Personal financial management is a useful method of controlling income and expenditures as well as planning future savings. By understanding the basic principles and minor aspects of money management such as the compound interest method, people can avoid bankruptcy and enhance their chances for the side income.
Since I did not have the opportunity to study personal financial matters in high school because there were no such classes and the school’s administration only started to consider the introduction of personal finance courses, I learned everything from my parents, the Internet, and my experience. Having analyzed my knowledge, I can conclude that I know only the basics: the main principle that says to spend less than earn, the second rule of searching for side business and income, and the third rule of money management. These principles are self-explanatory, and people know them intuitively. As a matter of fact, my experience shows that in most cases simple intuitive knowing in not enough. I read the articles on the Internet about the effective money management and successfully followed the tips that were written in them because the theory is quite simple: calculate the income, divide it into parts, assign on various needs, and do not forget to put some amount of money for savings. However, the theme of side income is rather complicated because it concerns a wide range of components: hobbies, investments, education, and even relationships with people. Personally, I am interested in smart investments and the compound interest method of earning income.
In the previous unit, we learned how to calculate the total amount of money in the investment account using the exponential equation that operates with variables of ending and principal amounts of money, the interest rate, a number of annual compoundings, and a number of investment years. I found out that with $250,000 deposited for ten years at 8% interest I will earn nearly $577,400. As it turns out, the compound interest method is a real instrument for earning money. The process implies two components: time and money, and its principle say that the more time is given to the investment, the more money will an investor receive in the future (Ryan, 2011). This principle allowed me to derive a simple, self-explanatory rule: the investing activity should start as soon as it is possible.
Following the idea that was expressed in the previous paragraph, I regret that I did not know the principle ‘more time – more money’ before. I would definitely start investing earlier. However, I cannot say that I learned this rule too late. For a young person that is only starting its personal finance management, I would advise to invest the money as soon as it is possible and to be an active investor. Active investors study the market and possibilities of deposits; they know the difference between bull and bear markets, understand the nature of market volatility, and avoid practicing market timing (Garman & Forgue, 2011). Personally, I contemplate the possibility of active investment. As opposed to passive investment activity that consists of depositing money in a bank and simply waiting several years to pass, active investment involves a constant analysis of the market, which helps to develop financial management thinking and to be in the course of current economic events. Consequentially, having become an expert that understands the nature of investments, a person has numerous chances to earn a significant income.
In conclusion, I may say that the course of finance helped me to learn certain interesting and beneficial aspects of personal money management such as investments. I realized that the compound interest method is a real instrument of earning income, and, moreover, our lessons made me involved in the theory of investment that studies various opportunities of earning money on the stock exchange market.
References
Garman, E. T., & Forgue, R. (2011). Personal finance. Boston, MA: Cengage Learning.
Ryan, J. (2011). Personal financial literacy. Boston, MA: Cengage Learning.