If you went through the US school system, chances are you’re familiar with fundamental courses like English, maths, science, or language. But, unless you made an effort to seek out financial education on your own, you most likely weren’t introduced to money basics like budgeting and saving while studying in school.
Considering how often we’re faced with money decisions on a daily basis, it’s pretty surprising that personal finance isn’t part of the curriculum. In fact, 84.5% of Americans agree that financial literacy should be taught in schools, yet the topic still rarely makes it into the classroom.
Whether you could use a personal finance refresher or you’re interested in improving financial literacy for your family, here are some important facts about money that you won’t find in the textbooks.
1. Budgets can make your life easier
Learning how to manage money can be overwhelming at best. But setting a budget can be life-changing. At the most basic level, a budget is any type of plan for how you’ll spend your money each month so that you can stay in control of your financial decisions.
Here are a few ways you can create your first budget:
- Download a free budgeting app
- Create your own spreadsheet, or use one of these free templates
- Write it down with a good ‘ole pen and paper
There are also different approaches to budgeting, like using the cash envelope system and zero-based budgeting. But what matters most is finding a system and a style that works for you and sticking to it.
The Lesson: Making your budget work is so much easier when you’re using a bank account to keep track of your income and spending.
2. Saving and investing are not the same
When you save money, you typically do it with a bank account. Your money earns interest and you can tap into it when you need it. Since bank accounts are low-risk, that means there’s very little chance of losing the money you’re put in. In turn, opening a savings account is a great way to start building an emergency fund or save for a long-term goal, like buying a home.
Investing money, on the other hand, means putting it into the stock market. You don’t necessarily have to buy stocks; you can also invest in mutual funds, bonds, real estate and other securities. In this case, your money has a chance to grow and that growth can potentially outstrip what you’d get with a regular savings account. That’s good if you’re putting money away for the long-term, say, in a retirement account. The trade-off is that investing is riskier than just saving since you can’t predict what the market will do.
The Lesson: Saving and investing can both play a part in your financial education and plan. But it’s important to understand how they’re different and where they fit in when it comes to achieving your money goals.
3. It pays to be the early bird
If there’s one fact about money you should master sooner, rather than later, it’s that time is really on your side when saving or investing. That’s because the longer you have to put money away, the more you can benefit from the power of compounding interest.
Compounding interest means interest that you earn on your interest. Say you open a savings account with $1,000 and add $100 to it every month. Your account earns a 1.00% APY, with interest compounding monthly. After 10 years, your savings would grow to more than $13,700.
The magic of compounding interest becomes even more important when you start investing money for retirement. Let’s assume you’re 28 years old. You decide to open a Roth IRA and contribute $6,000 to it each year, with a goal of retiring at age 68.
If you keep contributing that same $6,000 annually and earn a 7% annual return, you’d have $1.28 million when you retire. Now, assume that you wait until age 38 to start saving that same amount. Delaying your investments by a decade cuts your retirement nest egg in half, to just $606,000. The Lesson: Getting a head start on saving and investing, even if it’s just $50 or $100 a month, can put you well ahead of the game financially the longer your money has to compound.
4. All debts aren't created equal
Debt is something you may learn about in your financial education the hard way. You open a credit card to try and build your credit score, for example, and before you know it you’ve racked up a huge balance. Or you took out student loans to pay for school without understanding how repayment would work once you graduated.
One of the most important facts about money to know about debt is that not all debt is bad debt. While credit cards and payday loans typically fall in the bad debt category owing to their higher interest rates, things like student loans or a mortgage are usually considered good debt.
That’s because these debts either have low interest rates, are used to fund some type of investment in yourself, or both. Taking out student loans to pay for school, for instance, could be beneficial if it helps you earn a degree that eventually lands you a high-paying job. No matter what kind of debt you’re managing, keep these tips in mind:
- Pay your bills on time or early every month.
- Aim to keep the balances on your credit cards as low as possible.
- Keep older credit accounts open.
- Don’t apply for new credit too often.
- It’s okay to use different types of credit (i.e. loans, credit cards) if you’re using them responsibly.
Following those guidelines can help you build a better credit score and keep you from ending up buried in debt. Also, consider where something like Chime’s Credit Builder credit card might fit in the picture for establishing and growing your credit score over time if you’re just getting started with using credit.
The Lesson: How you manage your debt matters because it directly affects your credit score, which can impact your ability to borrow money, get utilities in your name, or even rent an apartment.
5. A 9 to 5 job isn't the only way to make money
Here’s a money myth you might have heard: You need a good job to be financially successful.
While landing a good job is a sure bet for your finances, it’s also important to keep in mind that it’s not the only way to make money. Starting a side hustle, for example, has become an extremely popular way to earn extra income to grow savings, pay down debt, or just cover the bills. There are side hustles you can do from home or outside your home, depending on your skills, interests and how much time you have to commit.
And starting a side hustle (or two, or three) can be even more valuable if you’re worried about being financially impacted by a job loss or layoff. While unemployment benefits can close the income gap temporarily, a side gig could keep you going financially until you’re able to get another full-time job.
The Lesson: There’s more than one path to making money. Explore all your options.
Financial education is an ongoing process
Learning these facts about money is a good starting point, but it’s key to remember that increasing financial literacy can be a lifelong process. The more you educate yourself about money, what to do with it, and what to avoid, the more you’ll know how to manage it. And over time, that knowledge can pay dividends when it comes to increasing your savings, reducing debt, and building a strong financial foundation for the future.