Learning about financial literacy is a lifelong process. Unfortunately, most Americans weren’t introduced to the basics of financial education while studying in school. Topics surrounding budgeting, building your credit score, or increasing savings are not a part of our childhood education. The more knowledge you have around money, how to use it, and what to avoid, the stronger your foundation for financial success. Whether you need tips for yourself or want to help educate your family, here are some important money facts you won’t learn at school!
There is a difference between investing and saving. When you save money in a savings account, your money earns interest with little to no risk, and you can access your funds whenever you need them. When investing, you are putting your money in the stock market, where you can invest in stocks, bonds, real estate, mutual funds, and more. Your money has a chance to grow more, but the investment is riskier than a savings account since your funds are tied to the performance of the stock market. Savings accounts are great when saving for a big purchase such as a home or a vacation. Investment accounts are best when saving for long-term goals such as retirement. Both play a part in your financial future.
It pays to start early. Time is on your side when it comes to saving and investing. The longer your money is being saved, the more you benefit from the power of compounding interest. Compounding interest is the interest that you earn on your savings. Say you open a savings account with $500, and every month you add $50. Your account earns 1.00 APY with interest compounding monthly. After 10 years, your savings would grow to more than $12,700 with a compound interest earning of over $6,000.
The magic of compounding interest makes an even bigger impact when you start investing for retirement. Say you are 25 years old, and you open a Roth IRA with $6,000. Your goal is retiring at age 65, and you contribute $6,000 each year. If you contribute the same each year and earn a 7% annual return, by the time you retire, your account would be worth $1.68 million at age 65. Now assume you start later in life, and you don’t start that investment account until age 35. This would cut your return by over half to $798,000.
It is never too late to start investing, but the sooner you start, the higher your return!
All debts aren’t the same. One of the most important things to know about money is that not debt is bad. Debts like credit cards with high interest rates are not good. Some of us may have learned this the hard way by opening a credit card to build our credit score, and the next thing we know, we have a huge balance. Debts like mortgages or student loans are usually considered good, however, because these debts have low interest rates and are usually funding an investment such as your education or a property.
Your debt directly affects your credit score and can impact many things such as renting a home, opening utilities accounts, or even getting a loan. Regardless of your debt type, it is important to follow these tips:
- Aim to keep balances on your credit cards as low as possible.
- Always pay your bills on time or early each month.
- Don’t apply for credit too often and keep your older credit accounts open to build credit.
Budgets help build financial success. Money management can be daunting and stressful, but setting a budget can be life-changing. A budget is a plan for how you will spend and save your money each month. This helps you stay in control of your financial freedom. There are many different ways to budget, like zero-based budgeting, 50/20/30 budgets, cash envelope system, or “Pay Yourself First” methods.The method you choose should work for your unique financial situation and be a style you can stick with.
The more you educate yourself and your family, the more that knowledge will help you build a strong financial future. It is never too late to start!
