What is financial literacy?

The ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well being.
2008 Annual Report, President’s Advisory Council on Financial Capability

Budgets

A budget is one of the most important financial documents you can have. Not only do budgets help you from spending beyond your means, but they serve as a helpful tool when it comes to knowing where your money is going. When budgets are used properly, they help you identify where you are spending too much and draw your attention to where you can make changes.

Budgets can come in a number of forms. It is important to figure out what is a good fit for you so that it becomes something that is easy for you to use. Mint.com is a free online program (also available for your phone) that will track and display your income and expenses in a graph.

Identify what your income and expenses are; which expenses are fixed (rent, utilities, insurance) and variable (groceries, clothes, entertainment). Also determine which of your expenses are for items that are needs (housing, food) versus wants (entertainment, travel).

Plan for vacation and special occasions spending – make a list and figure how much money you can reasonably spend and stick to it.

If your expenses are greater than your income you will need to generate more income, cut expenses or a combination of both. When cutting expenses, look at your wants first and items such as coffee on the way to work, eating lunch out or stopping at a fast food place for a quick dinner.

Monitor your budget periodically and make changes when necessary.

Prioritize your debt – pay debts on time to establish good credit; consolidate student loans to help lower monthly payments; change your federal student loans from fixed term to income-based repayment (IBR); pay more than minimum on credit cards; pay off credit cards with highest interest rate first.

Review insurance coverage – rental insurance for personal property, health insurance if not covered by parents, car insurance, if married or you have dependents life insurance to help protect them if something happens to you.

Plan for future – make it a habit to save regularly, try to have savings to cover at least three to six months’ worth of expenses in case of an emergency, take advantage of any employer-sponsored retirement plans you can participate in.

Bank accounts

Bank accounts are a great way to exercise effective cash management. But with so many options out there, identifying the best type of account can be difficult and sometimes overwhelming. It is important that you research and find the best type of account for you.

Here are some things to think about as you research various types of banking accounts:

  • Interest rates
  • Online banking features
  • ATM fees
  • Deposit options
  • Fees and requirements
  • Convenience of locations
  • Overdraft protection
  • Reward points for card use

For help determining the best type of account for you, download the Basics to Banking worksheet.

Credit

When used correctly, credit can be a great tool in financial planning when it comes to reaching financial goals. When used incorrectly, poor credit can be devastating to your finances and your financial well-being. Credit is a contractual agreement whereby a borrower receives something of value in agreement to pay the lender at a future date. Once credit has been accepted it becomes debt. People acquire credit by making promises to pay in the future for something they receive in the present.

With maintaining a good credit score, the objective is simple – to show prospective creditors, employers, or anybody else who might look at your credit that you are responsible when it comes to your spending.

Ways to start building credit include:

  • Open a savings and checking account so that you can demonstrate a history of deposits, withdrawals, and transfers.
  • Have a utility bill put in your name. This can include a phone bill, an electric bill, or even your cable bill.
  • Apply for a gasoline card. They are fairly easy to get and it is fairly easy to plan for how much you will need to pay each month.

Credit cards

When used responsibly credit cards can be a valuable tool to help you with managing your money and establishing credit. Credit cards provide short-term loans. When you use your card to purchase an item whether coffee, a quick lunch or a new pair of jeans, the credit card company pays the retailer right away then gives you time – usually a month – to pay them back. You are legally bound to pay back that loan or debt.

If you fail to pay the balance in full each month, your credit card issuer will charge you interest on the balance you have spent. If you pay your balance in full each month before the due date, the card can be used as an interest-free loan.

Advantages

  • Convenience
  • Credit card statements can help you track your spending
  • Incentives and rewards earned
  • Help build your credit score

Disadvantages

  • Easy to spend beyond your means
  • Fees if not paid on time or paid off each month
  • If you only make the minimum monthly payment which is a small fraction of what you owe, the balance will accrue interest and cost you more over time
  • Fees for cash advances
  • High interest rates

Credit scores

The more you know about how your credit score is calculated, the easier it becomes to improve your score and build good credit. A higher credit score means that your credit applications are more likely to be approved, and with more favorable interest rates. In some states, credit scores can influence how prospective employers evaluate job applications, how insurance companies assess risk, and how landlords approve rental applications.

Many mortgage companies and lending institutions rely on the FICO® credit scoring system as a fast and reliable way to determine your credit worthiness. All three major credit reporting bureaus (Equifax, Experian, TransUnion) use the same basic formula to calculate your score, but with slight variations that can result in different numbers. This is why you should occasionally check your credit report with each of the major bureaus and investigate anything that doesn’t look right.

When you understand the basic formula, you can take simple steps that will ultimately result in a higher credit score, often within six-to-eight months. FICO® Credit Scores are calculated from information readily available on your credit report. The formula relies on five categories of credit data that varies in importance for different credit profiles.

The percentages below are based on the five categories for the general population.

  • 35% Payment History
  • 30% Amount Owed
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Types of Credit in Use

To obtain a free copy of your credit report from each of the major bureaus go to http://www.annualcreditreport.com. You are entitled to one free copy a year, after which a small fee applies for additional requests. Your credit report and your credit score are not the same thing. Your credit report is all the information that a credit reporting company has gathered about you. The credit reporting companies calculate your credit score by using the information in your credit report into their credit score formula. Federal law gives you the right to ask for a copy of your credit report from each nationwide credit reporting company every year for free. However, the law does not require the credit reporting companies to give your credit score for free.

FAFSA resources

Filling out the FAFSA each year is the first step in applying for financial aid. We’ve put together a list of resources to help you in completing the FAFSA.

Identity protection

Identity theft is a term which refers to the illegal use of an individual’s personal data. This can mean anything from the use of another person’s credit card number to the creation of a new account in another person’s name.

Some things to remember when it comes to releasing your information to others:

  • Don’t ever give any personal identification to strangers. NEVER give anybody your social security number. Only carry your social security card when it is absolutely necessary.
  • Don’t respond to emails that ask you for any financial information.
  • Keep track of your wallet, credit cards, and card numbers. Don’t ever leave them in a place where their safety can be compromised.
  • Sometimes credit card companies will send you a pre-approved card in the mail. Don’t just throw this away- make sure you cut it up or shred it! Somebody can fill out the information in your name. Make sure you also shred any documents that contain financial information.

Potential warning signs for identity theft include:

  • Bills not arriving on time.
  • Credit card information (such as statements or bills) for cards that you don’t use.
  • Credit being denied for no apparent reason.
  • Bills or receipts for things that you did not purchase.

Learn more about Identity Theft & Protection from the Federal Trade Commission.

Additional resources

There are many additional resources online to help you gain a greater understanding of financial literacy. Just a few are listed below.

  • 360 Degrees of Financial Literacy – general financial topics from the American Institute of CPAs
  • Banking on Our Future – a financial literacy program developed by U of Pittsburgh through the Operation Hope project.
  • Budgeting – Federal Student Aid – learn how budgeting can help you manage your finances so you can complete your degree.
  • Cash Course – Your Real Life Money Guide– your guide to making informed financial choices.
  • College Reality Check – the Chronicle of Higher Education’s website on Your Education Your Investment.
  • DallasFed.org – a personal finance education resource created by the Federal Reserve Bank of Dallas
  • Love Your Money – provides you with the tools you need to manage money, set goals, save, and invest wisely.
  • MyMoney.gov – the U.S. government’s website for the basics of financial literacy
  • Student Debt Repayment Assistant – a student loan financial information/facts site to help you estimate your debt load at graduation and assess your options for repayment from the Consumer Financial Protection Bureau
  • YouCanDealWithIt.com – a public service of PHEAA with practical money management, effective handling of credit cards, understanding student aid and the repayment of student loans