Beginner’s Guide To Financial Literacy

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Understanding how money works is a crucial skill in the world today, and too many Americans go through life without the proper knowledge involved in financial success, and what it takes to get there. Financial literacy is a subject that is usually associated with personal finances, and regards the decision making process involved in matters of real estate, investments, retirement and college savings accounts, and even insurance plans. Knowing how to sort through the underlying laws and mechanics of credit cards, checking accounts, compound interest, consumer rights and other monetary concepts can help you balance your accounts both in your home life and your business life. The absence of financial literacy has been a growing concern in the country for over a decade now, and although the Financial Literacy and Education Commission was created in 2003 by the government, the negative effects of illiteracy in money is still causing ripples around the world.

Understanding Your Bank Accounts

It may seem like the simplest thing in the world, but thousands of people open bank accounts every day without understanding the basic principles of the place that they’re so freely depositing their money. Knowing the differences and similarities of the accounts can help you find the best setup for your needs and your finances. Savings accounts and checking accounts have always been different, but in the past the saving account was much more different, and in fact was considered an account to be used only for deposits; in this way it earned daily or monthly interest. Checking accounts, on the other hand, were used to make purchases, pay debts, and deal with all of the outgoing finds. Modern checking and saving accounts still have a few differences, but they’re very similar in many regards.

Your Savings Account

Modern savings accounts are still used for putting aside money, saving for emergencies, vacations, large expenditures like weddings, and in some cases even retirement. They differ from checking accounts in a few different ways, one of which being that withdrawals are seldom made from a savings account. In fact, the number of withdrawals that most Americans make each month from their checking account is six or under, although if you can help it, making no withdrawals is best. The reason that minimizing the withdrawal of money from this account type is so important is because there’s usually an interest rate involved in your savings account, and in order to benefit from this you’ve got to keep a sizable amount of money in your account for as long as possible. High interest accounts pay more, but also have higher fees if you should break down and withdraw from the account. Many savings accounts offer the incentive of a monthly charge or a free account with a pay per withdrawal rate.

Your Checking Account

Unlike your savings account, a checking account doesn’t offer the same high interest rates, which in one way might seem like a negative factor, but in others is quite a benefit. If you plan on writing checks, making withdrawals, or using your account for interact transactions then this account will suit your needs much better, as they tend to have lower fees for usage. Most have a flat rate that allows for unlimited transactions each month, but others will offer a pay per use fee, which could be beneficial if you rarely use your card. Some cards do offer interest, but even the high interest accounts won’t give you the same opportunity for return as a savings account. Similar to savings accounts, your checking account may require a minimum fee to be held in order to avoid monthly fees. Students often get special rates for usage and interest.

Overdraft Protection

Despite the way that it looks when you’re using it, overdraft protection is not free money to be spent how you please. Although it does fall under the category of credit, this personal line of credit is meant for protection, not for leisure. You can get an overdraft line of credit through a wide variety of financial institutions, even if it isn’t something that you set up when you first opened your account. If you’re interested in setting an overdraft limit, contact your bank for more information on the specifics involved, but as long as you’re approved there shouldn’t be a problem. The purpose for this specific line of credit is to protect yourself in the case that you can’t afford to pay all of your bills. This gives you a safeguard against financial errors, but shouldn’t be used as a means of living when your other finances run low. People who live in their overdraft will diminish their credit scores and their finances without even realizing the damage that it’s doing. You should also be aware that your bank has the right and capability to close the overdraft at any time, forcing you to pay back the overages and leaving you without that safety net that you so carefully set for yourself. People who abuse their overdraft often regret it in the end. Of course, these credits outside of your actual bank contents has a limit of its own depending on how much you’re allowed to borrow. The average overdraft limits runs anywhere from $100.00 to $1000.00, although it can go much higher, and there may be interest calculated as a monthly or annual fee.

Credit Cards: Friend or Foe

The majority of citizens in the United States of America hold one to three credit cards on average, and in rarer cases, even having ten cards or more isn’t unusual. Credit cards have become a staple in this culture; they help you build and shape your credit score, and although they certainly come in handy when you want to rent a hotel room for the night, rent a car, or shop online, these cards can cause severe financial problems when misused. The problem is that much like the overdraft limit on a checking account, credit cards are often used as a source of income and a means on which to live rather than as a backup plan or a convenience to be used sparingly and always paid off right away. Credit card users who allow their balance to grow each month face high interest rates of up to 23% or higher, and could actually find themselves reaching for these cards without even thinking about it when in line for even the basics like groceries.

Credit Card Terminology and What It Means

Using a credit card is using borrowed money, and if it’s something that you need to borrow then it isn’t yours. This means that you have to pay it back, of course, and with the addition of interest you’ll find yourself paying back much more than the principle sum you borrowed. Before you invest in a credit card, it’s important to do your research in order to find the best card for your needs. Some cards hold an annual rate, which can sometimes lower your interest, as well as offer incentives such as travel points or cash back rewards. You also have to be wary of finance charges, which are costs outside of the normal interest rates. This can be things like a cash advance fee which is charged to your account when you take money from an ATM with your credit card. When it comes time to pay your bill you’ll be given a grace period, which is roughly twenty-five days, in which you can pay your bill without a finance charge. You’re only eligible for this grace period if your bill is paid in a timely fashion without any reminders needing to be made.

Interest Rates and How They Work

Talking about credit cards brings up the subject of interest rate, and how it is charged. One such rate is called an APR or annual percentage rate, and this is the percentage of the rate of interest charged over the course of a year. Over time, the interest rates on your credit card can change; this is called a variable rate, which means that it’s a prime rate plus a percentage as the market changes. A fixed rate on the other hand is an annual interest rate that doesn’t move over time. Of course, the upside of a fixed interest is that when prices go up you’re still paying the same rate, but on the other side, if prices go down then you may be left paying higher premiums. In some cases you might find yourself being offered a temporary introductory rate; this is a temptation offered to get you to invest in the card, after a certain period of time, usually six months, the rate will convert back to a standard amount at a fixed or variable term. The best way to avoid large interest payments is to pay your card as you go. Don’t use your credit card for purchases unless you have the money to back it up and pay it off right away.

Saving For Your Future

Knowing that you need to save money is a no brainer, but understanding what it is that you’re saving for is something altogether different. Most people make the assumption that they should be saving for retirement, and although it’s true that building a nest egg for your golden years is an important reason to save, putting aside money early and building up a worthwhile number in your account can make a major impact on what you’ll wind up with later in life based on the interest that it earns. Saving early means more later, but not just because you’ve been putting money aside for a long time, because of a little something called compound interest. The earlier that you start saving money, the less you’ll need to put away in the long run. Compound interest happens when interest is added to the main balance or principle sum of an account, and that interest begins to earn its own interest. Saving can be tedious, and if you don’t have a whole lot of patience or will power, it can even be difficult, but the key to successful saving is consistency. It’s better to put a small amount into your account each month than a large amount one time and nothing for several months.

Real Estate Purchases

In todays’ economy owning your own house isn’t always a possibility; even those who have the money to afford a house can find the experience stressful, especially if it’s your first time. Think about how much money you make gross in a month, the expenses that you have now like car payments, as well as what you could afford to make each month as a mortgage payment. Remember that when you have a house you’ll have more expenses to consider; using a mortgage calculator, which can be found on many different online real estate sites, can help. Once you know what kind of mortgage you’re in the market for you can shop around with different financial institutions to see what they’ll give you and get preapproved to get an idea of how accurate your prediction is. One mistake that some people make is assuming that if a bank is willing to give them a certain number as a mortgage then this is what they can afford, but this isn’t always the case. Banks can always overpay, which can cause problems later when you aren’t able to pay your mortgage.

Due to the need for better education in the world of finances, there have been many training programs made available to the public to improve the financial literacy of America. Both government organizations and independent institutions have created curriculum to teach the basic principles to children and adults alike in an effort to proactively change the universal understanding of money. Money Smart, created by the U.S. Federal Deposit Insurance Corporation was designed with the young learner in mind and uses 8 individual and information packed modules to reach out to students aged 12 to 20. The FDIC also collaborates with other groups to provide educational tools for seniors 65 and over, as well as for those interested in becoming entrepreneurs. Of course, there are other programs geared toward young students like the SUCCESS program, Foolproof Financial Literacy Curriculum, or the National Endowment for Financial Education. There are many other organizations offering the same kinds of connections to the financial industry, some for children, other for adults, and while most of them are instructor based, many are conveniently offered at no charge and through downloadable video versions.