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Personal finance skills part 1

Kirjoittanut: Ariel Cohen - tiimistä SYNTRE.

Esseen tyyppi: Akateeminen essee / 3 esseepistettä.
Esseen arvioitu lukuaika on 9 minuuttia.

Personal financial skills – Part 1 




“Financial skills are life skills. Most people just don’t treat them that way. We teach our kids manners, multiplication tables, how to read, and about relationships, but financial literacy is too often left off the table” (Papadimitriou 2014) 

Personal finances refer to the management of an individual’s or a household’s money and financial resources. It encompasses a wide range of activities, including budgeting, saving, investing, banking, borrowing, insurance, tax planning, retirement planning, and estate planning. Effective management of personal finances is crucial for achieving financial stability, meeting financial goals, and securing a comfortable future. 


In today’s world, where financial choices are complex, becoming financially savvy is essential. Understanding how to make informed decisions about spending, saving, and investing can greatly impact one’s financial well-being. By learning the principles of personal finance, individuals can gain greater control over their money, minimize debt, build wealth, and attain financial security and freedom. 


This journey to finance, involves understanding individual financial goals and constraints, developing a realistic budget, being mindful of financial risks, exploring various investment opportunities, and planning for retirement.  


With financial knowledge and competence, individuals can empower themselves to make intelligent financial choices that align with their unique circumstances and aspirations. Through effective personal financial management, one can enhance their financial health, reduce financial stress, and create a solid foundation for a more prosperous future. (Kenton 2022)  


Everyday spending 


What does everyday life cost? The cost of everyday life can vary significantly depending on various factors, such as the individual’s location, lifestyle, family size, and personal preferences. Generally, everyday life expenses can be broken down into several categories: 


  • Housing: This includes rent or mortgage payments, property taxes, utilities (electricity, water, gas), maintenance, and home insurance. 
  • Food: Expenses related to groceries, dining out, and any other food purchases. 
  • Transportation: Costs associated with owning a car (fuel, maintenance, insurance, loan payments) or using public transportation, taxis, or ride-sharing services. 
  • Health Care: Medical expenses, insurance premiums, prescription medications, and any out-of-pocket healthcare costs. 
  • Education: Expenses for tuition, books, supplies, and educational activities for oneself or family members. 
  • Entertainment: Costs related to hobbies, movies, concerts, sports events, subscriptions (Netflix, Spotify, pornhub, etc.), and other recreational activities. 
  • Communication: Expenses for mobile phone plans, internet services, and cable or streaming services. 
  • Personal Care: Costs for grooming, personal hygiene products, and beauty treatments. 
  • Clothing: Spending on clothes, shoes, and accessories. 
  • Debt Payments: Any credit card payments, student loans, personal loans, or other outstanding debts. 
  • Savings and Investments: Contributions to savings accounts, retirement funds, or other investment vehicles. 
  • Miscellaneous: Any other expenses that don’t fit into the above categories, such as gifts, donations, or unexpected costs.  


The total cost of everyday life can vary significantly from person to person and from region to region. Creating a budget and tracking expenses can and will help individuals gain a clear understanding of their specific everyday life costs and identify areas where they can optimize their spending. (Capital one 2020) 

 In Finland, the consumer research center has developed reference budgets that provide an understanding of how people spend their money. These budgets are based on reasonable minimums and do not include unexpected expenses. They offer a helpful means to compare one’s own spending to the reference budget and gain insight into how money is generally 

utilized. For instance, according to the reference budget, an under-45-year-old man spends 1634 € per month on living expenses. 


There are plenty of budgeting tools and graphs that you can use according to your expenses and track your everyday spending better. In the budget, you need to consider which things you and which things can wait until later. (Martat 2023) 


Several effective methods can be employed to reduce spending, leading to improved financial management. Some of these approaches include eliminating unnecessary subscriptions, cooking meals at home, shopping with a pre-made list, reducing energy consumption, utilizing public transportation, negotiating prices, and choosing second-hand purchases. It is crucial to recognize that seemingly minor expenses can accumulate significantly over a long period. 


For instance, purchasing five plastic bags each week may result in an annual expenditure of 65 €. Similarly, spending 10 € weekly on non-essential items like candies can accumulate to 480 € over a year. Reflecting on whether these expenses could be redirected to more meaningful purposes and how they may impact future financial prospects is essential. Over the course of ten years, a total of 5450 € (Candies and plastic bags) may be spent on such seemingly insignificant items or invested (Morris, 2023). This emphasizes the significance of making thoughtful financial decisions to achieve long-term financial goals. 



Taking debt  


You might have heard as a child, that taking debt is a bad thing and should be avoided, but don’t let that fool you. Everything comes with a risk, but there is always the other side of the coin that might reveal a solution getting you closer to your goals. Debt is something that divides opinions, there is bad debt, and there is good debt.  


Debt refers to money owed, often with interest, that requires repayment. However, not all debt is equal; some types of debt are more favorable than others. Good debt serves as a means to achieve significant milestones, such as becoming a homeowner without a mortgage or graduating from college, which could be considered as an investment for the future. 


Bad debt refers to borrowing money for non-essential purchases, making it challenging to accomplish your goals. While these items may provide temporary satisfaction, their value diminishes quickly. Designer clothing loses its worth once worn, and the latest tech gadgets soon become slow and forgotten. To stay on track with your objectives, it’s crucial to stay away from bad debt whenever possible. (Rosenberg) 


As discussed earlier, if the debt helps you to generate value, income, or net worth, it can be considered a good debt. Getting yourself into debt might be beneficial to overall financial health in different scenarios.  


There is a clear link between education and employment opportunities. Individuals with higher levels of education are more likely to secure well-paying jobs and experience greater ease in finding new employment when necessary. Investing in a college or technical degree is often financially rewarding, as it can lead to a relatively quick return on investment after entering the workforce. Nevertheless, it is essential to evaluate the value of different degrees and carefully consider both short-term and long-term prospects for the fields of study that interest you. A good example of a good loan is the student loan in Finland, if graduating on time, students are eligible for a 40 % refund on their loan. If they do not require the entire loan amount for living/ other expenses, they have the option to allocate the funds to investments. 


Starting a business usually requires capital to start and many starting entrepreneurs need to take a loan. Starting a business always includes a risk, but when succeeding, the debt is worth it.  


Mortgage debt is most likely the biggest debt individuals take in their lifetime. You can either buy the house for yourself or invest in real estate. Meanwhile, you live in the house, and you are getting the money eventually back by paying off the mortgage. Living in your own home means you are paying it for yourself and not for others, so it can be considered a good loan.  


Bad debt is borrowing money for depreciating assets and these types of instant credits most likely have a high interest rate. These types of loans tend to put people into a debt cycle that is hard to break. Some good examples of bad loans from a financial perspective are cars, since they (usually) drop value, and combined with the interest rates on the loan, you will pay much more for the car than the actual price. While clothes, food, furniture, and various essentials are necessary, using a high-interest credit card or instant credits to finance these purchases is not a wise choice. Instead, reserve credit card usage for convenience but ensure that you can fully repay the balance each month to avoid accruing interest charges. For other expenses, consider using cash whenever possible to prevent unnecessary debt accumulation. 


It is not recommended to pay off debts by taking other debts since it might lead to debt cycle. (Smith 2023)  


Managing debt 


When having debt, you might want to consider developing a budget, where you list all the expenses and income. Then you can ensure that you can afford all the monthly payments. From there you can work toward paying them off and allocate extra funds towards a certain dept. There is also a possibility to get a debt consultant who will help you to build a strategy to pay the debt off. 


In Finland, it is possible to enter into a debt settlement program. If you find yourself overwhelmed with debt and unable to make repayments, it may be more beneficial to suspend payments and see the option of enrolling in this program to potentially receive debt forgiveness. (Takuusäätiö).  


Debts are not all the same. Good debt has the potential to grow your wealth, while bad debt involves high interest costs on purchases for assets that depreciate in value. 


Identifying whether a debt is good or bad often relies on an individual’s financial circumstances, including their risk tolerance. Seeking guidance from a professional financial advisor can be beneficial in assessing your debt situation and exploring effective management strategies. (Smith 2023) 


Key takeaways: 

Good Debt: 


  • Debt that has the potential to increase your net worth or significantly improve your life. 
  • Examples: Mortgage or student loan, which can benefit long-term financial health. 


Bad Debt: 


  • Debt incurred to buy assets that rapidly lose value or are meant for immediate consumption. 
  • Example: High levels of credit card debt, which can negatively impact your credit score. 


Debt Management Options: 


  • Planned Budget: Implementing a well-structured budget to effectively manage debt. 
  • Debt Consolidation: Utilizing debt consolidation strategies to regain control over finances. (Smith 2023) 


Saving money is a critical component of personal finance since it gives you a safe, secure, and bright future. The younger you start, the faster you achieve long-term financial stability. The significance of saving money is an acknowledged fact. It is one of the most fundamental and frequently shared pieces of financial advice. However, despite its importance, many individuals struggle to save money. Simply knowing that saving money is essential, might not be enough to commit. Saving money requires discipline and a willingness to make certain sacrifices, which can be challenging without a clear understanding of the reasons behind them.  


Understanding the reasons to save money becomes crucial if you want to maintain a consistent and long-term savings plan. Knowing why you should save, provides the motivation and purpose needed to stay committed to your financial goals. It transforms saving money, from being a hard task, into a meaningful and rewarding journey.  


Allocating a portion of your income to a savings account can indeed be challenging, especially without a specific goal in mind. The temptation to spend on immediate desires rather than saving for the future can be strong. However, one of the numerous reasons to save money is that even if you are unsure about the exact purpose right now, you will inevitably encounter future situations worth saving for. Whether it’s a new car, a home, funding a child’s education, or other possibilities, having savings in place opens up opportunities. 


It is wise to have a reserve of cash set aside for emergencies and unforeseen expenses that might come unexpectedly. Building an emergency fund provides peace of mind, ensuring you are financially prepared to tackle any sudden financial challenges without resorting to high-interest debt. Saving money provides financial security and allows you to take calculated risks. (Discover 2023) 



Although saving money is crucial, there are some cons and disadvantages as well. When you keep the money in your bank account, the interest rates are low and when the interest is less than the constantly rising inflation, your money loses it’s value. So saving money in a bank account will actually lose it’s value in the long run. Saving money also causes FOMO (fear of missing out). Since saving requires a lot of discipline and you need to prioritize it, you might feel like missing out on things. Your friend group goes on a vacation together, concerts, or for a night out and you sit at home saving your money for the future. It is hard to balance your life somewhere between YOLO (you only live once) and being financially smart. (Hayes 2023). Since time is our most valuable asset, we need to balance those things in order to live a good life. We can’t know what the future holds, and when you’re lying in a hospital bed, with a few weeks to live, you might think that maybe you should have lived instead of always saving money you never had time to spend.  





Blackrock. N.d. How to invest in bonds. Read on 28.7.2023 



Capital one. 2020. Budgeting and the most common cost-of-living expenses. Read on 23.7.2023 



Chen. J. 2023. Risk-return tradeoff: How the investment principle works. Read on 29.7.2023 



Discover. 2023. 3 reasons why you should start saving today. Read on 28.7.2023 



Fernando. J. 2023. The power of compound interest: Calculations and examples. Read on 28.7.2023 



Juntunen. E. 2023. Viisas sijoittaja: Tunne itsesi ja osakemarkkinat. Read on 23.7.2023 


Fernando. J. 2023. The power of compound interest: Calculations and examples. Read on 28.7.2023 



Gravier. E. 2023. Index funds are one of the easiest ways to invest — here’s how they work 




Hayes. A. 2023. Stocks: What They Are, Main Types, How They Differ From Bonds. Read on 4.8.2023 




Hayes. A. 2023. Divident payout ratio. Read on 29.8.2023 



Hayes. A. 2023. Saving vs. Investing: What teens should know. Read on 28.7.2023 



Hartill. R. 2022. What is the difference between simple & compound interest. Read on 9.9.2023 



Investor.Gor. Mutual funds. Read on 11.9.2023 



Langager. C. 2021. How can you lose more money than you invest in shorting a stock. Read on 21.7.2023 



Martat. 2023. Mitä eläminen maksaa?. Read on 24.7.2023 



Mueller. A. 2018. The stock exhange demystified. Read on 28.7.2023 



  1. Apadimitriou. Financial savvy: The advance you need in life. Read on 27.7.2023



Osakesijoittaja. N.d. Tunnusluvut. Read on 31.7.2023 



Rosenberg. E. 2020. Most investment pros can’t beat the stock market, so why do everyday investors think they can win?. Read on 30.7.2023 


Rosenberg. D. n.d. Good debt vs. bad debt: It’s all about targeting your goals. Read on 27.7.2023 





Sijoittaja.fi. 2022. Sijoittaja, optimoi verotus ennen vuoden loppua. Read on 20.9.2023 



Smith. L. 2023. Dept management quide. Read on 27.7.2023 



Takuusäätiö. Velkajärjestely. Read on 25.7.2023 



Tincher. L. 2023. How to analyze stocks. Read on 28.8.2023 



Tretina. K. 2023. Stocks vs. Bonds: Know the difference. Read on 28.7.2023 



Vanguard. Dont let high costs eat away your returns. Read on 11.9.2023 




Vero. 2023. Osakkeiden myynti. Read on 20.9.2023 

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