Financial Education 101: An Introduction to Wealth

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Welcome to financial education 101. We know that the earlier you learn the basics of how money works, the more confident and successful you’ll be with your finances later in life. It’s never too late to start learning, but it pays to have a head start. 

The first steps into the world of money start with education i.e financial literacy 101 or financial knowledge. Banking, budgeting, saving, credit, debt, and investing are the pillars that support most of the financial decisions that we make in our lives. 

In this article, we’ll examine financial literacy, what it is and how it can improve your life.

Table of Contents

    What Is Financial Education 101?

    Financial literacy or financial knowledge is the ability to understand and make use of a variety of financial skills, including personal financial management, budgeting, and investing. To be financially literate means comprehending certain financial principles and concepts, such as the time value of money, compound interest, managing debt, and financial planning. Achieving financial literacy can help individuals to avoid making poor financial decisions. 

    It can help them become self-sufficient and achieve financial stability. Key steps to attaining financial literacy or becoming financially literate include learning how to create a budget, track spending, pay off debt, and plan for retirement.

    Financial literacy means educating yourself on these topics, and also involves learning how money works, setting, and achieving financial goals, becoming aware of unethical/discriminatory financial practices, and managing financial challenges that life throws your way.

    KEY TAKEAWAYS

    • Financial literacy or being financially literate is the ability to understand and make use of a variety of financial skills to set financial goals.
    • Those with higher levels of financial literacy are more likely to spend less income, create an emergency fund, and open a retirement account than those with lower levels.
    • Some of the basics of financial literacy and its practical application in everyday life include banking, budgeting, handling debt and credit, and investing which equips you to be financially literate.

    The Importance of Financial Literacy

    In its National Financial Capability Study the Financial Industry Regulatory Authority (FINRA) found that Americans’ with higher levels of financial literacy were more likely to make ends meet, spend less of their income, create a three-month emergency fund, and open a retirement account than those with lower financial literacy and becoming financially literate. 

    They make informed financial decisions as it is more important than ever, and take retirement planning. Many of the workers rely on pension plans to fund their retirement savings, with the financial burden and decision-making for pension funds borne by the credit card companies or governments.

    Today, few workers get pensions, instead some are offered the option of participating in different financial plans. Those without employer options need to actively seek out and open individual retirement accounts (IRAs) and other tax-advantaged retirement accounts. 

    Add to this people’s increasing life spans (leading to longer retirements), Social Security benefits that barely support basic survival, complicated financial health or financial well being and other insurance options, more complex savings and investment instruments to select from and a plethora of choices from banks, credit unions, brokerage firms, credit card companies, and more. 

    It’s clear that financial literacy is a must for making thoughtful and informed decisions, avoiding unnecessary levels of debt, helping family members through these complex decisions, and having adequate income in retirement.

    Personal Finance Basics

    Personal finance is where financial literacy and being financially literate translates into individual financial decision-making. How do you manage your money? Which savings and investment vehicles are you using?

    Being financially literate in personal finance is about making and meeting your financial goals through financial literacy, whether you want to own a home, help other members of your family, save for your children’s college education, support causes that you care about, plan for retirement, or anything else. 

    Among other topics, it encompasses banking, budgeting, handling debt and credit, and investing. Financial goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items.

    To make the most of your income and savings, it’s essential to become financially savvy and financially literate. It will help you distinguish between good and bad advice and make intelligent financial decisions.

    KEY TAKEAWAYS FINANCIAL LITERACY 101

    • Few schools have courses on managing your money, so it is important to learn how through trusted financial professionals.
    • The core areas of managing personal finance include income, spending, savings, investments, and protection.
    • Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more.
    • Being disciplined is important, but it’s also good to know when you shouldn’t adhere to the guidelines, which helps if one is financially literate.

    The Importance of Personal Finance

    Personal finance is about meeting your personal financial goals. These goals could be anything having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. Effective money management of your personal finance and spending habits is why we can consider financial literacy important.

    It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

    Introduction to Bank Accounts

    A bank account is typically the first financial account that you’ll open. Bank accounts can hold and build the money you’ll need for major purchases and life events. Here are steps in creating a stable financial future.

    Why Do I Need a Bank Account?

    In the U.S., bank accounts are generally insured by the Federal Deposit Insurance Corporation (FDIC). That means you should always have access to your cash, even if every customer decided to withdraw their money at the same time. Many financial transactions require you to have a bank account to:

    • Use  credit and debit cards.
    • Use payment apps like Venmo or PayPal
    • Write a check.
    • Use an ATM
    • Buy or rent a home.
    • Receive your paycheck from your employer.
    • Earn interest on your money.

    Online vs. Brick-and-Mortar Banks

    When you think of a bank, you probably picture a building. This is called a brick-and-mortar bank. Many brick-and-mortar banks also allow you to open financial accounts and manage your money online.

    Some banks are only online and have no physical buildings. These banks typically offer the same services as brick-and-mortar banks, aside from the ability to visit them in person.

    Which Type of Bank Can I Use?

    Retail banks: This is the most common type of bank at which people have accounts. Retail banks are for-profit companies that offer checking and savings accounts, personal loans, credit cards, and insurance. 

    Retail banks can have physical, in-person buildings that you can visit, or they can be online only. Most offer both options. Banks’ online technology tends to be advanced, and they often have more locations and ATMs nationwide than credit unions do.

    Credit unions: Credit unions provide savings and checking accounts, issue loans, and offer other financial products, just like banks do. However, they are not-for-profit organizations owned by their members. Credit unions tend to have lower fees and better interest rates on savings accounts and personal loans. 

    Credit unions are sometimes known for providing more personalized customer service, though they usually have far fewer branches and ATMs. They are a good option for saving money with minimal financial stress

    What Types of Bank Accounts Can I Open?

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    There are three main types of bank accounts that the average person may want to open:

    1. Savings account: A savings account is an interest-bearing deposit account held at a bank or other financial institution. Savings accounts typically pay a low interest rate, but their safety and reliability make them a sensible option for saving available cash for short-term needs.

      They usually have some legal limitations on how often you can withdraw money. However, they’re generally very flexible so they’re ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply storing extra cash that you don’t need in your checking account.
    1. Checking account: A checking account is also a deposit account at a bank or other financial institution that allows you to make deposits and withdrawals. Checking accounts are very liquid, meaning that they allow numerous withdrawals per month (as opposed to less liquid savings or investment accounts) though they earn little to no interest.

      Money can be deposited at banks and ATMs, through direct deposit, or through another type of electronic transfer. Account holders can withdraw funds via banks and ATMs, by writing checks, or using debit cards linked to their accounts.

      You may be able to find a checking account with no fees. Others have monthly and other charges (such as for overdrafts or using an out-of-network ATM) based on, for example, how much you keep in the account or whether there’s a direct deposit paycheck or automatic withdrawal mortgage payment connected to the account. Lifeline and second-chance accounts, available at some banks, can help those who have difficulty qualifying for a traditional checking account.
    1. High-yield savings account: A high-yield savings account usually pays a much higher rate of interest than a standard savings account. The tradeoff for earning more interest on your money is that high-yield accounts tend to require bigger initial deposits, larger minimum balances, and higher fees. You might be able to open a high-yield savings account at your current bank, but online banks tend to have the highest interest rates.

    What’s An Emergency Fund?

    An emergency fund is not a specific type of bank account but can be any source of cash that you’ve saved to help you handle financial hardships like job losses, medical bills, or car repairs. Here’s how they work:

    • Most people use a separate savings account for their emergency savings.
    • The account should eventually total enough to cover at least three to six months’ worth of expenses.
    • Emergency fund money should be off-limits for paying regular everyday expenses.

    Credit Cards

    You know them as the plastic cards that (almost) everyone carries in their wallets. Credit and debit cards are accounts that let you borrow money from the credit card issuer and pay it back over time. 

    However, for every month of missed payment, you’ll be charged interest on your remaining balance. Note that some credit and debit cards, called charge cards, require you to consistently pay your balance in full each month. However, these are less common.

    What’s the Difference Between Credit and Debit Cards?

    Debit cards take money directly out of your checking account. You can’t borrow money with debit cards, which means that you can’t spend more cash than you have in the bank. And debit cards don’t help you to build a credit history and credit rating.

    Credit cards allow you to borrow money (credit card debt) and do not pull cash from your bank account. This can be helpful for large, unexpected purchases. You can make minimum payments, but carrying a balance every month and not paying back the money that you borrowed in full means that you’ll owe interest to the credit card issuer and accumulate credit card debt. So be very careful about spending more money to the credit limit, because debt can build up quickly and become difficult to pay off.

    On the other hand, using a credit card judiciously and paying your credit card bills on time helps you establish a credit history and a good credit score. It’s important to build a good credit score not only to qualify for the best credit cards but also because you will get more favorable interest rates on car loans, personal loans, and mortgages. Being financially literate means you can manage your credit card payment to improve your credit score and effectively navigate financial situations.

    What Is APR?

    APR stands for Annual Percentage Rate. This is the amount of interest that you’ll owe the credit card issuer on any unpaid balance. You’ll want to pay close attention to this number when you apply for a credit card.

    A higher number can cost you hundreds or even thousands of dollars if you carry a large balance over time. The median APR today is about 23%, but your rate may be higher if you have bad credit. Interest rates also tend to vary by the type of credit card.

    Which Credit Card Should I Choose?

    Credit scores have a big impact on your odds of getting approved for a credit card. Understanding what range your score falls into can help you narrow the options as you decide on the cards for which you may apply. Beyond your credit scores, you’ll also need to decide which perks best suit your lifestyle and spending habits.

    If you’ve never had a credit card before, or if you have bad credit, you’ll likely need to apply for either a secured credit card or a subprime credit card. By using one of these and and with proper credit utilization, you can raise your credit scores and earn the right to credit at better rates.

    If you have a fair to good credit scores, you can choose from a variety of credit card types, such as:

    • Travel rewards cards: These credit cards offer points redeemable for travel including flights, hotels, and rental cars with each dollar you spend.
    • Cash-back cards: If you don’t travel often or don’t want to deal with converting points into real-life perks a cash-back card might be the best fit for you. Every month, you’ll receive a small portion of your spending back, in cash or as a credit to your statement.
    • Balance transfer cards: If you have balances on other cards with high interest rates, transferring your balance to a lower-rate credit card could save you money, help you pay off balances, and help improve your credit scores.
    • Low- or No-APR cards: If you routinely carry a balance from month to month, switching to a credit card with a low or no APR could save you hundreds of dollars per year in interest payments.

    Your credit score and credit report are pretty much the same thing, right? Far from it. Although a fair number of consumers conflate the two, credit report and credit score both have different information that is used for different purposes.

    KEY TAKEAWAYS

    • A credit report is a detailed look at your financial life, assembled all in one place.
    • The credit report contains detailed data on your financial history, assembled in four categories: identifying information, credit accounts, credit inquiries, and public records.
    • A credit score is a numerical rating that rates your credit report in the same way that a teacher grades a student’s educational performance.
    • A credit report is used by lenders as a shortcut to decide whether or not to grant you credit.

    Be aware of your protections under the Equal Credit Opportunity Act.7 Research credit opportunities and available interest rates, and be sure that you are offered the best rates for your particular credit history and financial situation or financial situations.

    Financial literacy – Budgeting

    Creating a budget is one of the simplest financial options and most effective ways to control your spending, saving, and investing. You can’t begin to improve your financial health or  financial well being if you don’t know where your money is going, so start tracking your expenses against your income. 

    Then set clear goals. One budget template that helps individuals reach their goals, manage their money, and save for emergencies and retirement is the 50/20/30 budget rule: spending 50% on needs, 20% on savings, and 30% on wants.

    How Do I Create a Budget?

    Budgeting starts with tracking how much money you receive and spend every month. You can do this in an Excel sheet, on paper, or with a budgeting app. It’s up to you. However, you decide to track, clearly lay out the following:

    • Income: List all sources of money that you receive in a month, with the dollar amount. This can include paychecks, investment income, alimony, settlements, and money that you make from side jobs or other projects, such as selling crafts.
    • Expenses: List every purchase that you make in a month, monthly budget split into two categories: fixed expenses and discretionary spending. Review your bank statements, credit card statements, and brokerage account statements to be sure to capture them all. Fixed expenses are the purchases that you must make every month. Their amounts don’t change (or change very little) and are considered essential.

      They include rent/mortgage payments, loan payments, credit card payments and utilities. Discretionary spending is nonessential spending or varying purchases for things like restaurant meals, shopping, clothes, and travel. Consider them wants rather than needs.
    • Savings: Record the amount of money that you’re able to save each month, whether it’s in cash, cash deposited into a bank account, or money that you add to an investment account or retirement account like an IRA (if your employer offers one).

    Subtract your total everyday expenses from your total income to get the amount of money you have left at the end of the month. Now that you have a clear picture of money coming in, money going out, and money saved, you can identify which expenses you can cut back on, if necessary. 

    If you don’t already have one, put your extra money into an emergency fund until you’ve saved at least three to six months’ worth of expenses (in case of a job loss or other emergency). Don’t use this money for discretionary spending. The key is to keep it safe and grow it for times when your income decreases or stops.

    What Is the Stock Market? 

    The stock market refers to the collection of markets and exchanges where stock buying and selling takes place. The terms “stock market” and “stock exchange” can be used interchangeably. 

    And even though it’s called a stock market, other financial securities, such as exchange-traded funds (ETFs), corporate bonds, and derivatives based on stocks, commodities, currencies, and bonds, are also traded there. 

    There are multiple stock trading venues. The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, and the Cboe Options Exchange.

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