The Ultimate Guide for Financial Literacy

The earlier that you start learning about the inner workings of money and the financial industry, the more successful and confident you will be when dealing with finances later in life. According to the best trading mentors, there’s no such thing as being “too late” when it comes to learning, but it’s always nice to get a head start. Proper education in financial literacy will help you take your first steps into this money-run world. There are various trading educators that can help you gain financial literacy, and if you want to become literate in the financial world. Review this blog for more on the best trading mentors marketplace.

Debt, credit, saving, budgeting, investing, and banking are all pillars that make up some of the most important financial decisions you’ll make in your life. Here’s everything you need to know to become financially literate:

What does it mean to be financially literate?

A financially literate individual can make use of and understand many different financial skills such as investing, budgeting, and personal financial management. They can also comprehend different financial concepts and principles such as compound interest, time value of money, financial planning, and managing debt.

You can make informed financial decisions after becoming financially literate, which will help you achieve self-sufficiency and financial stability. Some of the key steps in becoming financially literate include tracking your spending, learning how to make a budget, paying off your debt, and planning for retirement trading mentors is what you may need to become financially competent.

If you educate yourself regarding these topics, you’ll learn how money works, how to set and achieve your financial goals, and become aware of discriminatory or unethical financial practices while managing any financial challenges that pop up in your everyday life.

A laptop screen showing graphs of financial literacy

Why is financial literacy important?

According to the National Financial Capability Study conducted by the Financial Industry Regulatory Authority (FINRA), the level of financial literacy in the U.S. is declining every couple of years. This test has five questions that measure the average consumer’s knowledge regarding bond prices, diversification, inflation, compounding, and interest. Of the people who were a part of the previous study, only 34% got at least 4/5 questions correct.

However, making informed and sound financial decisions is becoming increasingly important. Consider your retirement planning—thousands of workers once used to rely on their pension plans for funding their lives after retirement, and the burden of making the right decisions was borne by whatever governments or companies were sponsoring them.

Today, fewer and fewer workers are getting pensions, with many opting for the 401(k) plan. This plan allows employees to make their own investment choices and contribution levels. Those who don’t have employer options must actively seek and open their retirement accounts or other accounts that provide them with a tax advantage.

Additionally, people’s life spans are increasing, and retirements are getting longer. There is only so much that social security benefits can provide. There’s a mixture of complex investment instruments, savings, insurance, and health options, and a wide variety of credit unions, banks, credit card companies, and brokerage firms. As a result, financial literacy is needed to make informed and thoughtful decisions to avoid unnecessary debt and help your family members get an adequate income for their retirement.

Tall buildings from below

The basics of personal finance

Financial literacy can translate into long-term decision-making for your finances. Are you good at managing your money? What investment vehicles and savings are you taking advantage of? Personal finance consists of making financial goals and going through with them—whether it be to own your own house, help your family members, save for future children and their college fees, plan your retirement, or any other important causes. These can encompass handling credit and debt, budgeting, and banking.

Bank accounts

One of the first financial accounts you will ever open includes bank accounts. They’re incredibly important and necessary for making any major purchases. Here are some different bank accounts that you can consider for creating a better financial future for yourself:

Do you require a bank account?

While most Americans have bank accounts, around 6% of the households in the U.S. don’t have any. Opening a bank account is much safer than physically holding on to your cash. Any assets in your bank account will be much harder for robbers and thieves to steal. They are also usually insured, depending on the country. This means that you will always be able to access your cash, regardless of if every other customer also decided to take their money out simultaneously.

A bank account will let you make the following transactions:

  • Use a credit card or debit card
  • Write a check
  • Use apps for payment such as PayPal or Venmo
  • Rent or buy a home
  • Make use of an ATM
  • Receive a paycheck from your job
  • Earn interest using your money

Brick-and-mortar vs. online banks

If you think of the word ‘bank,’ you probably imagine a building. These are called brick-and-mortar banks. Most banks like these allow people to open accounts and keep track of their money online. Other banks are only available online and don’t have any physical buildings. Banks like these usually offer the same services, but you can’t visit them personally.

What kind of banks can you use?

Credit unions offer checking and savings accounts and provide many different financial products. However, they’re NFP organizations that certain members own. Credit unions have much lower fees and superior interest rates on loans and savings accounts. They’re also often known for providing better and personalized customer care services, though their branches and ATMs are few and far between.

Retail banks are the most common banks where people have their accounts. These for-profit companies offer savings and checking accounts, credit cards, loans, and insurance. These banks usually have physical buildings that customers can visit but can also be completed online. Usually, they implement a combination of the two. Banks have rather advanced online technology and many more ATMs and locations across the nation than credit unions.

 A plant with money

Different types of bank accounts

The average person should open at least three main kinds of different bank accounts:

  • Savings account: this interest-bearing deposit account can be held at banks or other financial institutions. Savings accounts usually have a rather low-interest rate. Still, their level of reliability and safety makes them a very sensible option for saving your cash in case of short-term needs. There are legal limitations regarding the frequency at which you are allowed to withdraw your money. Still, they tend to be rather flexible, making them good options for emergency funds, saving for short-term purchases, or storing any extra cash you don’t need right now.
  • Checking account: this deposit account can also be created at any financial institution or bank, allowing you to withdraw and deposit your money whenever you want. These liquid accounts allow many monthly withdrawals compared to savings accounts, but they barely earn any interest. Cash can get deposited at ATMs or banks through an electronic transfer or direct deposit. As an account holder, you can withdraw your funds through a bank by using your debit card or writing a check. Some checking accounts don’t have fees, while others can have monthly charges based on the amount you keep in your bank and if there’s an automatic-withdrawal payment connected to it.
  • High-yield savings account: this account is a sort of savings account that pays a relatively higher interest rate than a standard savings account. This trade-off means you must make a bigger initial deposit, have a larger minimum balance, and pay a higher fee.
A folder with papers

Do you need an emergency fund?

Emergency funds aren’t a kind of bank account—they’re any source of money that you have saved up to handle any sudden financial hardships like medical bills, car repairs, or job losses.

Most people have a separate savings account for their emergency funds. Generally, the rule is that this account should have enough money to cover your expenses for the next 3-6 months. Keep this account off-limits when paying for your usual expenses.

Credit cards

You might know about credit cards as the little plastic card that most people carry daily. Credit cards consist of accounts where you can borrow money to pay back over time. If you don’t pay the full amount back within a month, you will get charged with a certain amount of interest on whatever the remaining balance may be. Charge cards are a form of credit card where you need to pay the balance back every month, but they’re not as common.

A graph showing Bitcoin values

Difference between debit and credit cards

Debit cards directly withdraw money from your checking account whenever you make a purchase. There is no borrowing when it comes to a debit card, so you won’t be able to spend more than what you already have in your bank. Debit cards don’t help build up a good credit rating or history either.

Credit cards let you borrow money without pulling any cash from your account at your bank. This is incredibly helpful for any unexpected or large purchases that you might make, but if you carry a balance and don’t pay the money back completely, you’ll owe interest to your issuer. This makes it extremely important to think carefully before spending money that you don’t have—debt builds up fast and only snowballs from there.

Alternatively, if you judiciously use your credit card and pay all your bills on time, you can establish a good credit rating and history. This is important for qualifying for better credit cards and getting favorable interest rates on mortgages, personal loans, and car loans.

A graph showing changes in price over time

Understanding APR

APR is the annual percentage rate, which is the interest you will owe for your unpaid balance to the issuer of your credit card. Paying attention to the APR when applying for your credit card is important. A high number can cost you hundreds of dollars if your balance carries over for long periods. You might have a higher rate if your credit rating is bad. The type of credit card that you use can also influence the interest rate.

What credit card is the best?

Your credit score will have a rather large impact on your chances of getting credit card approval. You must understand the range of your score so that you can narrow down the options while deciding the kind of card you want to apply for. Apart from the credit score, you must also consider the best perks for your spending habits and lifestyle.

If you have bad credit or have never owned a credit card, you’ll have to apply for a subprime credit card or secured credit card. Using these and paying them back on time will slowly help you increase your credit score. Make sure you stay aware of any protections you might fall under. Do thorough research on interest rates and credit opportunities available to you so that you get the best rates according to your financial situation and credit history.

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