April Is Financial Literacy Month. Do You Have These 5 Finance Basics Down?
The weather is getting better and flowers are starting to bloom! Yes, it's that time of year ... Financial Literacy Month. Let's go through a few basics:
Basics #1: Debt & Credit Scores
Understanding the ways in which credit or debt can work with or against you should serve as the foundation of your financial knowledge. It’s important to have a firm grasp on your financial standing and a plan for tackling debt responsibly.
Debt
When used correctly, debt can be useful. Responsibly managed debt can help you reach important goals like buying a car, purchasing a home, going to college, or starting a business. But when misused, such as borrowing to meet monthly living expenses, debt can spiral out of control fast. Missed payments can accrue interest or penalties and may negatively impact your credit score.
Credit Score
Your credit score is one of the factors that lenders use to judge your trustworthiness and qualification for mortgages, auto loans, and other lending opportunities. Landlords and employers may also check your credit before renting to you or offering you a job. Your credit score is dependent on a number of factors including previous credit history, current debts, history of payments, and more.
Basics #2: Budget
Have you started your 2021 budget? Your living expenses may not be typical now, but things will get back to normal. Having a budget will help you save more and alleviate financial stress. It doesn’t need to be complicated: Do you spend more than you earn? If you are retired, are you spending the amount budgeted in your financial plan?
Basics #3: The Value of Time
As a general rule of thumb, it’s never too early to start saving—for retirement, home buying, a child’s education, or whatever could be coming down the line. The earlier you start saving, the more you’ll be able to tuck away over time—especially with the power of compounding interest. This leverages the value of time to your advantage.
Basics #4: Inflation
Inflation has the potential to eat away at the purchasing power of your money. With inflation, the dollar you earn today may not be worth a dollar in the future. Below are two important concepts to remember regarding inflation.
Cash In a Mattress
Keeping all your cash under a mattress is not only unsafe, it literally costs you money. Assuming the annual rate of inflation is a hypothetical two percent, every dollar you keep under your mattress and not earning interest would shrink in value to $.98 next year.
Rate of Return
Because inflation erodes the purchasing power of your money, any returns earned on your accounts may not be the “real” rate of return. If your account earned a hypothetical six percent rate of return over the last year, but inflation was 1.5 percent, your real rate of return was 4.5 percent.
Basics #5: Identity Theft & Safety
Especially as the world shifts to doing everything virtually, identity theft remains one of the biggest threats to financial and personal security. A cracked password or misplaced Social Security number can have big consequences on your current and future finances.
Consider using a unique password for each site or service you use. A password manager makes this easier by generating and storing strong passwords automatically.
Please reach out if you have questions about any financial basics, and take this month to reevaluate your current financial situation and identify potential areas for improvement.
Shari Greco Reiches