6 personal finance questions every adult needs to answer. | Blog Spoko

Earning money like a pro is just one basic feature of your financial independence. Because every adult must also know how to spend rationally, invest wisely, and borrow safely.

Our today’s article helps to find answers to six basic personal finance questions, which would help you to handle the money management easily.

.

What is my total worth?

Knowing the size of one’s personal capital is crucial for making complicated decisions, building long-term plans, and evaluating risks.

While human life is priceless, personal capital is a measurable figure. It includes the total value of your possession, real estate, cars, savings (minus loans, mortgage, deposits, debts).

What is my budget?

Budget is like an ABS for a pre-schooler. It kicks off the process of educating yourself financially. And you can actually judge if someone is mature enough knowing his/her budgeting.

A budget is a list of planned expenses for different time horizons. It is typically divided into 3-4 spending categories:

– essentials (utilities, food, healthcare)

– strategic spendings (mortgage, car loan, education)

– dreams and “cravings” (devices, vacation, entertainment)

– investments (savings, deposits).

Knowing the contents of the budget is important if you need to evaluate your financial possibilities or if you plan to buy something expensive (e.g., how do I save to cover the mortgage?).

What is the emergency fund?

Saving for a rainy day is not a sign of being severely depressed or having a negative perspective over everything. These days it rather proves one’s proactivity and the ability to think critically.

An emergency fund is your money safety net (in case you lose your job, get sick or experience any unexpected force majeure). It is generally believed that you should keep 4-5 monthly incomes for that purpose. We highly recommend retaining them in the bank to avoid expensive impulse purchases.

What are credit history and credit rating?

Knowing these two concepts would definitely be helpful once you decide to take a bank loan or mortgage. So, credit history is basically a statistic of your previous relationships with banks. Where, when, and on what conditions have you borrowed money earlier? How fast have you paid off?Sometimes the check is performed on a deeper level, covering delays on utility payments and car fines.

Credit rating is a credit history represented by a score number. It’s commonly calculated by special bank software. If your credit score is high, your loan could be approved automatically (not involving the bank clerk).

What is the “cost” of my loan?

Only some categories of short-term loans can be «free»(meaning interest-free). All the rest are given to customers with a certain interest rate, which essentially represents a service fee. The bank gives you some money and you have to pay for that.

The rate is called in such a way because it is calculated as a pre-defined interest from the amount you are about to borrow. You should pick the lending institution based on the interest rate size.

How and where should I invest?

Successful investment takes time, knowledge, and experience. The financial term “diversification” means varying your investments – real estate, fixed income, precious metals. This would help to secure and strengthen your position.

You could invest in stocks (you purchase a small “part” of a company and get a share of its’ profit), bonds (type of investment where you get a fixed percentage as a profit and can sell the bonds when needed), investment fund (portfolio of different investments, where you get a personal share).

There is no strict rule on how much one should invest, since your cost of living, income, and personal circumstances may vary. Experts recommend getting to 20-25% of your annual income, but it’s up to you to decide upon the numbers that suit you well.

.

Getting answers to all these questions will help you to rule your finance safely and wisely. Additionally, they might save you from making reckless decisions and taking inconsiderate risks.