Many people proclaim financial ineptitude because they aren’t “good with numbers.” However, the number knowledge required to make good with your personal finances can be surprisingly limited.
Chances are, if you are a functioning, literate adult, you already use these concepts everyday. And because I’m good at belaboring the obvious, I’ll point out exactly where.
Addition & Subtraction
Paycheck – Bills = Savings
Savings – Extra Spending = Less Savings
The more you spend, the less you save. The less you save, the less you have to spend.
There are three ways to increase the amount you have to spend:
- Win the lottery.
- Work more.
- Put your money to work (keep reading).
You may have noticed that I didn’t included borrowing on this short list.
In the short run, borrowing does increase spendable cash, but in the long run, the cost of borrowing (interest), coincided with the fact that you have to pay the money back, reduces what you can spend freely.
% Percentages %
Most of us want to be able to spend more. Don’t misread me, this doesn’t necessarily mean we want to spend more selfishly. Spending can also mean giving.
So what is more? More is a relative term, that’s what it is. Spending more and saving more require a point of comparison and that’s where percentages come in.
A small purchase.
A good rate of return on an investment.
A $100 pair of pants might not be a big purchase for some one who makes $120,000/year, but for someone who makes just $12,000/year, that’s 10% of their monthly income.
8% may seem like a great return on an investment, but not when a comparable alternative is yielding 12%?
Using percentages gives us a big picture of where all of the pieces fit into our financial puzzle.