A Personal Finance Wake Up Call Teresa Kelly Purdue University ✓ Solved

In May 2018, a report by the United Way indicated roughly 50% of American households cannot afford housing and food. Part of the issue is climbing prices and stagnant wages, but lack of financial literacy also plays a part. People don’t always understand the role of interest in personal finance. Interest rates increase debt for things like mortgages and credit, but they can also increase the value of saved or invested money. The information in Unit 9 improved my understanding of personal finance, how to view interest, and the proper to handle financial matters. Unit 9 changed how I manage money.

In the past, intuition and necessity drove the plan or lack of therefore. Spending priorities, wants not needs, and modeling from parents and friends—not reading or analyzing expert advice—created habits. The strategy focused on paying bills on time, short-term savings for emergencies or small down payments on big ticket items to finance less, and achieving immediate financial goals such as having money left in checking at the end of the month. School has changed that approach through necessity. Schools costs require money, Content – MM 212 in particular – has also forced a reflection on poor financial habits.

Unit 9 showed that interest plays a key role in personal finance in two ways. First and most importantly, interest determines how much something really costs. Time, rate, and compounding raise debt exponentially. For example, according to Bankrate.com (2018), the amount paid on a 30-year mortgage for a $170,000 house can exceed $350,000 depending on interest and other factors. At the same time, the simple interest paid in savings and money markets only add about 1-2% per year.

According to the National Foundation of Debt Management (2017), a savings account holding $3,000.00 on January 1, 2018, will only be worth about $3,060.00 on December 31 while a $3,000.00 credit card balance will accrue nearly $450 in interest over the same period. Understanding this can allow comparisons between promotions such as lower interest rates versus longer terms or smaller payments versus cash back at signing. While 72 months at 1.8% interest might produce lower monthly payments, 48 months at 0% interest results in less money paid overall and in the car being paid off sooner. The cash back up front might seem nice, but the additional interest on the increased balance will wipe out that gain in the long run.

Even saving the money and gaining a small percentage of simple interest does not negate the impact of compound interest. Paying down debt faster creates a larger net gain. Unit 9 demonstrated that financial goals have to be more structured and focused on spending less over time by picking the most financially beneficial options. Rather than simply paying bills on time, debt reduction must be the priority. Minimum payments don’t allow for that and cost money each month.

In addition, financing large purchases also adds to debt. Smarter shopping and eliminating rather than reducing use of credit provide better options. Finally, the idea of “money left” is not really a goal. It is not specific or measurable. Rather, planning then doing what it takes save 10% of each month is a measurable, realistic strategy.

Mistakes from the past have provided powerful lessons and allowed me to appreciate what the course has taught. Past experiences with personal finance, interest, and managing financial matters caused periodic stress, but mostly seemed to work. Unit 9 showed a much better approach and revealed the weaknesses of winging it without a long-term plan or focus. By applying strategies over intuition, understanding interest, and creating structured financial goals, managing money and reducing debt feels less insurmountable.

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The importance of financial literacy cannot be understated in today's economy, where many families struggle to meet basic needs. A wake-up call regarding personal finance practices is essential for long-term stability. Through Unit 9, individuals can gain insight into the critical understanding of interest and its implications on both debt and savings, which in turn can empower them to make informed financial decisions.

Financial literacy enhances the understanding of key terminologies and concepts, such as interest rates, which play a significant role in personal finance. Knowledge of how interest accrues on loans and applies to savings can radically change an individual’s financial trajectory. For instance, individuals often focus on the short-term benefits of low monthly payments on loans, without comprehending the long-term consequences of extended borrowing periods and associated interest costs (Chen & Volpe, 1998).

One avenue to this understanding is through comprehensive education, beginning in schools and extending to personal experiences. Opening dialogues about money management, interests, and the reality of compound vs. simple interest can lead to better spending habits among young adults. The earlier individuals understand the cost of debt, the better equipped they will be to deal with financial obligations (Lusardi & Mitchell, 2014).

Interest, whether positive or negative, has profound effects on personal finance. Compounding interest magnifies wealth-building; conversely, it can also inflate debts, particularly in scenarios where minimal payments on credit cards lead to chronic debt cycles (Lusardi, 2019). For instance, many consumers may not realize that delaying payments creates substantial burdens that split into future financial obligation expansions (National Foundation for Debt Management, 2017). Therefore, creating structured financial goals is essential in combating this problem.

Structured financial goals, as discussed in Unit 9, focus primarily on understanding and minimizing debt—a transition from paying bills on time toward strategically reducing credit burdens (Kumar, 2020). Tactical approaches, such as targeting high-interest debts first while making minimum payments on lower-interest debts, can eventually lead to an accelerated debt repayment plan. Consequently, every dollar saved in interest translates into greater future savings and investment opportunities.

A proactive savings strategy could involve setting specific targets. For thrifty individuals looking to enhance their financial health, the suggestion of saving a fixed percentage of income, akin to the suggested 10%, provides measurable and specific benchmarks for success. This calculated approach leads not only to savings accumulation but can also lay the groundwork for wealth creation through investments (Fernandes, Lynch, & Netemeyer, 2014).

Furthermore, understanding the nuances of financing larger purchases can minimize the pitfalls associated with unnecessary debt. A mindful assessment of interest rates against potential savings can equip consumers with a better purchase strategy—opt for longer-term loans with lower rates, or take advantage of "0% interest" offers, completely minimizing the overall financial burden. The better-informed consumer is, the more successful they become in navigating commonly encountered financial scenarios.

Economic realities demonstrate that enjoying a lifestyle that surpasses means leads to financial destruction. Educating oneself on the effects of debt accumulation, credit utilization, and the psychology behind consumer habits is vital. This immersive understanding aids in creating a holistic view of personal finance and encourages sustainable financial habits that lead not just to survival but to flourishing (Lusardi & Mitchell, 2017).

In conclusion, the lessons derived from Unit 9 present a transformative opportunity for individuals to strategically approach personal finance with a structured mindset. Through financial education, understanding of interest, and the implementation of concrete saving strategies, individuals can fundamentally improve their economic standing, alleviate financial stress, and foster a culture of financial responsibility within their communities (Mandell, 2008).

References

  • Bankrate.com. (2018). Mortgage calculator. Retrieved from [Link]

  • Chen, H., & Volpe, R. P. (1998). An analysis of personal financial literacy among college students. Financial Services Review, 7(2), 107-128.

  • Fernandes, D., Lynch, J. G., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861-1883.

  • Kumar, A. (2020). Debt management strategies for college students. Journal of Student Financial Aid, 50(1), 51-65.

  • Lusardi, A. (2019). Retirement planning: A review of the literature. In The Handbook of the Economics of Finance (Vol. 2, pp. 1-59). Elsevier.

  • Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.

  • Lusardi, A., & Mitchell, O. S. (2017). Financial literacy and planning: Implications for retirement wellbeing. Financial Analysts Journal, 73(5), 28-42.

  • Mandell, L. (2008). The financial literacy of young American adults. The Journal of Consumer Affairs, 42(2), 230-256.

  • National Foundation for Debt Management. (2017). Debt calculator. Retrieved from [Link]

  • United Way. (2018). Financial stability study: The state of household finances in the U.S. Retrieved from [Link]