Master Financial Literacy for BeginnersLAST UPDATED: July 12, 2023 | By Conrad Golly
Many of us feel overwhelmed when it comes to managing our finances. We know that gaining financial literacy is important, but don’t know where to start or what we should learn.
This can lead to making costly mistakes with our money, feeling lost about budgeting or savings goals, or getting stuck in a cycle of debt.
Fortunately, you don’t have to navigate your financial journey alone. This financial literacy for beginners guide will help you understand the basics of personal finance and equip you with the tools and knowledge to take control of your finances and reach your goals.
Why Financial Literacy for Beginners is Important
As a beginner in the world of personal finance, it’s important to understand why financial literacy is crucial to your financial health and stability.
Here are a few reasons why you should prioritize financial literacy:
Better Financial Decision Making
When you have a good understanding of financial concepts, you are better equipped to make informed decisions about your money. This includes decisions about budgeting, saving, investing, and managing debt. By making better financial decisions, you can improve your financial situation and work towards achieving your financial goals.
Improved Financial Stability
Financial stability is essential for a stress-free life. Financial literacy can help you achieve this by teaching you how to create a budget, save money, and manage your debt. With this knowledge, you can avoid financial pitfalls and build a strong financial foundation for yourself.
Increased Financial Health
Just like physical health, financial health is important for your overall well-being. By understanding financial concepts, you can take control of your finances and make sure that they are working for you. This includes learning how to manage your credit score, invest your money, and plan for retirement.
Avoiding Debt Traps
One of the biggest benefits of financial literacy is that it can help you avoid debt traps. When you have a good understanding of financial concepts, you can make informed decisions about borrowing money and managing your debt. This can help you avoid high-interest loans and credit card debt that can quickly spiral out of control.
Long-Term Financial Planning
Finally, financial literacy is important because it helps you plan for the long-term. By understanding financial concepts, you can create a plan for your future that includes saving for retirement, buying a home, and achieving other financial goals. With a solid plan in place, you can feel confident about your financial future.
Financial literacy is essential for anyone who wants to take control of their finances and achieve their financial goals. By understanding financial concepts and making informed decisions about your money, you can improve your financial situation, achieve financial stability, and plan for a brighter financial future.
Understanding Personal Finance
When it comes to personal finance, it’s important to have a basic understanding of how to manage your money effectively. This includes knowing how to budget, save and invest, and manage debt. In this section, we’ll cover the basics of each of these areas.
What is the 50 20 30 rule?
The 50/20/30 rule is a popular budgeting technique that involves dividing your after-tax income (take-home pay) into three primary categories.
- 50% to Needs: This category includes essential expenses such as housing, utilities, food, transportation, and other necessary expenses.
- 20% to Savings and Debt Reduction: This category includes savings for retirement, emergency funds, and paying off debt.
- 30% to Wants: This category includes discretionary spending on non-essential items such as entertainment, dining out, hobbies, and travel.
The 50/20/30 rule is a simple and flexible budgeting strategy that can help individuals manage their after-tax income and achieve financial goals.
What’s An Emergency Fund?
An emergency fund is not a specific type of bank account. Instead, it is any amount of money that you have saved to help you deal with financial difficulties such as losing your job, paying for medical bills, or repairing your car.
This is how emergency funds are used.
- Typically, individuals maintain a distinct savings account specifically intended for emergency funds.
- You should aim to accumulate enough money in the account to cover your expenses for a period of three to six months.
- You should not use your emergency fund money to pay for your regular expenses.
Introduction to Credit Cards
Credit cards are plastic cards that allow you to borrow money from the issuer and pay it back over time. If you don’t pay back the money in full each month, you’ll be charged interest on the remaining balance. Note that some credit cards, known as charge cards, require you to pay your balance in full every month, but these are less common.
What’s the Difference Between Credit and Debit Cards?
Debit cards deduct money from your checking account without allowing you to borrow money or spend more than what you have. Additionally, using debit cards does not contribute to building your credit history or credit rating.
Credit cards enable you to borrow funds without withdrawing cash from your bank account, which can be useful for big, unforeseen expenses. However, if you carry a balance from one month to the next, meaning you don’t completely repay the money you borrowed, you will be charged interest by the credit card company.
It is critical to exercise caution when spending more than you can afford, as debt can accumulate quickly and be tough to pay off. If you use your credit card responsibly and pay your debts on time, you can build a good credit history and a high credit score.
This is important because having a good credit rating will not only help you qualify for the best credit cards, but it also gives you access to lower interest rates on personal loans, auto loans, and mortgages.
What Is APR?
The annual percentage rate (APR) is the interest amount that you will owe on any balance that you leave unpaid to the credit card issuer. It is important to pay attention to this number while applying for a credit card as a higher APR can cost you a significant amount of money if you have a large balance over time.
Presently, the median APR is around 23%, but if you have poor credit, your rate may be higher. Additionally, interest rates differ based on the type of credit card.
Which Credit Card Should I Choose?
Knowing your credit score range is crucial in increasing your chances of approval for a credit card. This helps you streamline your options and choose the best card for your needs and preferences. It’s important to consider both your credit score and your lifestyle and spending habits when choosing a credit card.
If you don’t have a credit card or have bad credit, you can improve your score by using a secured or subprime card and making timely payments. If you have a fair to good credit score, there are many credit card options available to you.
- Rewards cards for travel are credit cards where you can earn points for every dollar spent. These points can be used to book flights, hotels, and rental cars.
- If you don’t travel frequently or don’t want to bother with redeeming points for rewards, then a cash-back card may be the most suitable option for you. Each month, you will get a small portion of your spending back in either cash or statement credit.
- If you currently have high-interest balances on other credit cards, consider using balance transfer cards to transfer these balances to a card with a lower interest rate. This can help you save money, pay off your balances faster and ultimately improve your credit score.
- Consider switching to a credit card with a low or no APR if you usually have an unsettled balance every month. This can save you hundreds of dollars in interest payments every year.
Make sure you understand your rights provided by the Equal Credit Opportunity Act. Research credit options and interest rates to ensure you receive the most favorable rates based on your credit history and financial situation.
Creating a monthly budget by Conrad Golly Money Main St
Creating a monthly budget is an essential part of personal financial management. It helps you keep track of your income and expenses and ensures that you don’t overspend.
To create a budget, start by listing all of your monthly expenses, including rent/mortgage payments, utilities, groceries, transportation, and any other bills you have. Then, subtract your expenses from your income to see how much money you have left over each month.
Creating a budget is a crucial step in taking control of your finances.
Here are some simple steps to help you get started:
Track your income and expenses: Start by recording your monthly income, including all sources of money you receive, such as paychecks, side gigs, and investment income. Next, list all your monthly expenses, including both fixed and discretionary spending. Fixed expenses include rent/mortgage payments, utility bills, and loan payments, while discretionary spending includes non-essential purchases like restaurant meals and shopping.
Determine your savings: Calculate the amount of money you’re able to save each month, whether it’s in cash or in an investment or retirement account.
Subtract your expenses from your income: Once you’ve tallied up your income and expenses, subtract your total expenses from your total income. This will give you a clear picture of how much money you have left at the end of each month.
Adjust your expenses: Review your expenses and look for areas where you can cut back on spending. This will help you free up extra cash that you can put towards your emergency fund.
Start an emergency fund: Put your extra money into an emergency fund until you’ve saved at least three to six months’ worth of expenses. This will help you prepare for unexpected emergencies like job loss or medical bills.
By following these simple steps, you’ll be on your way to creating a budget that works for you.
Saving and Investing
Saving and investing are key components of personal financial management. Having a savings account is a great way to start building up an emergency fund, which can help you cover unexpected expenses without going into debt. Additionally, investing your money in the stock market can help you grow your wealth over time.
However, it’s important to remember that investing comes with risks, and it’s important to do your research and consult with a financial advisor before making any major investment decisions.
Saving And Investing tips:
- DO set up a portion of your paycheck to automatically go to investments and savings.
- DON’T leave a savings account as your last financial priority. (Unless you have high debt)
Managing debt is another important aspect of personal finance. If you have credit card debt, it’s important to make sure you’re paying off your credit card bills on time and keeping your credit card balance low.
Credit card companies often charge high interest rates, which can quickly add up if you’re not careful. Additionally, if you have a mortgage or other loans, it’s important to make your monthly payments on time to avoid damaging your credit score.
Managing your personal finances requires discipline, planning, and a little bit of knowledge. By creating a monthly budget, saving and investing wisely, and managing your debt effectively, you can build a strong financial foundation for yourself and your future.
Investing In the Stock Market
So you’re ready to start investing? Awesome! Here are the basics to help you make sense of it all.
Step 1: What Is the Stock Market?
The stock market is where people go to buy and sell stocks (duh!), but it’s also where you can trade other stuff like ETFs, bonds, and more. Main players in the US include the NYSE, Nasdaq, and Cboe Options Exchange.
Step 2: How Do I Invest?
You need a broker to buy stocks, and there are three main ones to choose from: full-service brokers, online/discount brokers, and robo-advisors. They all have their pros and cons, so do some research to figure out which one is right for you.
Step 3: What Should I Invest In?
The securities you purchase and the amount you invest will vary based on your available funds and willingness to accept risk. The list below outlines the most popular securities in order of descending risk, but there is no universally right choice for everyone.
A stock, which is also referred to as “shares” or “equity”, represents partial ownership of a company and allows the shareholder to receive a portion of the company’s assets and profits.
If you own stock, you can participate in voting during shareholder meetings, receive dividends from the company’s profits, and sell your shares to another person.
Stock prices can change frequently during the day and may be influenced by various factors such as the company’s performance, the domestic and global economy, and current events.
It’s important to note that stocks can either increase or decrease in value or even become worthless. Due to these fluctuations, stocks can be considered more volatile and potentially more risky as compared to other forms of investments.
ETF stands for exchange-traded fund which is a collection of securities such as stocks. It usually follows an underlying index and can utilize different strategies while investing in any industry sector.
An ETF can be visualized as a pie that holds a mix of various securities. By purchasing shares of an ETF, you are essentially getting a piece of that pie, which includes small portions of the securities it holds. This allows you to invest in multiple stocks conveniently through a single purchase – the ETF.
ETFs share many similarities with mutual funds, such as professional management and immediate diversification. Yet, the primary difference is that ETFs trade on stock exchanges and are treated like regular stocks, with shares that fluctuate throughout the day.
Investing in ETFs is less risky than investing in individual stocks because ETFs contain multiple securities. This means that if the value of some securities decreases, others may remain stable or even increase in value.
Mutual funds are investments that contain a variety of stocks, bonds, and securities. They offer individual or small investors access to professionally managed portfolios that are diversified at an affordable price. The funds are categorized based on the types of securities they invest in, their investment goals, and the returns they aim for. Many employer retirement plans invest in mutual funds.
Mutual funds differ from individual stocks as they own a variety of different stocks and securities. Mutual fund trades are only made once a day at the net asset value (NAV), rather than fluctuating throughout the day like stocks or ETFs. Mutual funds, like ETFs, are less risky due to their diverse portfolio of holdings.
Bonds: Companies, municipalities, states, and sovereign governments issue bonds to fund their projects and operations. Purchasing a bond means lending money to the bond issuer and receiving the amount back with interest. The coupon rate of the bond indicates the interest rate earned by the investor.
Bonds are called fixed-income instruments because historically they pay a fixed interest rate to investors, but some pay variable rates. The price of bonds moves opposite to interest rates. If rates increase, bond prices decrease, and vice versa. Bonds have maturity dates, which indicate when the investor must receive back the full principal amount, or the issuer may risk default.
Bonds are given a rating based on the probability of the issuer repaying the bondholder. The higher the rating, the safer and more stable the bond is considered. Investment-grade bonds are linked to publicly traded companies and government bodies with positive outlooks. These bonds receive ratings from “AAA” to “BBB-” by Standard and Poor’s and from “Aaa” to “Baa3” by Moody’s.
Generally, bonds that have higher ratings will have lower interest rates compared to those with lower ratings. The most commonly known AAA-rated bond securities are the U.S. Treasury bonds.
When it comes to managing your money, having a bank or credit union account is essential. Not only does it provide a safe place to store your money, but it also makes it easier to manage your finances. In this section, we will discuss the types of bank accounts, using credit and debit cards, and direct deposit.
Types of Bank Accounts
There are several types of bank accounts to choose from, but the most common are checking and savings accounts. A checking account is a deposit account that allows you to write checks, use a debit card to make purchases, and withdraw money from ATMs. A savings account, on the other hand, is designed to help you save money and earn interest on your balance.
When choosing a bank or credit union, it’s important to consider the fees and minimum balance requirements associated with each account. Some banks may charge monthly maintenance fees, while others may require a minimum balance to avoid fees.
Using Credit and Debit Cards
Credit and debit cards are essential tools for managing your finances. A debit card allows you to access the funds in your checking account to make purchases or withdraw cash from ATMs. A credit card, on the other hand, allows you to borrow money from the bank to make purchases and pay it back over time.
It’s important to use credit and debit cards responsibly to avoid overspending and accumulating debt. Make sure to track your purchases and pay your bills on time to avoid late fees and interest charges.
Direct deposit is a convenient way to receive your paycheck or other income directly into your bank account. This eliminates the need to deposit a physical check and allows you to access your funds more quickly.
To set up direct deposit, you will need to provide your employer or other income source with your bank account information, including your account number and routing number. Some banks may also provide a direct deposit form that you can fill out and submit to your employer.
Having a bank or credit union account, using credit and debit cards responsibly, and setting up direct deposit are all important aspects of managing your finances. By understanding these basics, you can make informed decisions about your money and work towards achieving your financial goals.
If you’re considering taking out a student loan, it’s important to understand the basics of student loan debt and repayment options.
Understanding Student Loan Debt
Student loan debt is money that you borrow to pay for your education, and you must repay it with interest. It’s important to only borrow what you need and to understand the terms of the loan before you sign on the dotted line.
When you take out a student loan, you’ll be required to make regular payments to your lender. These payments will be based on the amount of money you borrowed, the interest rate on the loan, and the length of the repayment period.
There are several repayment options available for student loans, including:
- Standard Repayment: This is the most common repayment plan, where you make fixed monthly payments over a set period of time.
- Graduated Repayment: This plan starts with lower monthly payments that gradually increase over time.
- Income-Based Repayment: This plan is based on your income and allows you to make lower monthly payments if your income is low.
- Pay As You Earn: This plan is similar to income-based repayment, but your payments are capped at a certain percentage of your income.
- Income-Contingent Repayment: This plan is based on your income and family size, and your payments are adjusted each year based on changes in your income.
It’s important to choose the repayment plan that works best for you and your financial situation. You can contact your lender to discuss your options and find the plan that will work best for you.
Remember, student loan debt is a serious financial obligation, and it’s important to understand the terms of your loan and your repayment options before you borrow. By taking the time to educate yourself and make informed decisions, you can avoid unnecessary debt and achieve your financial goals.
Credit Scores and Reports
One important aspect of financial literacy is understanding credit scores and reports. A credit score is a three-digit number that represents your creditworthiness. It’s based on your credit history and helps lenders determine whether or not to approve your credit application.
Your credit report is a detailed summary of your credit history. It includes information about your credit accounts, such as credit cards, loans, and mortgages, as well as your payment history and any outstanding debts. Credit reporting agencies, such as Equifax, Experian, and TransUnion, collect this information and use it to calculate your credit score.
It’s important to regularly review your credit reports to make sure they are accurate. Errors on your credit report can negatively impact your credit score and make it harder to get approved for credit in the future. You’re entitled to one free credit report from each of the three major credit reporting agencies every year. You can request these reports online, by phone, or by mail.
When reviewing your credit report, look for any errors or inaccuracies. Make sure all of your personal information is correct, and check that all of your credit accounts are being reported accurately. If you find any errors, you can dispute them with the credit reporting agency.
Your credit card statements can also provide valuable information about your credit history. Make sure to review your statements each month to check for any unauthorized charges or errors. Paying your credit card bill on time and in full each month can help improve your credit score over time.
In summary, understanding credit scores and reports is an important part of financial literacy. Regularly reviewing your credit reports, checking your credit card statements, and paying your bills on time can help improve your credit score and make it easier to get approved for credit in the future.
The Bottom Line: Financial Literacy for Beginners
This article covers the most important and commonly used financial products, tools, and tips for beginners.
Congratulations! Here’s your Financial Literacy for Beginners written high five.
You have taken the first step towards achieving financial literacy. By educating yourself about financial matters, you can make informed financial decisions and take control of your own money. Being financially literate means that you have the knowledge and skills to manage your finances effectively, set financial goals, and achieve financial stability.
Remember, financial literacy is a lifelong journey, and there is always more to learn. To continue your financial education, consider taking a financial literacy course or attending a workshop offered by a financial institution or the Federal Reserve Bank.
When making financial decisions, it’s important to consider the long-term consequences. Always weigh the pros and cons of paying interest on loans or credit cards, and make sure to read the fine print before signing any financial agreement.
However, if you wish to explore further, you can refer to these additional resources.
Are Banks Safe?
The Federal Deposit Insurance Corporation (FDIC) insures most bank accounts in the United States up to a certain limit. Currently, the limit is “up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.” If you have a large sum of money to deposit, you can open multiple accounts to ensure that all of it is covered.
Is It Safe To Invest In The Stock Market?
Investing in stocks carries a risk of losing money if their share prices decrease. Brokerage accounts are insured by the Securities Investor Protection Corporation, but the coverage of up to $500,000 in securities and cash only applies in the case of the brokerage firm’s failure and inability to repay its customers. It does not protect against regular investment losses.
What Is The Safest Investment?
Investing in U.S. Treasury securities such as bonds, bills, and notes is safe because it is backed by the U.S. government. However, these investments pay low rates of interest, which means that investors could experience the risk of inflation reducing the amount of purchasing power their money holds.