Studies show that consumer debt grew by $800 billion in the past year, making now the right time to evaluate your financial literacy. Financial literacy analyzes your ability to effectively manage different areas of your finances, from credit cards and taxes to investments and savings. Building a strong foundation with money management allows you to avoid becoming a part of the growing debt statistic.
Credit Cards
One of the main areas individuals struggle with is credit card management. Credit cards can be a great tool when properly used. But most Americans charge more than they are able to pay. Every month you have an outstanding balance, you accumulate interest charges which can range up to 30 percent. This means you are being charged $30 in interest for a $100 purchase you don’t pay off right away. Avoiding interest is fundamental to financial literacy and allows you to spend your hard-earned money elsewhere.
Taxes
As the old saying goes, “there are only two things in life that are certain: death and taxes.” Taxes are inevitable, but there are ways you can minimize your burden legally. The first type of tax you will see is payroll taxes. These are the amounts your employer withholds from your paycheck. Choosing the right withholding rate can help you avoid underpaying when you file your income tax return. Take a look at your last paycheck to see the amounts you are currently withholding and if adjustments are needed.
Investments
Once you get a grasp on the money you are currently spending, you can make changes to generate excess income for investments. Investments can be confusing, as there are many different types, including stocks, bonds, retirement accounts, real estate, and mortgages. You don’t need thousands of dollars to begin investing. Skipping one Starbucks run a week or buying one less piece of clothing can free up cash for investments.
Savings
Building up a savings account is not only helpful for unexpected expenses, but it can also help you reach your financial goals faster. Every individual should have an emergency fund that covers at least six months of expenses in the event of a job loss or unexpected cost. It may take time to build up this cash reserve, but you will have peace of mind once it’s there. Additionally, putting the money in a high-yield savings account can help you generate extra income to reach your goals.
Summary
Credit cards, taxes, investments, and savings are four financial literacy basics you need to know. For more information on financial literacy reach out to B/ACE Magazines financial expert, Tamara Dervin. You can follow her @iammoneybasics for more professional advice.