The Importance of Personal Finance
Personal finance is an immensely important part of one’s lifestyle, yet it is rarely taught in school. It is important to understand because it relates directly to the decisions you make with your money on a daily basis. By definition, personal finance is the management of one’s monetary resources over time. Money gives one the freedom of choice, and this allows individuals to have greater access to resources that allow them to fulfil their dreams.
Money → Freedom of Choice → Ability to Follow Your Dreams
Taken from another perspective, money affects how you lead your life. An understanding of personal finance and how money works can allow individuals and families to make smart money choices that set them up in a good position to achieve their future goals.
A simple scenario involving the concept of the time value of money can demonstrate the importance of personal finance knowledge:
Imagine that you have two friends. One is 25 years of age and another is 35 years of age. These two individuals decide to do the following with their money:
25 year old: Invest $2,000 a year until the age of 65
35 year old: Invest $2,000 a year until the age of 65
Assume that the two individuals will receive the same rate of return on their dollar. For the purposes of this example, the rate of return will be 8%. By the time that these two individuals reach the age of 65, their investment will accumulate to the following amounts of money:
25 year old: $518,113
35 year old: $226,566
Difference: $291,547
Although the 25 year old only began investing 10 years earlier than the 35 year old, and even though the 25 year old invested only $10,000 more than the 35 year old, the 25 year old was able to accumulate more than 2x the amount of the 35 year old by by the time they turned 65 years old simply by deciding to start investing at a younger age.
That decision allowed the 25 year old to make $291,547 more from his investments than the 35 year old. In other words, his decision was worth $291,547. An understanding of the time value of money as well as several other aspects of personal finance can allow you to leverage what you have to set yourself up for a better future.
