successfully throughout your daily life.Unfortunately, many of us don’t start to understand money or seek out financial education until we make a financial misstep, like getting rejected for a credit card or an apartment, having to pay a steep interest rate on a personal loan, or facing some other form of financial strain.There are certain money concepts that everyone should understand that affect your financial life and resources. These basics set the foundation for how you use and grow your money.Understanding the difference between a need and a want helps categorize your spending as you spend and save money. Needs are things that you cannot do without — things like a place to live, food to eat, or medical treatment.Wants are things that are nice to have but are not necessary if you cannot comfortably afford them — like entertainment, travel, and gym memberships. The problem comes in when people confuse a want with a need and base their budget around that.Do you need to exercise? Yes. Do you need a $200 monthly gym membership to do it? No. If adding that $200 to your budget results in financial strain, or if that money could instead be used to pay down debt, it’s probably better not to have the gym membership right now.By really looking at your budget and being honest about your needs and wants, you will be able to make a big positive change to your spending.Compound interest is how you grow wealth. To put it simply, compound interest is the interest you earn on interest. As interest grows on itself, your money will grow faster than simple interest, which is calculated only on the principal amount.For example, if you have $100 and it earns 5% interest every month, you will have $105 at the end of the first month and $110.25 at the end of the second. You not only earn interest on your original deposit but also on the interest you earned during the first month. Compound interest is so effective because even if you never deposit another cent in that account, the money that is there will still grow at an increasing rate over time.You can use compound interest to grow your retirement savings. If you start saving for retirement early, you have time for your funds to grow.Your credit utilization is the amount of credit you’re using divided by the credit limit on your revolving accounts, typically your credit cards. When your credit score is calculated, your credit utilization is an important factor, because high utilization usually results in an increased risk that someone will miss a payment down the road.The fact is, someone who is maxed out on their credit cards will almost certainly struggle financially. Remember, credit is not an extension of your income. As a result, if you’re using too much credit, you might not be able to pay all your monthly bills — and you might struggle to get new credit cards or loans when you need them.

Source