April is financial literacy month and although it is important to work with a financial planner Orlando to strategize and meet your financial goals, it is equally important to understand the fundamentals of financial literacy. We deal with money every day, and without comprehensive understanding of the basics, it will be very difficult to be financially successful. If this is a new concept to you, below are 3 simple, but important financial concepts you can use as the basis of your financial understanding.
Credit Scores And Debt
Your credit score and debt you hold can work with or against you when trying to establish your financial foundation. Do not avoid either of them however, because trying to operate in cash only is short-sighted. Instead, it’s important to have a firm grasp on where you stand financially and to have a plan for tackling debt responsibly.
Your credit score is one of the main factors lenders use to judge your trustworthiness and if you’re able to qualify for auto loans, credit cards, or a mortgage. Employers and landlords will often require a credit check from you before renting to you or hiring you for a position. The credit score number is dependent upon numerous factors including previous credit history, current debts, and payment history.
When debt is correctly used, it can be useful for your financial stability and strategy. However, it is easily misused and can spiral out of control very quickly. Multiple missed payments can accrue interest and penalties that can hurt your credit score, not to mention cost you even more money. If managed responsibly, debt can help you reach important financial goals like buying a car, or a home, going to college, or starting a business.
Interest can be a little difficult to grasp because there are two types: one that accrues on debt and one that accrues on interest. The interest that accrues in your savings account gets added to your principal amount and then more interest accrues based on that new amount of money and the cycle continues. This is called compounding interest and is integral to growing your retirement savings.
When you take on debt, like a credit card, you’re responsible for paying back both the principal amount and whatever interest accrues on that money as well. This interest is how the bank makes money on the loan and provides you, the borrower, with an incentive to pay back the money in full and on time.
Inflation has the potential to reduce the purchasing power of money, meaning the dollar you earn today may not be worth a dollar in the future. If you struggle to understand it, here are two different concepts to consider.
If you choose to not keep your money in a bank, and keep it in your dresser drawer, not only is it unsafe, but it will actually cost you money. If the inflation rate is 1%, each dollar you have in your bedroom will only be worth .99 cents the following year.
Because of inflation, it is important to remember that the rate of return is not an exactly accurate number. If, on your money accounts, you hypothetically earned a 5% return, but inflation is 1%, your actual and real rate of return is only 4%.
Financial strategies are numerous, and crucial for anyone looking to build wealth. But without a grasp on some of the more basic fundamentals of finance, you won’t ever be able to fully create a successful strategy or achieve your financial goals.