Financial Literacy

Banking. Credit. Insurance. Investment. Real estate. These are not just significant sectors within the global economy; they represent essential pillars of personal finance that every individual should understand. In a world where financial literacy can significantly impact one's quality of life, having a solid understanding of these areas is crucial. From managing debts to investing for the future, these topics form the bedrock upon which sound financial health is built.

This week, we'll explore several essential topics of personal finance, aiming to introduce you to some fundamental concepts governing our financial lives. Whether you are taking your first steps into financial independence or seeking to refine your knowledge, our series will provide valuable insights and practical advice to help you navigate the complexities of today's financial landscape. 

We start by exploring the banking and credit industries, understanding their role in personal finance, from the importance of maintaining a healthy credit score to the intricacies of choosing the right banking products for your needs. Our discussion will extend beyond merely keeping a clean credit report; we'll explore strategies for leveraging credit to your advantage.

Investing is another cornerstone of financial well-being we'll cover in depth. Beyond the basics of stocks, bonds, mutual funds, and retirement plans, we'll discuss creating a diversified investment portfolio tailored to your financial goals and risk tolerance. The aim is to demystify the investment process, making it accessible to everyone, regardless of their financial background.

Often overlooked until urgently needed, insurance will also be a focal point. We'll break down the types of insurance everyone should consider, from life and health to property and liability, explaining how each plays a critical role in safeguarding your financial future.

The dream of homeownership is a key aspiration for many, and understanding real estate financing principles is fundamental to turning this dream into reality. We'll guide you through buying a home or investment property, from securing a mortgage to navigating the closing process.

Workplace benefits, including health insurance, pensions, and 401(k) plans, are vital to your financial ecosystem. Our series will explain how these benefits work, their importance in your financial plan, and strategies for maximizing their value.

As we approach tax season, we'll provide a primer on filing taxes tailored to various financial situations. From the single filer with a straightforward return to those navigating more complex scenarios, we'll offer tips to ensure you're both compliant and optimizing your tax situation.

Our journey through personal finance is designed to arm you with knowledge and confidence, empowering you to make informed decisions that align with your financial goals and aspirations. By laying a solid foundation in these critical areas, you'll be better prepared to tackle the challenges and opportunities that come your way, ensuring a prosperous and secure financial future.

Join us this week as we embark on this comprehensive exploration of personal finance. Together, we'll demystify the financial concepts crucial for thriving in today's economy, ensuring you're well-equipped to achieve your financial objectives. Let's dive in and build a future characterized by economic stability and success.

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It’s all too easy to let life’s expenses consume entire paychecks. Loan payments, day-to-day spending, mortgage or rent payments, and other costs can sometimes distract us from contributing toward longer-term financial goals. Some may want to save an emergency fund to avoid credit card debt for an unexpected bill. Others may wish to contribute consistently to a retirement or brokerage account to build wealth for the future. Either way, automating your savings plan can pay dividends.

Rather than wait for a windfall or tax refund to kickstart a savings plan, one option is to use payroll deductions or automatic checking to savings transfers to get started. Even small amounts consistently saved can make a real difference over months, years, and even decades.

This hands-off approach is the cornerstone of the “pay yourself first” philosophy. Automatically redirecting income towards savings flips the script on how many people think about saving for the future – rather than waiting to have “extra” money to save, daily spending adjusts to after-savings income.

Starting Small? No Problem

Making ends meet on less money may seem challenging (and for those experiencing financial hardships, it indeed may). However, saving amounts that may seem trivial can grow substantially over a longer time horizon. For example, those hoping to save an emergency fund may find they can get by while saving $25 per week. But over a year, that adds up to $1,300 – a substantial cushion against unplanned expenses and potential credit card debt.

For those saving for retirement, investing just $10 a day starting at age 25 may grow to over $1 million by age 65, assuming an 8% average annual return. Even $3 a day amounts to nearly $350,000 using the same assumptions.

The benefit of automatic savings is that you can start with an amount manageable for you now, increasing over time. Like the saying about the best time to plant a tree (“20 years ago”), there’s no substitute for the power of time to grow money through continual contributions and compound interest.

How to Get Started

The tools will vary based on your employer and financial services provider. Still, the concept is the same – rather than keeping all of your money in a checking account and allocating different amounts to savings when you happen to think about it, the money is automatically redirected immediately.

If supported by your employer, one approach is to use payroll deductions to allocate your income to different accounts. For example, 80% of income may be routed to your checking account, 10% to an emergency savings fund account, and 10% to a retirement account. Of course, the exact percentages will vary based on your income, expenses, and other considerations unique to your situation.

For those who are self-employed or work for employers who don’t support payroll transfers, a typical checking account can be set up to accomplish a similar result. They can set up monthly checking to savings transfers to build an emergency fund. For retirement savings, a brokerage account can be set up to schedule withdrawals monthly on a pre-determined date.

The Takeaway

Like setting up automated bill payments, automatic savings requires understanding your monthly cash flow to avoid potential overdrafts. But one advantage of automatic savings is that you can start with any amount that’s comfortable for you. The important part is to get started and then reevaluate your savings target over time.

Nobody likes another monthly bill, especially for something as intangible as insurance. But insurance is one of the building blocks of financial security - and something it's easy to ignore until it's too late.

Most of us are familiar with health and auto insurance. Both are considered indispensable and are required by law. However, one could argue that other types of insurance are just as important. Let's examine the critical role that optional insurance policies may play in securing financial security for you and your family.

Life insurance

Here's a good yardstick to use when evaluating your need for life insurance: Do you or a loved one depend on your income? If the answer is yes, then you almost certainly need insurance. A recent survey showed that up to 30% of people who know they need a policy have yet to purchase one. Why's that?

Most people don't like to dwell on their mortality, and younger people, in particular, may view life insurance as something for later - perhaps when they have more income to replace. Life insurance also requires that we make financial sacrifices today to benefit those we may leave behind - a challenge especially for those living paycheck-to-paycheck. 

However, life insurance can be crucial in securing your family's financial security by offering protection against losing earning power. And life insurance doesn't simply have to be a hedge against untimely passing. You can use life insurance as an investment vehicle by opting for permanent whole-life insurance instead of purchasing a term policy that pays out only upon death. While premiums for these policies are higher than term premiums, part of your premium is invested, allowing your policy's value to grow. You can then withdraw or borrow against the equity generated by the policy.

Most experts suggest that term-life policies are the best deal for most families. But if you need a nudge to buy a policy, the whole-life option may be worth considering.

Additional Insurance Options

Depending on your financial situation and current insurance coverage, there may be other ways that insurance can increase your financial security. A few examples include:

Enhanced Auto Insurance

Even though auto insurance is required by law, the minimum requirements in most states are so low that you could be financially responsible for losses in the event of a significant crash. Purchasing more than the minimum, such as up to $300,000 in coverage per accident, can work to protect your assets and savings - in fact, the bill for even relatively minor crashes can easily exceed the minimum requirements in many states.

Umbrella Insurance

Umbrella insurance is another policy that people find helpful. It extends the amount of liability coverage you have under an existing auto or homeowners policy. So, for example, if a car crash results in you being sued for $500,000 and you only have $100,000 in liability coverage under your standard auto policy, a supplemental umbrella policy can close the gap.

Renter's Insurance

Renter's insurance is another type of policy that's often overlooked. Most people own a laptop or desktop computer, clothes, furniture, electronics, plus more. These assets may have been accumulated over years and may not seem worth much. But have you ever considered how much it would cost to replace your possessions if they were lost or stolen?

Designed to cover the replacement cost of your possessions in the event of a fire, theft, vandalism, flood, or any other damaging event, renter's insurance offers many of the benefits of homeowners insurance. It's also relatively cheap - between $150 and $300 per year for approximately $20,000 in coverage for personal possessions and $100,000 or more in liability protection. 

Renter's policies may also cover additional living expenses if your apartment becomes unlivable and even your liability if someone is hurt while in your home. If you don't own a home, renter's insurance may be something to explore.

The Takeaway

We might begrudge paying for it, but insurance protects our families and financial futures - and the examples here are just a few to consider. So, before writing it off as something to deal with later, consider the financial benefits these policies may offer you and your family.

Most credit cards work in the same way – you borrow money and repay it according to the terms of the card agreement. Beyond that, significant differences in card terms, costs, and benefits may be important depending on your unique financial needs. There's no such thing as the "best" credit card, but you can find the best card for you.

When looking for the best card for you, it's essential to understand the difference between soft and hard credit inquiries. A soft inquiry happens when lenders screen you for preapproved offers and doesn't affect your credit score. When you apply for credit, that's a hard inquiry and affects your credit, typically to a small degree.

However, applying for many credit cards in a short period can significantly impact your credit score. Each hard inquiry can potentially lower your score by a few points, and multiple inquiries in a short time frame may signal to lenders that you're a higher-risk borrower. Therefore, it's best to narrow your choices to a card or two before applying.

Pre-Qualification for Credit Cards

Many credit card issuers offer pre-qualification tools on their websites. Pre-qualification uses a soft inquiry to show you whether you're likely to be approved for a card and what terms you might receive without affecting your credit score. While pre-qualification doesn't guarantee approval, it can help you focus your search on cards you're more likely to get.

Factors to Consider When Choosing a Card

Since fees, interest rates, penalties, and perks can vary widely between cards, here are some factors to consider when looking for the best deal:

Your Credit Score

Knowing your credit score will ensure you apply for the best card possible. As your score increases, costs decrease, and you get more card options like points that can be redeemed for cash or credit towards other services. And for those with poor credit, secured cards can help you rebuild credit, even though no borrowing is involved.

If you don't know your credit score, you have a few options – a free credit score service and a paid service. Websites that offer free scores, like Credit Karma and Credit Sesame, use your personal information to market products to you and don't require a credit card. Other sites, like the credit reporting bureaus, offer "free" scores as part of a credit monitoring service for a monthly fee (after a free trial month). If you don't cancel, you'll get charged. On the other hand, you can pay for your score from myFICO.com for $20 with no recurring charges.

Once you know your score, here's what it means:

• 750-850 Excellent
• 690-749 Good
• 630-689 Fair
• 300-629 Poor

When you search for a card, most offer some description of the expected credit score range. If your credit rating is under the required range, save a hard credit inquiry for other cards with a higher chance of approval.

Your Spending Behavior and Reward Options

Suppose you already have a high credit card balance and tend to carry a balance from month to month. In that case, you'll likely focus on cards with lower interest rates and balance transfer deals.

If you consistently pay your balance in full, you'll want to focus on the perks that matter most to you, from cash back to travel points.

When exploring card options, the cards with the lowest fees and most generous benefits are restricted to those with good to excellent credit. Still, there can be significant differences between cards – no matter your credit score. Some cards may offer extended purchase warranties, trip cancellation coverage, lowest price protection, and more. Not taking advantage of your eligible benefits is like leaving money on the table.

Annual Fees

Another consideration, especially when exploring cards that offer generous benefits, is whether or not the card charges an annual fee. It's crucial to understand whether the benefits provided by the card justify the cost - sometimes several hundred dollars per year. For example, someone who travels often may find airport lounge access worth the fee. But if a fee-based card offers more cash-back than a no-fee card, whether or not it's worth it depends on your annual spending.

Understanding Card Terms and Conditions

Federal law requires that you receive a Federal Truth in Lending Disclosure Statement from any credit card company before you open a credit card account. The statement must include specific account fees, why penalty rates may be applied, and terms applicable when the account is opened. It also tells you all the rules and fees associated with your credit card account.

The Schumer Box

Named after the senator from New York, the Schumer Box is a table that discloses key facts about a credit card, including interest rates, fees, terms, and conditions. It includes:

• The interest rates for purchases, balance transfers, and cash advances
• Any grace period before interest is charged
• How to avoid paying interest
• Minimum charges
• Annual fee
• Transaction fees
• Penalty fees

This box will help you compare cards when shopping for one. It is critical to understand how interest is charged and when penalty fees and interest rate increases are triggered. For cards with similar costs, compare the benefits described in their marketing materials.

While the Schumer Box provides a standardized summary of key terms, it is crucial to read the full terms and conditions of any card you're considering. This document will provide more detailed information about how the card works, your rights and responsibilities as a cardholder, and any additional features or restrictions that may not be covered in the Schumer Box.

Finding and Comparing Credit Cards

There are dozens or even hundreds of credit card comparison websites on the internet, and virtually all of them have one thing in common – they're paid when you sign up for a card they promoted. A credit card may not be listed if it doesn't pay a referral fee. So comparison sites could best be described as "comparing cards for which we're paid a referral fee."

Card comparison sites may offer many options, but what if the best card for you isn't on those websites?

One strategy is to use comparison sites to understand the options available for people with similar credit scores. Then, do something the comparison sites wouldn't expect: contact your bank or credit union. Financial institutions continually compete with one another, so a competitive card offer could be closer than you expect.

Additionally, consider using independent financial websites or tools that don't receive compensation for card recommendations. These can provide more unbiased comparisons and information about different card options.

Remember, the best credit card for you aligns with your spending habits, financial goals, and credit profile. Take the time to research and compare different options, and don't be afraid to ask questions before applying. Your financial health is worth the effort!

Here's one thing many financially successful people share in common: They carefully, sometimes exhaustively, track their saving and spending. On the other hand, those mired in financial trouble often take the opposite tack - they pay little attention to what's incoming and outgoing, sometimes willfully ignoring negative information.

If you're resolving to undertake a New Year's financial tune-up, and you don't fit comfortably within the first category, it's time to make some changes.

The Value of Evaluating Your Data

In today's "Big Data" society, we can't help but leave fumes of data everywhere we go. The websites we visit, the credit cards we use - it all adds up to an enormous amount of information. So massive, in fact, that an MIT study once estimated the average American office worker creates a staggering 1.8 million megabytes of data each year.

All of that data is pure gold for marketers and corporations. It offers precious insights into our preferences and behaviors. There's absolutely no reason why you shouldn't tap the inherent value of your own financial data for your own benefit. By collecting and analyzing your financial information, you can identify and address patterns of problem spending, and create workable solutions to facilitate more saving.

How Do I Gather My Data?

Getting this information is simple. Just visit your bank's website and download all activity for the previous 12 months. Then review your spending and saving activity with a critical eye. Where and when did you spend too much? Are there commonalities between your spending splurges? Did you save consistently? Did you rack up unnecessary fees? If so, how can they be avoided?

Most major banks also have online tools you can use to take a deeper look at your spending habits. Many offer comprehensive money-management dashboards that allow you to track all your activity across every account. Graphs will show you exactly where your money is going, on a percentage basis.

The Spending Tracking Epiphany

For many people, tracking an entire year's worth of spending is an eye-opening experience - almost an epiphany of sorts. For example, you might estimate that you spend $500 each month on food, only to realize you spend more than double that amount. Or you may have no idea how much you're spending on gas or entertainment.

While most of us know exactly what we pay each month for major recurring expenses such as cars or mortgage payments, discretionary spending is typically far murkier. Many times, we simply have no idea what the real scope of our spending is. A thorough 12-month review is one of the best ways to find out.

The Takeaway

If you're aiming for a full financial tune-up, it's critical to have comprehensive and accurate information with which to work. By reviewing your expenditures for the last 12 months, you can get an honest picture of your true spending behavior - and then make any necessary changes.

When it comes to making the most of your job, salary is only part of the picture. The benefits package employers offer is a critically important component - and one that current and prospective employees too often overlook.

To prevent that from happening to you, we've collected some of the most important information to consider when making the most of your job.

The Business of Employee Benefits

For employers and employees, benefits are a two-way street. Workers tend to be happier and more productive when their companies offer a full complement of supplementary benefits. On the other hand, those doing the hiring can more easily compete for talented workers by offering an attractive amount of non-salary compensation.

The most common employee benefit in the U.S., of course, is health insurance. Many people don't realize that employer-based healthcare is a fluke of history. Because of wage controls instituted by the U.S. government during World War II, many companies began offering health insurance as an inducement for new workers. The idea proved so popular that healthcare and employment became inextricably linked after the war ended.

Along with health insurance, private companies have historically offered pension plans to workers as a primary benefit. These defined-benefit pensions aimed to support retired workers by paying them a percentage of their previous income every month after finishing their careers. While defined benefit pensions are typically an excellent financial deal for workers (often requiring little to no employee financial contribution), corporations have been phasing them out for years in favor of a new system - the 401k.

The 401k is similar to a pension except for one crucial thing - it places the responsibility of securing a financially independent retirement on the worker rather than the company. Employees agree to invest a percentage of their yearly salary in a retirement account. They can earn an employer contribution that matches up to a certain percentage.

Like employer-based healthcare, many people assume the 401k has been around forever. It was created in the 1980s by an obscure financial advisor trying to help his clients earn a tax break. The 401k was never designed to be a standard workplace benefit - let alone the default retirement planning option for most workers.

While health insurance and retirement contributions are the most common forms of employee benefits, plenty of other non-salary compensation programs are widely available today. Many firms offer workers expanded maternity and paternity leave or additional vacation time, the opportunity to purchase subsidized life insurance or discounted stock options, and cafeteria plans.

The Takeaway

When considering whether or not to accept a new position, it's essential to look beyond salary figures when weighing the value of an offer or your current job. The right benefits package can help you stay healthy, save for retirement, and enjoy more time away from the office.

And that's a combination sure to benefit anyone.

Many of us seem relatively unconcerned about the potential of being hacked, even though our financial security may depend on it. And that's precisely the mindset hackers count on and profit from. You're at risk if you live any part of your life online (virtually impossible not to these days).

Don't head for the hills to pursue a life "off the grid" just yet. Hackers, like most people, prefer the path of least resistance. They cycle through vast numbers of potential victims, searching for easy marks. That means if you employ even the most basic safeguards, your odds of being hacked diminish considerably.

So, let's talk about how to avoid becoming a victim.

In Praise of Strong Passwords

Here's the inviolable online security rule: always have a strong password that is at least eight characters long. Don't use your nephew's name, your birthday, or anything else with a personal connection.

If you want premium protection, take the password generation task out of your hands and use a password management software application or browser that can automatically generate strong passwords for each of your online accounts. But keep in mind that using a browser for password management, for example, means all your passwords are only as secure as your password for that browser.

For the best protection, use two-step authentication to secure your accounts. This type of authentication requires a password and a code sent to another of your devices - a text to your phone or an email. Suppose you want the current gold standard in account protection. In that case, some services also support using an authentication device that generates new codes every few seconds. Apps like Google Authenticator can be downloaded to your phone, or you can purchase a dedicated authentication device.

Manage Your Data

Don't use an app you downloaded two years ago? Don't let it linger. Consolidate your online presence by deleting accounts that have reached zombie status. The less useless information you have sitting online, the better.

Another best practice is to back up your personal information consistently. You have two basic choices: an external hard drive or a cloud-based service. Both will prevent the awful feeling of losing important files, photos, and personal information.

Adjust Your Behavior

Get a fantastic email offer that seems dubious? Delete it immediately. If the slightest internal alarm bell starts ringing, don't follow through. Phony emails are the bread and butter of hackers and phishers for one reason - they still work.

Attachments bear the same scrutiny. If you need clarification on the sender, never open an attachment. In the worst-case scenario, a hacker can take control of your computer, harvest the data, and use your hardware for nefarious purposes.

It's also wise to pay close attention to what you share on social media and in the cloud. Hackers can use anything you post or say publicly to access your computer or accounts. It's important not to underestimate their skill - even the tiniest scrap of seemingly innocuous information can be leveraged against you.

Staying Safe and Secure

Target. eBay. Bank of America. Snapchat. These names represent just a handful of the entities that have been hacked in the last two years. If it can happen to them, it can happen to you.

That's why it's critical to follow the steps outlined above. We can't guarantee our online security, yet we can give ourselves the best chance to avoid hacking-inspired financial disasters.