personal finance essay topics

personal finance essay topics

The Importance of Personal Finance Education

1. The Basics of Personal Finance

The biggest financial lesson that is not taught in school is the importance of savings. You need an emergency fund that covers at least six months of your expenses. You should then have savings for long-term goals such as travel, buying a home, starting a family, starting a business, retirement, etc. It’s also best to start out with a mindset to invest in income-generating assets rather than consumer liabilities. Focus on getting your emergency fund in place while tackling high-interest debt like credit cards, consider enrolling in your employer’s retirement savings plan (if available), and setting up an automatic savings plan. The moment you receive your check, it’s wise to automate the distribution of those dollars into savings and investments before you find a way to spend it.

Personal finance is one of the most important aspects of our lives, and yet it is not taught in school. A lack of personal finance instruction contributes to the significant increase in the number of individuals that experience financial events with life-altering effects. Young people are often not taught the basics of personal finance. From understanding the importance of accumulating and using credit wisely to deciphering the most critical aspects of investing and retirement savings, understanding the basics can get complicated really fast. The good news is that anyone can learn the basics of personal finance if they’re willing to apply themselves. It all starts with figuring out what your basic personal finance goals are.

2. Building a Strong Financial Foundation

Personal finance education helps students build a strong financial foundation that will help them in all facets of their quality of life. The lessons learned are far deeper than just personal finance; for instance, research indicates that students with a rigorous personal finance education have higher standardized test scores in math than students who do not. Personal finance can be used as an excellent vehicle in which to teach students numeracy and creativity—critical skills for today’s economy. By enhancing student financial behaviors, students may have more money to save, invest, and donate as they grow into contributing members of society. Students with quality financial education are able to experience a successful financial future and youth with low levels of financial knowledge have lower net worth and are more likely to engage in financially riskier behaviors. Persistence in personal finance education influences savings, engagement, and credit capacity, which will eventually lead to better future.

Education is the key to success, and your first lesson begins with understanding personal finance. Each individual should develop a strong financial foundation in order to succeed in his/her future. It is important for students to understand that personal finance is one of the key concepts to having a successful financial future and is especially important for their long-term success. It is not uncommon for students to graduate from grade twelve with little or no exposure to basic personal finance concepts such as the benefits and convenience of using a checking account, using a budget or managing a credit card. Financing higher education, buying a new car, or getting one’s first credit card are some of the largest financial decisions students have to make as they enter the real world with which they may be significantly uninformed.

3. Investing for the Future

Typically, when a person starts a new job with a new employer, a 401(k) account is established for the new employee within the first half of a year. There is an employee form that the person must fill out asking how much of the person’s paychecks the employee wants to have deposited into the employee’s 401(k) account. The employer institution takes the requested money and invests it in the employer’s mutual funds. Each month, each quarter, or sometimes every six months, the person will see that the deposits into the 401(k) account have increased, in part due to the person’s deposits but also in part due to the increase in value of the mutual fund holdings. Seldom, the person will see some distributions that are directly deposited into the person’s bank account. The distributions and deposits into the 401(k) occur in a dividend index account because the dividends from the securities that the mutual funds hold are deposited back into the mutual funds. After many years, an employee will find they will have amassed a sizable amount of money in the 401(k) account. Certain rules have to be followed as to how much money can be taken out of the account before the person reaches a certain age; otherwise, the person has to pay a penalty on top of owing income taxes.

Investing for the future | Steps such as creating a budget, saving for an emergency, paying off debt, and increasing one’s knowledge of personal finance will help ensure that a person’s financial needs are met. Such success often leads to financial freedom and the ability to travel, engage in hobbies, purchase items the individual wants, or maybe just to stop working when the person reaches the traditional retirement age. With proper planning and investing, a return is given for money that is set aside in accounts that include a 401(k) and an individual retirement account (IRA), which is essential to enjoying one’s retirement years. However, there are no guarantees that one’s financial needs will be met in the future. Not making an investment is a risk for meeting one’s future financial needs during one’s retirement. Making an investment presents different types of risks with varying probabilities of occurring. But there is one investing concept that has a higher probability of occurring and leads to the accomplishment of one’s investing goal. Public companies will increase their profits and distribute those profits to the common stock shareholders annually in the form of cash dividends.

4. Managing Debt and Credit

Most eight-year-olds know that when you go to a store and you want to buy something, you hand the cashier some “money”. Adults and older kids know that this money does not all come from the cash customer; plastic or paper tells the store that the shopper has a “bank” with money in it (as determined by the shopper’s bank, often in conjunction with over-burdened credit-based systems). Unlike the bedtime story books on how to grow allowances into smarty-pants savings accounts that teach responsibility and frugality, this facade of endless resources doesn’t translate to what these young consumers perceive as a realistic mode of payment in the future. While we may be able to remember Dad handing over cash for a tank of gas and then finding it somewhere within our budget to save for that family vacation, our children are becoming more familiar with the family’s “debit” card instead.

When it comes to managing personal debt, it helps to keep things simple. Fewer people these days spend every last penny of their paychecks, opting instead to save some of their monthly earnings. Making regular deposits to the bank or an investment firm supports a level of financial security. While this is exciting to hear, there are still far too many consumers who are burdened with credit card and other forms of personal debt. And, at the same time, there are fewer young people who understand how the idea of “credit” works. As a result, it is more important now than ever to talk with our children – boys and girls – about personal finance and budgeting concepts at an early age, ideally before they become teenagers.

5. Planning for Retirement

Compounding can create such confusion among middle school students that intelligent people encounter difficulty in grasping this simple mathematical concept against which there are still very few defenses. The ability to delay spending while allowing your money to double, increases, doubles again, increases again, doubles one more time, increases again, doubles again, and then doubles for the last time nearly guarantees financial wealth. Such a lesson could, perhaps should, begin in grade school and continue through high school graduation, a period of time encompassing an excellent habit-forming span of at least eight to 12 years. Retirees probably will not realize that asset values sometimes go in directions other than the one that allows the magic of compounding to work and, unfortunately, education is not actually a cure for this, but knowing that it can happen while persisting in the face of it has its own empowerment. A study of the effects of knowledge about how the magic happens showed that even a moderate familiarity with compounding enabled people to save consistently.

Daily living expenses seem to demand attention over the need to plan for a presumably distant future. ‘Retirement’ is an old person’s word. Yet planning and investing for retirement is extremely important for young people whose retirements could well last 30 years or more, and daily spending habits are crucial in the ongoing struggle to save while formulating a retirement plan. Unfortunately, our schools are generally turning out financial experts who are ill-prepared to plan for their own financial futures. People are much more likely to realize that they themselves ought to be planning and saving for their own futures if they are taught about these needs when they are young.