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April Is Financial Literacy Month. Do You Have These 5 Finance Basics Down? Thumbnail

April Is Financial Literacy Month. Do You Have These 5 Finance Basics Down?

Working with a trusted financial professional is important when it comes to strategizing and preparing to meet your financial goals. But as most of us handle money on a daily basis, it’s important to have an in-depth understanding of the fundamentals of financial literacy. Below we’ve identified five financial basics everyone should know. Understanding these important concepts can serve as a basis for your financial standings.

Basics #1: Debt & Credit Scores

Understanding the ways in which credit or debt can work with or against you should serve as the foundation of your financial knowledge. First and foremost, it's not wise to avoid credit or debt altogether out of fear or intimidation. Instead, it’s important to have a firm grasp on your financial standings and a plan for tackling debt responsibly.

Debt

When used correctly, debt can be useful. But when misused, it can spiral out of control fast. Missed payments can accrue interest or penalties and may impact your credit score in a negative way. Debt that is managed responsibly can help you reach important goals like buying a car, purchasing a home, going to college, starting a business and more. 

Credit Score 

Your credit score is one of the factors lenders use to judge your trustworthiness and qualification for mortgages, auto loans and other lending opportunities. Landlords and employers may also check your credit before renting to you or offering you a job. Your credit score is dependent on a number of factors including previous credit history, current debts, history of payments and more.

Basics #2: Interest

There are two sides to interest that can make it a tricky concept to grasp - interest accrued on debt and interest accrued on savings.

When you take on debt (like credit card debt, an auto loan or mortgage), you’ll be responsible for paying back both the principal amount and the interest accrued on the loan. The interest is how a lender makes money on the loan and provides the borrower with an incentive to pay the loan back in full and on time.

When you have a savings account that accrues interest, the interest earned gets added to the principal. Then, interest is earned on the new, larger principal, and the cycle repeats. This is called compounding interest, and it can be an integral part in growing your retirement savings - as the longer the interest has to compound, the greater the savings will grow.

Basics #3: The Value of Time

As a general rule of thumb, it’s never too early to start saving - for retirement, homebuying, a child’s education or whatever could be coming down the line. The earlier you start saving, the more you’ll be able to tuck away over time - especially with the power of compounding interest. This leverages the value of time to your advantage.

Basics #4: Inflation

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. Below are two important concepts to remember regarding inflation.

Cash in a Mattress

Keeping all your cash under a mattress is not only unsafe, it literally costs you money. Assuming the annual rate of inflation is a hypothetical two percent, every dollar you keep under your mattress and not earning interest would shrink in value to $.98 next year.

Rate of Return

Because inflation erodes the purchasing power of your money, any returns you earn on your accounts may not be the “real” rate of return. If your account earned a hypothetical six percent rate of return over the last year, but inflation was 1.5 percent, your real rate of return was 4.5 percent.

Basics #5: Identity Theft & Safety

Especially as the world shifts to doing everything virtually, identity theft remains one of the biggest threats to financial and personal security. A cracked password or misplaced Social Security number can have big consequences on your current and future finances.

The common wisdom is to use a unique password for each site or service you use. A password manager can make this easier by generating and storing strong passwords automatically.

While this is a brief overview of some important financial basics, it’s important to work with your trusted financial professional to explore these topics further. Remember to reach out if you have questions about any financial basics, and take this month to reevaluate your current financial knowledge as you identify potential areas for improvement.

Click here to schedule a call with a BWC advisor today.

The information presented in this article is obtained from or based on sources believed to be reliable. BWC does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this article. The article does not purport to contain all the information that an interested party may desire and, in fact, provides only a limited view. Information presented does not constitute an offer to sell or a solicitation of an offer to buy any security.

All investments involve risk, including loss of principal invested. Past Performance does not guarantee future performance. Individual client accounts and performance vary. BWC does not provide tax advice.

About Beirne Wealth Consulting Services, LLC – www.beirnewealth.com

Beirne Wealth Consulting Services, LLC (“BWC”) is a privately owned, SEC Registered Investment Advisor with offices in Connecticut and Pennsylvania. BWC provides independent, fee-based investment management services and customized financial planning solutions. Our institutional business provides consulting expertise to defined benefit and defined contribution plans, endowments, foundations and non-profit organizations. Our private clients include high net-worth individuals and prominent families, many of whom bring complex wealth management challenges and multigenerational planning needs. For more information, please visit www.beirnewealth.com or give us a call today at 888-231-6372.

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