The Basics of Personal Finance that everyone needs to know
Zopa have recently shared a brilliant cartoon series, created by the rather wonderful @instachaaz, explaining some of the basics of personal finance and money. The images are fun and simple, and I thought they would be perfect to share on Mrs Mummypenny. I have picked out some of their cartoons and added in some of my personal basic lessons as well. I hope you enjoy.
You can find out more from Zopa by clicking here. Zopa has 14 years of experience in the peer-to-peer (P2P) lending world. They’ve helped 100,000s of people take the stress out of money with loans and investments built on honesty, transparency and trust. They’ve recently gained a banking licence so they can launch even more products to help more people feel good about their money. Please note this is a collaborative post with Zopa, but all the views are my own.
This is perfect for sharing with anyone who is not yet familiar with the basics of personal finance and money. And you never know you might learn something new!
The Debit Card compared to the Credit Card
I think one of most widely misunderstood products, particularly by those in financial need and the young, is the difference between the debit and the credit card. They are certainly terms that I find myself explaining to my children often.
The debit card represents your money in your current account that you can withdraw from the bank. The credit card represents money that you are borrowing from the bank, and that must be paid back. Most credit cards will charge a fee, known as an interest rate for borrowing this money beyond a certain period of time (normally around four to six weeks). These cards are easy to get mixed up particularly as a lot of people including me use them interchangeably.
Credit cards can be used cleverly instead of the debit card. I put all my regular spending, things like groceries, petrol, meals out, clothes onto a credit card that rewards me with an annual cash back bonus based on a % of what I spend. I pay the credit card balance in full each month to ensure I pay no interest charges. This means I make money out of my spending!
Whilst we are talking about credit cards, we should also talk about APR
The APR rate is a very commonly misunderstood term. The cost of your borrowing for a year above the initial amount borrowed. An APR rate will be quoted for all lending products including credit cards, personal loans and mortgages, allowing you to compare providers.
Expect to pay an APR of 18% and above for credit cards. APRs on loans vary hugely depending on so many factors, including your ability to repay the money (as in your credit rating), amount borrowed and over what period of time.
Just remember the higher the APR, the more interest will be added to your original borrowing and the more you will need to pay back.
Pay Yourself First – Saving Money
A habit that everyone needs to adhere to from their very first pay day. As soon as that cash hits your bank account pay yourself first. Pay your future self with a transfer into your savings of choice. There are lots of places you can put the money from savings accounts through to investments and pensions. Just ensure you do it from day dot.
It will soon become a habit and something that you are totally used to. An act that is as essential as paying the rent or mortgage.
Speaking from experience I regret not paying money into my pension from the beginning of my properly paid working career. I got used to having all my salary as money to spend, when I finally realised, I was missing out, aged 30, it was a big shock to my system. Suddenly it felt like I was losing money to my pension. Add to this the amount of pension savings I had already missed out on following a decade of great monthly pay days.
Savings Versus Investments
Putting your money into cash savings accounts is very low risk. Your money will grow very slowly over time, particularly now with savings interest rates very low. But this money will never fall beneath what you have saved to start with.
Or you can take more of a risk and invest your money. Invested into things like stocks and shares, which means buying a small part of a company, or peer-to-peer lending. This is a riskier option but with that additional risk comes the opportunity for greater return. Of course, risk means that your investment can go up as well as down.
Time wise you will tend to invest money for the longer term, as in leaving the money there for at least five years. Any money that you require short term easy access to should sit in cash savings.
The Importance of An Emergency Fund
Another key basic financial lesson from me is to build an emergency fund. This emergency fund should be around three to six months’ worth of your monthly essential expenses. Before any form of longer-term savings/investments are considered, this emergency fund should be built up.
It is then used for real emergencies, e.g. if you lost your job or if the car needed a big repair job. The reassurance of having the emergency fund set aside is huge. I always feel better when I have it and worry when I don’t. If you must dip into the fund work hard to replace that money afterwards. This money is best held in easy access cash savings.
The Wonders of Compound Interest
Compound Interest is a wonderful thing that makes saving and investing money over the long term very exciting. This cartoon explains it perfectly with easy to understand numbers. The beauty of receiving interest on top of interest.
You can see here the more years that money grows the more and more compound interest is received, proving that the earlier you start the more you will benefit from this wonder of compound interest. Start saving from as young as possible and make sure it’s in to an account that pays compound interest. Don’t be like me and wait until you are 30 before putting money into your pension!
The New World of Open Banking
I love this cartoon explaining open banking. A term that confuses a lot of people, of all ages with it being so new and different.
The cartoon is so simply put, open banking allows you to share your money information with companies who make it easier to understand spending patterns, overspending, budgeting. They add value to the information of what you are spending.
Open banking apps such as Yolt and Emma are brilliant tools to help keep track of all your spending and help you to understand month on month variations. Total spending versus a budget. I love using these apps and they make my financial life easier to control and understand.
You can see even more cartoons from Instachaaz on the Zopa Instagram page. Including some interesting facts about money and lending. Go check them out.