4. Personal Finance

Personal finance is the application of economic thinking to your own money. The GED® tests real-world financial literacy -- skills every adult needs.

Budgeting is the foundation. A budget lists your income (money coming in) and expenses (money going out) over a period. A good budget follows a plan such as 50/30/20: about 50% of take-home pay on needs (rent, food, utilities), 30% on wants, and 20% on savings and debt repayment. The goal is to spend less than you earn.

Saving and compound interest:

• Putting money in a savings account earns interest -- the bank pays you to use your money.
• Compound interest means you earn interest on both your original deposit and the interest already earned. Over time, this 'interest on interest' makes savings grow much faster. Starting early matters enormously.

Credit and debt:

• Credit allows you to borrow now and repay later, but lenders charge interest for this. The APR (annual percentage rate) is the true yearly cost of borrowing.
• A credit score (range 300--850) summarizes your credit history. Higher scores earn lower interest rates on loans and credit cards.
• Good debt (a student loan, a mortgage at a reasonable rate) can build wealth or earning power. Bad debt (high-interest credit-card balances for everyday spending) erodes wealth.

Investing means putting money to work to grow over time:

• Stocks -- ownership shares in a company. Stocks offer higher potential returns but carry more risk.
• Bonds -- loans you make to a company or government; generally safer but lower return.
• Diversification (spreading investments across many assets) reduces risk: if one investment loses value, others may not.

Insurance transfers risk: you pay a regular premium so that if something bad happens (car accident, illness), the insurance company covers the large cost.

⚠️ Common misconception: paying the minimum on a credit card is NOT the same as staying out of debt. Minimum payments mostly cover interest -- the principal balance barely shrinks and the total paid can far exceed the original purchase price.

💡 Tip: compound interest works for you when you SAVE and against you when you BORROW. Remember: the earlier you start saving, the more powerful compounding becomes.