Financial Literacy Month

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At InFirst, we believe that our mission goes deeper than providing stellar products and services to our members. In fact, what we offer our members more than anything else is education. A staggering amount of adults in the U.S. are financially illiterate, meaning that they may not know how to manage their money or balance a “checkbook”. Lack of financial education leads to poor decisions that can cost you a LOT more than you realize. Let’s take a deep dive into financial literacy facts and tips that you need to know! Bonus – when you know better, you do better. You can help your loved ones with these skills so they start off on the right financial foot!

Budgeting and Saving Money

In my household budgeting series, I took readers on an in-depth tour of how to set up a budget that included expected and unexpected items. For a crash course in all things budgeting, I highly recommend going back and reading those posts. You can find them here, here, and here. Having a well-rounded budget is the first step to solid financial footing. While you can make your budget sheet as detailed as you want it to be, it should include ALL of your expenses, ALL of your income, and your savings. Be sure to include a separate emergency savings fund.

Your emergency savings should have its own unique line item. Financial experts suggest you aim to have a minimum of $1,000 in this section. You can eventually work up to saving three to six months of expenses to cover a more serious emergency. Remember – an emergency savings fund isn’t meant to cover your daily coffee expense. It is truly for real emergencies.

You should also be planning retirement savings and saving for other goals throughout the year. Your annual vacation, holiday expenses, new car fund – all of that should be included. Need more incentive to create your budget worksheet? Studies show that writing down a goal makes you 42% more likely to achieve it! I don’t know about you, but I like those odds. J

Living paycheck to paycheck? Don’t get discouraged. Look for other ways to save. Can you trim money from your grocery budget by using coupons or cash back apps? What about switching your car insurance to a different provider for savings? Your budget needs to work for YOU. If that means you can only spare $5 per pay, then save that $5. Don’t get trapped in the mindset that you can’t save, or shouldn’t save, if it’s a small amount. Every little bit adds up! $5 x 26 pays = $130.

Interest Rates – the good, the bad, and the ugly

Speaking of adding up, let’s chat about interest rates. As consumers, we are all familiar with the concept of interest.  What is interest? It is money that is paid in return for money borrowed. You will earn interest (or dividends) from your credit union when you have a savings account. This is because the institution is using collective funds to operate. In return for placing your funds with them, they repay the favor in interest. Even better, the longer your money stays put, the more interest it earns.

Compounding is your friend - you will earn interest on the interest already earned. On the other end of the spectrum, there is interest on the debt. This is the same concept, except in reverse. The consumer pays interest on the money lent to them.

Loans may have a fixed interest rate – your auto loan, for instance, is a fixed rate for the term of repayment. This means for the entire loan contract, you will pay one interest rate. Variable rates, on the other hand, change with the market. This means that your rate may be 10% now, but may jump to 15% or more in the future. You often see this with credit cards.

When you carry a balance on your credit card month after month, you are paying interest on the purchases from the date of the transaction. It adds up fast! Here’s a not-so-fun fact - your minimum monthly payment is based on your existing balance. If your outstanding credit card balance increases with new purchases, the payment will increase based on the terms of your credit card agreement. If you are not in a position to pay off the outstanding balance on a monthly basis (and most of us aren’t), then aim or set a goal or strive to pay more than the minimum monthly payment so you can pay it off sooner and ultimately pay less back in interest.

Loan interest is not inherently bad. Repaying a loan will help you build, establish, and improve your credit score. In fact, you want your credit report to show a repayment history on secured and unsecured installment loans, and revolving debt.  So, debt in and of itself CAN be a good thing!

Important considerations on debt include:

• Can you afford the monthly obligation?

• If it is for a credit card, are you able to pay the balance off each month to avoid accruing interest?

• Are you being charged the most favorable interest rate for your creditworthiness?

• Will an additional credit inquiry help or hurt you?

• You will ALWAYS get a better deal by going to your credit union for your lending needs.

Since we have covered the good and the bad of interest rates, we have to talk about the ugly. Predatory lenders are alllllllll over the country, and they are just waiting for unsuspecting consumers to approach them for a loan. Watch out for obscenely high interest rates (over 30% in some cases), pressure tactics, collateral agreements that don’t make sense for the request, and payday loans in general.

Remember how I mentioned that you will always get a better deal with your credit union? That’s because credit unions actually have your best interests in mind. As a not-for-profit institution, we are not incentivized for charging higher rates or up-charging unnecessary items. It should also be noted that legally, credit unions cannot charge more than 18% interest, so seeing a higher number than that should be a red flag. Of course, you could just avoid all of that hassle and go to your credit union first.

One last note about debt. It’s cyclical, which makes it nearly impossible to get out of. You borrow money, you pay it back and usually end up needing more and more. Utilizing financial literacy tools will help you finally break free. Once you have used it to your advantage (to build or improve credit – or simply to benefit from credit card rewards points), you can leave it behind by implementing a debt repayment plan into your budget. Research the snowball method, the avalanche method, or come up with your own plan to get out of debt. Once you are free from debt, you have more money to save or do what you want without that hanging over your head!

If you need a little extra help with your budget or breaking the cycle of debt, call one of our certified financial counselors. That’s what we are here for!

I want to hear from you! Leave a comment below, or email me.

Krista Kyte is a personal finance blogger and personal banker with over 18 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.