The Basics of Financial Literacy
Personal finance is easier to understand when you know how credit and debt affect you. You don’t have to be afraid of credit and debt and avoid them completely, but you should be careful.
Debt can be a useful tool if you use it right. But if you use it wrong, debt can get out of hand. If you miss payments, your credit score can go down, and that can take a long time to fix. For example, missed payments can stay on your credit report for seven years.
Your credit score shows how trustworthy and qualified you are for loans, such as mortgages and car loans. It can also affect your chances of renting a place.
Understanding Interest
Interest can be your friend or your enemy. When you borrow money with an interest rate, it costs you more, but when you invest early and use compound interest, it earns you more.
Compound interest is when your money grows faster because you earn interest on both the principal and the interest. The interest you earn is added to the principal, and then you earn interest on the new, bigger principal.
The Value of Time
Saving early is a smart move. The sooner you start, the better your outcome. By saving for retirement early, you can use the power of time to your benefit.
Lets take a look at Cindy and Charlie. Imagine Cindy and Charlie each invest a total of $100,000. Cindy starts investing right away, putting $10,000 every year in an account that earns a hypothetical 6% return. Cindy stops investing after 10 years. Charlie waits for 10 years before he starts to invest. He also invests $10,000 every year for 10 years, earning the same hypothetical return as Cindy. Who has more money after 20 years? Surprisingly, Cindy has almost double the money that Charlie has, because her money had more time to grow with compound interest.
Understanding Inflation
Your money may lose some of its value over time due to inflation. This means that a dollar you earn today may buy less in the future. Here are some things to consider when dealing with inflation.
Cash in a Mattress
Storing all your money at home is risky and expensive. If inflation is a hypothetical 2%, every dollar you save will be worth only $.98 the next year.
Rate of Return
Your money may buy less over time because of inflation. The “real” rate of return is the rate of return on your accounts minus the inflation rate. If your account earned a hypothetical 6% return last year, but inflation was 1.5%, your real return was 4.5%.
Identity & Safety
Your financial and personal security can be at risk from identity theft in the modern world. Someone can use your stolen password or Social Security number to harm your present and future finances. Consider using a password manager. A different password for each site and service you use is a good idea. A password manager can help you with this by creating and keeping strong passwords for you until you need them.
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