5 Easy Things You Can Do For Financial Literacy Month: Home Edition

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In March 2004, the Senate passed Resolution 316 that officially recognized April as National Financial Literacy Month. Financial Literacy is the ability to understand how money works in the world and is mostly associated with personal finance. To be truly financially literate, one must have the knowledge to make the right decisions when it comes to real estate, insurance, investing, savings, tax planning and retirement. You must also be able to handle your personal finances — like using a credit card wisely — and understanding your rights as a consumer when it comes to loans and investments.

It’s a well-known fact that most Americans are woefully undereducated when it comes to the topic of money. This is illustrated by our consumer debt problem: Americans owe $11.52 trillion to lenders and creditors. Many Americans are worried about retirement; 38% of adults are concerned about being able to retire at all. Not much is being done about the problem: only 17 states require a course in personal finance for kids in high school. In 2012, 30,000 teenagers from 198 countries took part in a test of financial literacy. One in 6 American teenagers failed to reach the baseline of proficiency. (By the way, the city of Shanghai in China scored the highest average in the test.)

There are many steps you can take to gain financial literacy, but here are 5 easy ones:

Pay Yourself First

A lack of savings is at the root of many financial problems. When emergencies arise, like car repairs or unexpected medical expenses, if you don’t have any savings, you are susceptible to payday or title loans, or living off of a credit card, both of which dig you into a hole financially.

There are four types of savings, one for emergencies, one for retirement, one for kids’ college and short term ones for the things you would like to have like travel, cars, jewelry, furniture or electronics. If you’re already tight on money, this may sound like a lot of savings to have. Start small with one kind of account — for emergencies — and you’ll find that it becomes a habit that you can apply towards other types of savings. It’s surprising, but once you automatically put that money away every month you’ll be surprised by how much you don’t miss it. The younger you are when you start to save, the sooner you’ll be financially independent.

Make One Extra House Payment A Year

By just making one extra payment on your mortgage a year, you can shorten your mortgage by 5 years. What this equates to in actual savings? If you have a $200,000 mortgage, at a rate of 4.5% interest, your payment is $1013.37. If you make one extra payment, that’s about $85 extra per month, you will save $27,843 dollars over the life of the loan. Bankrate.com has an additional mortgage payment calculator you can use to play with the numbers.

Auto Pay Your Accounts

If you’re like most people, you lead a busy life. Everyone forgets to pay their bills once and awhile and even if you always pay early enough to avoid late payments on your credit report (defined as being more than 30 days past your billing statement), you will be hit with hefty fines (up to $37) each time you miss the due date and you could also see your interest rates rise if you pay late often enough. The average credit card interest rate, even for those with good credit is 15%. Penalty interest rates can range as much as 29%, so if you cannot pay down your entire balance each month you can find yourself paying lots of extra interest each month once you enter this cycle. If you auto pay your accounts each month, you’ll never be late and never face those fines and extra interest charges.

If you actually do pay late enough to see the lates reported to the credit bureaus, starting auto pay now can help repair your bruised credit.   Late payments hurt the most in the first two years they are recorded on your credit report. A recent history of on time payments can really boost your score.

Banks want you to be responsible, so they make setting up auto-payments easy. If you have an online bank account, there will be a way to set up payments to many recipients. Any bill that is reoccurring can be set up with auto pay: you can pay utility companies, mortgage companies and credit card companies for example, and most companies allow this option.

Pay Down Your Debts

When most people talk about their debts, they are talking about credit cards or student loans. While student loans are technically classified as “good debt” (meaning the debt helps you to earn money), credit cards are not. Your credit utilization rate, or the amount of credit used divided by your credit limit plays a large part in your credit score. You can lose 25 to 45 points if you max out a credit card.  Most credit experts like to see a credit card utilization rate in the neighborhood of 10-25%. Lower credit scores can cost you money in the way of higher interest, inaccessibility to good rewards credit card programs, higher interest, even the possibility of losing out on a job to another candidate with a better credit score.

Student loan debt can also be crippling, though not because of the interest rates. The interest rates average 4.6% for undergraduate students and 7.2% for graduate students and parents. However, the debt can be crippling as the repayment period is short: student loan repayment period is 10 years as compared to a 15 or 30 year mortgage. The shorter the repayment period, the higher is the payment. The average student loan debt is about $28,950 for college seniors. The faster you can repay your debt down, the more money you save and the more you will have to throw towards a savings plan. Staying out of debt is a kind of savings.

Limit the Use of Credit Cards

It’s fine to have credit cards and use them, but if not used properly, you can get into a lot of trouble with them. In addition to lower credit scores, credit cards can keep you in a spiral of debt. If you can’t pay off your balance every month, you are going to get hit with interest charges that are outrageous. In contrast, the stock market pays an average of 10% over the long term and savings accounts are still paying the incredible low rates of under 2%. Paying this kind of interest is going to put you in the hole fast and keep you from putting that money towards savings and retirement.

Related Articles: 

Get Smart About Credit: What to Know Before Buying a Home

Home-Buyers: Fast Ways to Save for a Down Payment

Posted in Mortgages
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