Growing up, most of us never really learned about the financial side of life. We learned how to do math, read, write and spell but we never really learned how these things are important in the real world.
Credit cards, checking accounts, investments, etc… all of these things are “about” money, involve math, require comprehension but never fully discussed in school!
In this article we will discuss how if we had learned these lessons earlier on our lives would be better off financially:
The importance of financial literacy
Financial literacy is a skill that can be learned and improved. As much as we would like to think otherwise, it’s not something you just pick up on your own or automatically have access to because of your parents’ income or education level.
It’s important for everyone–not just those who are in high school or college–to know some basic financial concepts like budgeting and saving money before they start making their way through life on their own so they can avoid unnecessary mistakes along the way (and hopefully avoid some big ones).
Budgeting is important.
You should have learned in school that budgeting is important. It’s not just a good idea to have a budget, but it’s something that you need to do if you want to be financially successful and financially independent.
If you are not good at budgeting, don’t worry! There are many ways that people can learn how to set up their first budget and stick with it through all of life’s ups-and-downs:
- Make sure your needs are covered before focusing on wants (this includes food/clothes).
- Track your expenses for several months so that they become second nature.
- Review your spending habits
- Set a goal to have $$ at the end of the month
- Decide what you need to cut out to reach that goal
You may even find that some expenses are unnecessary or unjustified–that’s great! Cut them out when possible so that more money can go towards saving/investing instead of paying for things like streaming subscriptions you might not use.
Credit Cards
You know that credit cards are a loan, right? When you use a credit card to make a purchase, you’re borrowing money from the bank and paying it back later. You should be aware of how much interest will be charged on your balance if you don’t pay off your entire bill each month. You don’t want that $5 coffee to grow to $20 in interest charges…
But there’s more: Credit cards can also be used as an emergency fund! If something happens and you need cash fast but don’t have enough in your checking account to cover it, then use your credit card instead–it’ll come out of next month’s paycheck instead of this one.
But this is a temporarily solution. You don’t want to make a habit of using your credit cards as an emergency fund, but once in a while is ok.
Savings Accounts
Savings accounts are a type of financial instrument offered by banks. You can think of a savings account as an interest-bearing checking account. Savings accounts are FDIC insured, which means that if your bank goes belly up, the government will step in and cover any losses you suffer from their failure up to a limit. (generally $250,000) This makes it safe for consumers to put their money at these institutions without worrying.
Savings accounts have no set minimum balance requirements; however, most banks do charge fees (called “dormant fee”) if there’s not enough activity happening within your account. Check your bank to verify all fees!
You should use your savings account to build a cash reserve.
Alternatively, a checking account should be used as a pass through entity to pay bills. There is no real benefit to keep “extra” money in your checking account because they pay little to no interest.
Compound Interest
One of the most important things you can learn in school is how compound interest works. This concept is used to explain how savings accounts work, as well as other types of investments that earn money over time.
Any account that you have, where interest is earned on top of interest, your money is compounding!
For example; if you have an account with $100 in it and it earns 10% interest over a year, at the end of the year you have $110. (this is hypothetical!)
Year 2 $121 Year 3 $133…….Year 10 $259!!! (this only works if you leave the money in the account.)
If you take the interest out every year, your account will earn simple interest–interest only on the principle amount.
Investing in the Stock Market
The stock market is a great way to invest your money, but it can also be very intimidating. Before you jump in, it’s important to know how the process works.
When you invest in the stock market, you are taking your money and buying shares of a company. In a very simplified explanation, if that company does well, then the shares could become more valuable, but if that company does poorly, the shares could lose value.
You can buy shares in big companies, small companies, international companies etc.
An alterative to stocks, are bonds. With bonds, you are lending money to a company or government for a period of time. Most bonds pay “coupons” or interest semi-annually and have a maturity date.
When you are buying stocks or bonds, the goal is to grow your money over time. You should expect to earn more interest than what the savings account is paying, because you are taking more risk, but you can also lose value.
Mortgages
A mortgage is a loan that you take out to buy a house. The bank gives you the money, and then you pay them back over time with interest.
To obtain a mortgage you must demonstrate to the bank that you have the assets and/or cash flow to pay the money back over time. The mortgage company will review your paystubs, credit history, savings accounts, retirement plans, etc…. to determine your borrowing capabilities.
You can buy a fixed mortgage; where the interest rate doesn’t change for the life of the loan. You can also buy a variable mortgage; where the rate potentially changes every year…
Ultimately you want to buy a property that you can afford with a mortgage that makes sense based on your current and future financial condition.
Insurance
Insurance is a way to protect yourself against financial loss. And there are all different types…
You can protect your stuff like cars, houses and other property.
You can also protect your self from a sickness or injury.
And you can protect your family in case of a premature death.
You pay an insurance company a certain amount of money (premium) to have access to a pool of money in the future.
For example; if you get into a car accident, a hurricane blows your roof off or you get sick or hurt you can file a claim to access the pool of money.
But overall insurance is a cost and needs to be factored into your budget. You need to be able to balance paying for some things yourself and using insurance for others..
Financial Success
Financial success starts with having a basic understanding of the financial topics covered in this post. From credit cards to insurance, as you exist in this world, more and more financial instruments will cross your path. Take the time to understand the pro’s and con’s of each, so you can use them to build wealth and reach financial independence!
