question archive People who maintain their spending habits have a better chance of increasing their wealth

People who maintain their spending habits have a better chance of increasing their wealth

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People who maintain their spending habits have a better chance of increasing their wealth. Introduction

The gap between the rich and the poor is widening every day. The rich have good spending habits and thus are able to save and invest, thus increase their wealth. The poor have bad spending habits, which put them in dire economic situations such as high-interest debts, making it hard for them to increase their wealth. The rich are financially literate, and this enables them to make sound financial decisions. Financially literate people have access to quality banking services that allows them to track their spending. Tracking their expenses gives them the chance to save money which provides them with capital to invest. The investment generates more money which increases the person’s income. The value of money changes over time, and thus one must understand how to calculate the time value of money before investing (Muda, 2018). This gives them an edge as they can distinguish how different investments offer returns after a while.

Saving and spending habits are determined by several factors: financial literacy, gender, psychological factors, and an individual's economic situation. For effective saving, one has to assess their financial situation. This involves identifying their income sources and amount of income for a specified period, for example, one month. After identifying the income channels, one should determine their expenses. This will allow the person to save any excess money and cut off non-essential expenses.

Importance of good spending habits

Good spending habits enable one to save money and invest in various ways, such as investing in educating yourself, preparing for emergencies, preparing for periods of unemployment, and comfortable social life. The value of money increases over time; thus, saving money, no matter how small, can grow when saved and invested wisely. However, students must understand the difference between saving and investing. Saving is storing money in a safe place to cater for future emergencies such as sudden unemployment. It is essential to check if the interest the savings earn keeps up with inflation, especially if saving for an extended period. Investing involves taking risks to make more money; they include purchasing securities, mutual funds, real estate, and stocks. Students can reduce the risks involved in investing by diversifying their investments.

Good spending habit is the most critical part of wealth creation. It allows a person to save money to invest in other ventures, which increases their income. Students should take time to evaluate their choices before investing. They should understand the potential risks and returns of their investments. They should also monitor their investment turnover to avoid paying high taxes.

Good spending habit also allows a person to avoid debts. People should avoid getting unnecessary loans such as credit cards which charge very high interest. Students should ensure that they pay off any loan owed as quickly as possible. They should start saving after they finish paying off their loans, starting with the highest interest ones.

Factors that determine spending habits

There are several factors that determine an individual's spending habits. They include; financial literacy, psychological variables, economic situation, and gender.

Financially literate people understand the services offered by modern financial institutions better, for example, the interest charged on loans and savings and other bank charges. They thus make good financial decisions compared to the illiterate. They constantly track their finances to cut off unnecessary spending and look for ways to increase their savings. They have access to financial expertise and thus make good investment choices which increase their incomes. Therefore financially literate people are more likely going to practice good spending habits and are more likely to increase their wealth. Parents and teachers need to teach students about the importance of sound financial management. They should ensure that teenagers have adequate financial knowledge to prepare them for future financial responsibilities.

Psychological variables also influence spending habits (Kearns, 2021). Good spending habits involve setting financial goals and good management of resources. This affects the psychological well-being of the individual and their families. Achieving a set goal brings satisfaction which motivates the individual to continue saving. Individuals who believe that there are in control of their lives, especially their finances, are more likely to have good spending habits and save money regardless of their income levels. Individuals who have a negative perception of their abilities, especially in financial matters, are less likely to save, irrespective of their income level. Recent studies have established that students who were satisfied with life during their first year in college were more likely to have more income in the future.

Spending habits are also affected by gender. In many households, women are more likely going to be in charge of the family finances. They have a record that they use to plan for the family's expenses. Thus, they are responsible for the day-to-day running of the household, for example, catering for groceries. On the other men are less likely to keep financial records and are more likely to cater to long-term expenses such as a mortgage, school fees, and retirement. Thus women are more likely to save more than men. However, many women find investing stressful and time-consuming, while men find it exciting. Women are more likely to spend their savings on appearance items such as clothes and jewelry, while men are more likely going to spend their savings on leisure items such as electronics (Hayhoe, 2000).

Spending habits also depend on an individual’s economic situation. Individuals who have a lot of finances have better spending habits than individuals who do not have adequate finances. They have a lot of disposable income to spend on their expenses and are thus less likely to take loans. Individuals who do not have adequate finances have bad spending habits, such as taking loans to supplement their budgets which puts them in bad debt and makes it hard for them to save and invest. The rich have access to quality financial services from major banking institutions. This enables them to track their spending closely, keep financial records and save. They also have access to capital to invest, and these institutions give them good financial expertise on the best investment opportunities available. Thus, they are more likely to maintain good spending habits, save more, and invest more, thus increasing their wealth. Individuals from the low economic classes are less likely to save and invest and therefore find it hard to increase their wealth. They lack access to quality financial services and are thus less likely to track their spending and thus are less likely to save. They are less likely to have access to capital from financial institutions, and when they do, they are charged very high interest rates, which makes it hard for them to create wealth.

Government intervention

According to Former Federal Reserve Chairman Alan Greenspan, learning the basics of personal finance at a young age can help avoid poor financial decisions later in life. Thus personal finance education should mandatory in public schools to increase their knowledge of finance and expose students to personal financial concepts at an early age. Therefore, the department of education should introduce a unit to cover topics such as savings, spending, investing, and debt in the curriculum.

Reasons for government intervention

There are several reasons why the government should intervene and ensure that students are taught financial skills from an early age. There has been a trend where employers and the government shift the responsibility of planning retirement plans to individuals. This means that there is a need for better training to make individuals financially literate. (Kieschnick, 2006). Also, in the current American society, most teenagers have no positive financial role models to show them the importance of responsible financial behaviors. The country also receives thousands of immigrants who do not understand the American financial markets and will need to be educated. (Kieschnick, 2006). This will benefit the government especially the Department of Commerce because financially literate consumers provide the checks and balance that keeps unscrupulous sellers out of the market. Credit cards have put many Americans in bad debt; according to studies, forty percent of Americans admit they live beyond their means due to their misuse of credit. This is an issue of the department of social services and the American Psychological Association (APA); research shows that there is a connection between the increasing cases of domestic violence, marital distress, and financial problems (Kieschnick, 2006).

Challenges of government intervention

Funding from the federal government to the department of social services is already stretched. There is no guarantee that introducing mandatory financial education will not solve issues; however, it can reduce the severity of some of these issues. Recent studies have also established that people's spending habits are not based on the lessons they learned as children. Some spenders and savers grew up in the same environment and learned the same lessons as children. There are people who grew up in low-income families and accumulated a lot of wealth, and there are also people who inherited great wealth from their families and wasted it away.

The role of parents

The government should educate parents on the importance of teaching their children financial matters at an early age. The parents should be responsible role models to their children in financial matters. Many households in America provide teenagers in high school or college with weekly or monthly allowances. Parents must ensure that they should use this opportunity to teach their children about budgeting and personal responsibility. As discussed earlier, financial issues have a significant effect on the psychological well-being of a family. Parents should thus prepare their children to be financially literate so that they will make informed financial decisions for their future families (Kieschnick, 2006). This is important because financially secure families contribute to a healthy community, therefore, helping to contribute to economic development. Thus, financial education is a vital segment of a country because it helps to strengthen the family and community. People who have financial struggles suffer immensely; this can be either in the form of stress and humiliation, and this impacts their families. If teenagers are taught financial skills such as budgeting and using credit, they are likely to continue applying that knowledge in college and when they join the workforce. The main issue with many Americans is bad credit, and thus the first responsible financial behavior taught should be about paying credit card balances and savings or investing.

There is great pleasure in saving, either directly saving cash in a bank or indirectly by savings on a product or service. This act brings many people intense pleasure. The victory of a good bargain makes everyone feel good, but savers feel the rush even more since it’s a relief from the discomfort of needing to spend.

Social comparison

Saving is a significant financial behavior that has many benefits to a person. It provides one with a sense of psychological security. Saving also helps one avoid debts, and being free of debt provides a person with a sense of pleasure and satisfaction. Financial behaviors such as savings are influenced by many factors such as one's perceived social status; people who believe that they belong in a higher social status spend more and save less than those who perceive themselves to be a lower class (Maison, 2019). For example, these two people might have the same amount of wealth but will view it differently because their needs, aspirations, and expectations vary.

Spending habits may also be affected by a person’s economic position, for example, the level of assets and debt. Two people may have the same net worth but composed of different levels of assets and debt. They will have different spending habits because they view their financial situations differently. For example, a person may feel wealthier if they have a lower level of debt and consequently fewer assets; another person feels wealthier if they have more assets and greater debt. Thus social comparisons and perceptions significantly affect an individual's spending habits.

Savings tips

The importance of good spending habits such as saving has been discussed in detail above. The following are some tips students can follow to ensure that they spend money wisely and save. Students should avoid using credit cards or any other form of credit unnecessarily. Using cash makes one reevaluate and reconsider before spending money. Students should constantly monitor the funds in their accounts; this involves ensuring that they always withdraw money from their bank accounts in person so that they can see the balance. Students should learn to pay for services and products as they consume them and avoid paying upfront. This will help them understand how money "gets away from them." Students should be vocal about their savings goals to their close friends and family. This will make the friends and family members hold them accountable and occasionally remind them of their goals. Saving is a very hard habit, especially during the initial stages, to get over frugal fatigue; students should often reward themselves after meeting specific saving goals. Students should also differentiate between needs and wants before spending, and this will help them decide on whether to spend on something or not. Lastly, saving is a long-term plan; therefore, one should always focus on the long-term plans when savings.

Conclusion

Spending habits are vital for the economic development of an individual. These habits are influenced by factors such as gender, economic position, financial literacy, social comparisons, and psychological variables. Many Americans are not financially literate, and this hinders their economic development. Students should be educated on the importance of good financial behaviors from a young age. Savings is a critical part of wealth creation. Investing is also an essential part of wealth creation. The value of money changes with time (Drake, 2009). This demonstrates that time literally is money. The value of a certain amount of money now is not the same as it will be in the future and vice versa. Thus, students should learn how to calculate the time value of money when investing or saving.

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