Understanding your financial life is about more than just balancing your checkbook and reading a bank statement. It requires a basic level of financial literacy – knowing how money works and why. Here are five basics principles of financial literacy to help you navigate your way.
Credit and debt
Debt is like any tool: when used correctly, it can be quite useful. When used incorrectly, debt can easily spiral out of control. And should you miss debt payments, you may negatively affect your credit score. Your credit score is one of the factors lenders use to judge your trustworthiness and qualification for mortgages, car loans and other lending agreements. Landlords and employers may also check your credit score before renting to you or offering you a job.
Interest can work against you, but it can work for you, too. When you take out a loan with an interest rate, it’s working against you, but when you make an investment for the long term and take advantage of compounding interest, it’s working for you.
Compounding interest is a particularly important financial tool. It works like this: you have an account that’s accruing interest and the interest earned gets added to the principal. Then, interest is earned on the new, larger principal, and the cycle repeats.
The value of time
It's never too early to start saving. In fact, the earlier you start, the better your potential result. When you start putting away money for retirement sooner rather than later, you can leverage the value of time – and compounding interest – to your advantage.
Inflation has the potential to eat away the purchasing power of your money. That means, with inflation, the dollar you earn today may not be worth a dollar in the future. Say, for instance, you kept all your money under your mattress (even a proverbial one). Doing so would literally cost you money. If the rate of inflation was, hypothetically speaking, 2%, every dollar you squirreled away would shrink in value by $0.02 per year. Multiply that over dollars and years and the impact on your purchasing power becomes enormous.
Identity theft and safety
In the modern world, identity theft is one of the biggest threats to financial and personal safety. A cracked password or misplaced Social Security number can have big consequences on your current and future finances.
One way to fight identity theft is to use a unique password for each site and service you use, especially financial sites and services. But that can be hard to do. Consider using a password manager to generate and store strong passwords in order to make your accounts more secure.
Becoming financially literate won’t happen overnight. But by paying attention to detail, asking questions and talking to an advisor associated with Waddell & Reed, your understanding of money and finance can grow – a benefit that can last a lifetime.
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.