Coming to think of it, why do employed people get broke? Why are almost 80% of the population are employees? Why do people depend on their salaries for transaction and speculative purposes? These questions will help in my three friends in becoming financially stable and stronger throughout their lives. First, I have learnt that for one to break out of the vicious circle of debts and financial poverty, we should be able to be responsible in terms of our consumption. It all begins with consumption problem. In class, I learnt that one should have a budget constraint, a factor that will help my friends not to spend above their capabilities and set targets.
My three friends do not know how the credit cards and interest rates work. Thus, I will use the knowledge from personal finance to educate my friends on the various rates offered by credit cards, in terms of payment and avoidance of carrying huge credit card balances. For them to be financially strong, I will have to educate them on dangers of having huge credit card balances, why the interest accrues on daily basis when they carry balances. This knowledge will help them learn how to use their credit card and adopt a means of payment that will prevent them from accruing debts.
Secondly, I will educate my friends on how to use and understand, and balance a checkbook. Despite them having credit and debit form of payment, it will be important to train them on how to monitor their cash flows that will prevent any overdraft costs. Besides another factor will consider is to teach them on the basics of budgeting. This will entail differentiating wants from needs, prioritizing of needs and wants. This will help them in forgoing other luxury needs that would only lead to debts and over expenditure.
After minimizing on cost and breaking out of the vicious circle of expenditure and debt, i would help in educating them on the power and importance of compound interest. This will help them in thinking how to generate more wealth and income from the available resources. Savings and investing in interest earning bonds, and shares will help them in increasing their portfolio of wealth that will help them to learn how to build on credit and finally start a business, making them independent.
