Financial literacy 101: A crash course in personal finance

According to a study from the National Endowment for Financial Education, only 24 percent of millennials demonstrate basic financial literacy. Since April is Financial Literacy Month, this is an opportune time for young adults to get their financial knowledge in check with a crash course in personal finance. For those who need to sharpen their basic money management skills, here are a few money lessons to help brush up on their personal finance knowledge.

Saving vs. investing

Saving and investing play very different roles in one’s overall financial plan. Saving money is the process of putting cash into a liquid account, using it freely without being impacted by the stock market. It’s crucial to save money in an emergency fund, which is a safety net of funds used in the case of any unexpected emergencies. Investing, on the other hand, is the process of using money to buy an asset that may generate an acceptable rate of return over time, with the desire to build up wealth. These investments may be impacted by market volatility, and are usually backed by a safety net. When deciding whether to save or invest, investing should involve a longer term horizon to weather the ups and downs of the financial markets. Savings accounts should be deposited into non-volatile instruments like Money Markets.

Retirement savings accounts

Aside from the common 401(k) program, traditional and Roth IRA’s are investment vehicles that can help investors set themselves up for financial success in retirement. A traditional IRA is one in which earnings grow tax deferred and taxes are paid on investment gains only when withdrawals are made in retirement. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

Forms of debt

The word debt has a seemingly negative connotation, however there is both good and bad debt. Good debt is an investment that will grow in value or generate long-term income, for example student loans. Bad debt is debt that was used to purchase items that lose value and carry a high interest rate, such as credit cards or payday loans. One way consumers can avoid bad debt is to not spend money on items or experiences they can’t afford.

By having a solid understanding of these three financial concepts, investors can set themselves up for future financial success.