In 2003, the United States Senate designated April as Financial Literacy for Youth Month. In March 2004 the Senate unanimously passed Resolution 316 that officially recognized April as National Financial Literacy Month. This law emphasizes the importance of every American understanding financial basics and terms.
Scott wants to cast a vote for national cake month or peanut butter month. But all joking aside, we understand there is a sizable problem with financial literacy in our nation. And that knowledge gap holds people back. It really is hard to get ahead in this life if you don’t understand the financial basics and terms.
Trying to benefit from your hard-earned dollars without understanding financial basics and terms is like trying to play lacrosse with a soccer ball and a baseball glove. You have to understand the rules of the game in order to score.
Nearly 25,000 people from all 50 states have completed the National Financial Literacy Test – a 30-question test designed to measure participants’ ability to earn, save, and grow their money.
Ave score for:
10-14 yrs of age: 55%
15-18 yrs: 61%
(Link to the test at the bottom of this article.)
Those scores indicate that Americans are, at best, getting a “C” grade. A 77% is a passing grade, but, definitely not stellar. So let’s dive into some financial basics and terms to raise that grade to an “A”.
We could spend weeks and weeks on each of these topics, but the purpose of this article is to define a few terms and discuss some areas of importance regarding your money.
1. Credit term: FICO
Your credit score is a number that lenders will use before they extend credit to you and may also use it to determine your rate of credit. No surprise, you want a good credit score. And you want to check in on your score a couple of times a year.
Don’t be like your freshman who checks their grades the week of finals and then thinks there may be some way to magically raise it three letter grades.
We check our credit score every six months and would encourage you to do the same.
If you are just starting out, it is a good strategy is to establish some good credit. Open a credit card (not twenty of them). Pay it off each month to establish good credit. If your bills get ahead of you and balances go unpaid, your credit starts to head in the wrong direction.
It is super important to build your credit and to improve it. Credit scores range from 300-850. If you’re 800+ you’re a rockstar.
The great news is as a nation we are improving our credit scores. Americans are improving their track record of paying bills on time and not using all the credit available to them. So there’s an A+.
Check your score at least each year and discuss it with your spouse. You could use the reminder of April 15th to check your score each year. We all already associate that day with money so jot yourself a note to check on your credit score.
2. Debt term: APR
Any kind of debt you have, i.e. mortgage, credit card, line of credit, etc. all have an APR attached. APR stands for Annual percentage rate.
A credit card’s interest rate is, basically, the price you pay for borrowing money. For credit cards, the interest rates are typically stated as a yearly rate the APR.
They change APR’s often. If you carry a balance on your credit card, you can often call get the APR decreased, saving you money. The APR makes a big difference along the way. If they won’t lower your APR consider shopping around for a different (read: better) credit card.
Debt is no fun, but it’s not fatal either. Remember your relationship is worth far more than any unpaid pile of bills. Work together and you can dig out. We did.
3. Investing term: Beta
Beta is the measurement of risk in an investment. For example, one investment option has a beta of 1.2 and one has a beta of 0.8. The higher beta is more aggressive so in this example 1.2 is a more aggressive or “risky” investment.
Investopedia explains, “A beta of 1 indicates that the security’s price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security’s price is theoretically more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.”
Look for beta next time you evaluate your investment choices, or just use it as a word to throw around at parties.
4. Retirement term: IRA
A traditional individual retirement account (IRA) allows individuals to direct pretax income towards investments that can grow tax-deferred; no capital gains or dividend income is taxed until it is withdrawn.
The government established laws that assist us and encourage us to save, like a traditional IRA, a Roth IRA, 401 (k), 403 (b).
Think of your 401 (k) or IRA as an envelope that holds investments. The IRA really isn’t the investment, but what’s “inside” it. The law gives you an envelope that holds the investment. You can put different types of investments inside the tax code instrument. The envelope carries the investment so performance is affected by the combination and success of the items included in it.
If someone says, “My IRA investment is going up.” They are referring to the performance of the investments inside their Individual Retirement Account.
Investing well involves a lot of information so we’ve just started scratching the surface here, but maybe you use this as an encouragement to scratch your itch of learning more about investing.
5. Insurance term: Disability
There are over 200 insurance terms listed on the National Association of Insurance Commissioners website so we won’t try to cover even a fraction of them here.
Two common terms that cause confusion with insurance occurs between understanding the difference between long-term care insurance and disability insurance.
At a high level: Long-term care insurance covers you when you lose two activities of daily use, i.e. eating, bathing. Disability means you are disabled from working.
The phrase long-term care refers to the help people with chronic illnesses, disabilities, or other conditions need on a daily basis over an extended. The type of help needed can range from assistance with simple activities (such as bathing, dressing and eating) to skilled care that’s provided by nurses, therapists, or other professionals.
Disability Income is a program managed by the Social Security Administration that insures a worker in case of a mishap. It offers income protection to individuals who become disabled for a long period of time, and as a result can no longer work during that time period.
Hours and days and months could be spent explaining all the types of insurance available, but always remember this: Know what product is taking care of what need.
Sometimes people end up buying a larger product than they need with too many riders, etc. Buy policy that covers exactly what you want covered and no more.
You really need someone who you can trust. One product won’t cover all. Don’t get too much. Check around for cost there are lots of options out there. Never let someone pressure you into any type of insurance using scare tactics or strong arm. Take a breath and don’t sign anything until you know it’s what you need and you feel good about it.
So how did you do with the financial basics and terms? Would you get an “A”?
Would you like to try your hand at the Financial Educators’ Council test? We have faith in you.
If you have questions about or would like more info on any of these topics or other financial basics and terms, just email us. Have a fun term you’d like to share? Type it in the comments section.
Scott & Bethany Palmer
The Money Couple