5 Finance Tips They Didn’t Teach You in School

Debit and credit cards, why you need both

The difference between debit and credit boils down to paying with your money or paying with someone else’s. A debit card means you pay with your money from your account, while a credit card is paying with borrowed money that you must pay back.

Now credit cards are not always bad to use, in fact, using credit cards come with many advantages, like consumer protection against fraud, rewards and benefits programmes, and a source of emergency funds.

In addition, using credit you know you can comfortably pay back is very important for increasing your credit score.

Your credit score basically tells lenders how trustworthy you are to pay a loan, and so a higher score means you can get access to better rates when you do borrow. Having a good credit score means that you will be able to get better rates on things like mortgages which will save you a huge amount of money in the long run.

Always keep an eye on how much you have spent credit on and make sure you don’t use more than you can afford to pay back. Credit is an amazing tool, but you should always use it responsibly.

Remember you can use your credit cards to buy goods, and therefore providing yourself the insurance protection and other benefits that come with your credit card, but repay the balance in full within the month to avoid any interest charges. 

Inflation is a good thing?

Inflation isn’t always a good or bad thing but a necessity! A small amount of inflation, around 2% is used to help stimulate the economy. Spending and borrowing both help economic growth and inflation encourages this.

• Inflation helps to outright encourage spending and investing rather than saving everything. Since people know prices will rise it makes sense to either spend it while the money is worth more, or invest it in the hope that it keeps its value. Both of these stimulate the economy.
• Inflation also helps reduce debt.  A small amount of inflation means, especially over time, that the money you will use to pay back your debt is worth less than when it was borrowed. This effectively reduces the value of what you’re paying back.
• Inflation makes borrowing more appealing. Similar to the point above, a debt is paid back with money that is worth less than when the debt started. While being borrowed the money is spent on things and money being spent helps the economy. For example property has usually always gone up over time.

Inflation against interest

Something that people don’t think too often about when saving is how their money loses value over time. If you have your money stored in a bank, they may add interest to how much you have saved by a few percent. Now lots of people see this as a decent way to increase the value of their money but forget that inflation is constantly decreasing its value at the same time. Remember not to forget the tax that is also deducted from any increases due to interest earnt.

This applies to all types of investing, if you have your money invested somewhere and you increase its value by 2% over a year but inflation is at 3% then your money has actually decreased in its total value.

Next time you’re considering where to save or invest your money look up and consider the current inflation rate and its forecast before you make any decisions.

The cycle of the economy

There is a lot of uncertainty, especially with younger people, when they hear intimidating terms like ‘recession’ and a ‘struggling economy’. So here is a brief summary of the four stage pattern of expansion and contraction that the economy goes through.

• Expansion: During an expansion phase, multiple factors of the economy grows. Some of these factors are GDP, employment, spending and business investment. This phase is also known as a boom or recovery phase, and during this time banks may increase interest rates to control inflation.
• Peak: This is the highest point of economic activity, but growth starts to decrease. Employment increases at a slower rate, businesses are less willing to invest, and consumers will start to spend less. This phase is the point of change in the cycle from expansion to contraction.
• Contraction: During a contraction, GDP decreases, unemployment rises, consumers spend less, and businesses spend less. Central banks and governments will react to stimulate economic growth through methods such as lowering interest rates, implementing tax cuts and increasing government spending.
• Trough: This is the lowest point in the cycle, economic activity is at its lowest and unemployment will be at its highest. However, it also marks the end of contraction and recovery begins. After this, economic conditions will improve, and the cycle will usually repeat itself.

Although this is a simplification, hopefully it illustrates the journey that the economy is expected to travel through. With regards to contractions, rather than worrying if it will happen, you should do your best to prepare for when it happens, and not get caught out.

You need to budget

Budgeting is boring but it is the best way to get a proper understanding of your finances. Scrolling through your spending history and saying to yourself, ‘that looks ok,’ is not sufficient to understand your incomings and outgoings properly.

All you have to do is create a table, either on a computer or by hand, and write out how much you have spent and what you have spent it on. This should include subscriptions, weekly shopping, takeaway meals, and anything else you spend money on. Total how much is being spent monthly on bills, needs, and others, then compare it to how much is coming in from your income.

From there you can see your spending habits and how much you have leftover each month. Then, you can set goals to spend less where you are spending excessively and set yourself, ‘saving goals’, each month.

This is easier said than done, especially if you have many different expenses. However, there is no better way to see clearly where your money is going each month. You can only make an effective change to your spending habits if you know what they are in the first place.

School may not have taught you everything you needed to know about finance but hopefully you have learned something helpful with this article. Every time you learn something new about finance you take a step towards securing financial stability and future wellbeing. Keep learning and keep taking control of your financial future.