Becoming Financially Literate: 4 Tips for Better Financial Health
April is Financial Literacy Month, which is the perfect time to take advantage of available tools, resources, and tips for financial education that can help increase your financial success. This month, put yourself back in the driver's seat of your financial journey! Here are a few tips to get you started on improving your financial literacy:
1.) Examine Your Expenses
Do a thorough review of your bills, and you might find hidden fees that are pecking away at your hard-earned nest egg. At the onset of a purchase or subscription, we tend to do our due diligence, but as the years roll by, we stop reviewing, and that's when we lose control. Making a budget and keeping a close eye on what you spend each month is the best way to start taking back control of your financial life.
2.) Consider Your Credit
Even if you have a low balance, some credit cards charge multiple interest rates based on purchases and cash advances. Although the difference may be slight in the short-term on a small balance, it's more significant in the long-term with a larger balance. For example, a $10,000 balance with an APR of 16% paid off over two years will cost about $1,750 in interest. The same balance at a 20% APR will cost about $2,215 in interest.(1)
Most credit cards have variable APRs that'll fluctuate with a particular benchmark, such as the prime rate. For example, if the prime rate is 4%, and your credit card charges the prime rate plus 12%, your APR becomes 16%.
If you're eligible, one helpful strategy is transferring your current credit card balances to a balance transfer credit card with a lower interest rate.
3.) Drop Your Debt
If you are carrying consumer credit like credit cards, it's time to consider paying your balance off in full.
Paying off a credit card balance is much like getting a guaranteed rate of return on your investment! If your credit card charges 20% interest per year and you pay off the balance, you're guaranteed to save yourself 20%, which, in a way, is the equivalent of making a 20% return.
So, when you have cash to spare, in most cases, it's better to use it to reduce your credit card debt than to invest it. If you can pay off your balance and stop paying credit card interest altogether (and keep it paid off), you'll find you have more money to invest in the future.
4.) Learn the Lingo
Bucks, bacon, dough, moolah, cabbage, cheddar, Benjamins, whatever you call it, money makes the world go round! With so many words used for the same thing, it's not surprising that sometimes we hear financial terms but feel lost on the concept. Financial Literacy Month is the perfect time for a refresher. Here are a few financial terms you should familiarize yourself with:
- COMPOUND INTEREST
Think of compound interest as "interest on interest." It'll make your savings or debt grow at a faster rate than simple interest, which calculates on the principal amount alone. It's essential to understand this concept when you're investing and and borrowing so that you can make smarter decisions with your money.
- ASSET ALLOCATION
Asset allocation is the process by which you choose what proportion of your portfolio you'd like to dedicate to various asset classes based on your goals, personal risk tolerance, and time horizon. Make these choices based on your risk tolerance level and time available before you'll need to access your money. A qualified financial professional can help you with this.
Amortization is the process of paying off a loan (think mortgage or auto) in installments over a fixed period. The payments are broken up by how much goes toward interest and how much to the principal. It's important to recognize this breakdown and determine if an early debt payoff would benefit your retirement plan.
A fiduciary is any person exercising authority or control over the management of a financial plan or its assets' disposition. A fiduciary gives investment advice or has the authority to do so and has discretionary responsibility in administering that plan. Your financial professional should have this designation because they're then ethically bound to put your best interest above their own and recommend the best investments for your particular situation.
An annuity is a financial product that pays out a fixed stream of payments to help hedge your risk of outliving your savings. Because the lump sum is usually fairly illiquid and may be subject to early withdrawal penalties, annuities are primarily set up later in life and intended as an income stream for retirees. The guaranteed income-for-life aspect can make annuities an intriguing investment strategy for some people.
- LTCi (Long-Term Care Insurance)
Long-term care insurance covers medical costs that Medicare, health, and life insurance won't cover. Sudden illness or the need for critical care can quickly deplete a savings account if the proper insurance isn't in place, and placing the burden of care on loved ones for care can put undue strain on everyone. Consider this type of insurance to help preserve your choices about future care - or if you want to protect retirement assets or inheritance plans.
During Financial Literacy Month, pledge to yourself that you're ready, willing, and able to take responsibility for your financial future. Be curious, keep an open mind, and commit to improving your financial knowledge on an ongoing basis. It's the first step towards achieving financial health on the pathway to a more secure financial future. If you would like some professional guidance on your journey, contact us today for a free initial financial strategy session!
This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Annuity guarantees are based on the claims-paying ability of the issuing insurance provider.