Now that the holidays are over, life may be starting to slow down a little bit for many of us. After the financial stresses of the past few months, it’s a great time to review your finances. In fact, January is Financial Wellness Month, which is all the more reason to check up on your financial knowledge in preparation for the year ahead.
Financial knowledge is also sometimes known as “financial literacy.” Why is financial literacy important? It helps you navigate the world with the tools and knowledge necessary to be successful in managing your money.
Keep reading to learn more about financial literacy, the important role it plays, and key concepts to review.
Why Is Financial Literacy So Important?
Financial literacy means you have the knowledge you need to make informed decisions about your financial life. Unfortunately, if you aren’t financially literate, you may be more likely to make financial mistakes that can impact you for years in the future.
Statistics about financial literacy in the U.S. indicate a need for improvement. In fact, only about one-third of American adults were able to pass a basic financial literacy test, according to Fortune. Their research also showed that the number of people who were able to pass the test had actually decreased from prior years.
Another study, by GFLEC, took a look at one of the country’s generations of younger adults. Only 24% of millennials demonstrated the ability to understand basic financial topics.
Financial Concepts to Review
So, how can you become financially literate or improve your financial knowledge? Some people are lucky enough to learn about finance from their schools or from their parents. But if you didn’t have that opportunity, it’s not too late to get started. Here are some of the most important concepts to understand on your journey to financial wellness.
Checking and Savings Accounts
It’s a good idea to start by knowing the differences between checking and savings accounts. While checking accounts help you access your money on a daily basis, savings accounts are for saving that money for another day.
Checking accounts often provide customers with debit cards or checkbooks in order for you to access your money when paying for groceries, meals, or other types of living expenses. Your savings account, on the other hand, is meant to hold your money for the longer term -- so you won’t receive a payment card. If you’re able to leave your money in a savings account for a long period of time, it may even be able to accumulate interest.
Credit Usage and Loans
On top of having a debit card, you may also have a credit card. Keep in mind that a credit card is a type of loan -- a revolving line of credit -- so you’re technically spending money you don’t have yet with every swipe. When you use a debit card, on the other hand, the money you’re spending is coming directly out of your checking account.
Credit cards can be beneficial, but it’s imperative to spend responsibly. If you don’t pay it off in full every single month, you’ll also have to pay interest to the lender. That means you’ll be responsible for paying much more than the original loan amount.
Other types of loans, such as student loans, auto loans, and mortgages, operate similarly -- though generally with much larger balances. That means most people aren’t able to pay them off entirely in one payment. And that means a large amount of interest will accrue over a period of months or years. Always be sure you know what you’re getting when taking out any type of loan.
One major factor that impacts the interest rate you get on your loans is your credit score. There are two types of credit scores -- the FICO Score and the VantageScore -- though the FICO Score is more common when it comes to lending decisions.
FICO scores are calculated using the following percentages of importance:
- 35% Payment History: If you make your payments on time, lenders will likely find you more reliable.
- 30% Credit Usage: Don’t use too much of your available credit, or you may seem as if you are spending at an unsustainable level.
- 15% Length of Credit History: New credit users can seem like more of a risk to lenders.
- 10% Credit Mix: Credit is more than just credit cards. The better you can manage a mixture of credit, the better your score will likely be.
- 10% New Credit: If you have a lot of new credit lines opened in a short amount of time, this could impact your credit score.
Want to really set yourself up for financial success? Make -- and stick to -- a budget. Budgeting can help you get a clear picture of your cash inflow and outflow. It can also help show you the areas you can afford to cut back your spending in order to meet more of your savings goals.
When making a budget, be sure to set goals. Budgeting with specific goals in mind means you’ll have an easier time getting to your destination. Next, analyze and categorize your current spending: food, utilities, insurance, medical bills, childcare, after-school activities, and more.
Then, plan for your goals by putting them in your budget as expenses. See how it all fits together. Always remember -- be flexible, keep track, and work to make savings a part of your budget. Making adjustments from month to month can help you be realistic and meet more of your goals.
Investing can seem like a complicated concept. But it doesn’t have to be. Put simply, investing is a way of setting your money aside for a certain period of time and allowing it to grow. Also, investing is more than just the stock market.
What other ways can you invest? Depositing money into a Certificate of Deposit (CD) for a certain number of years is an investment. Contributing to a retirement account such as a TSP is an investment. You might already be investing without even knowing it.
When it comes to investing, it’s kind of like letting another entity “borrow” your money for a period of time. While they’re borrowing it, they pay you interest as now you’re the lender. That’s how money grows during the investment process. While returns on investment are not guaranteed, there are certain types of investments that hold less risk than others. CDs are fairly risk-free; the stock market, on the other hand, can be risky. Always be sure to evaluate the level of risk you can tolerate before making any investments.
To Your Financial Health in 2022
Checking up on your financial knowledge and reviewing key concepts can help you feel more confident in your financial life in 2022. Armed Forces Bank will be here as your partner through it all.
A happy and healthy New Year to you!