Financial‌ ‌Literacy‌ ‌101:‌ ‌
The‌ ‌5‌ ‌ Fundamentals‌

Financial literacy and financial security go hand in hand. While budgeting and retirement savings accounts often come to mind, financial literacy covers so much more. From understanding debt to preventing identity theft, the fundamentals of money management include a variety of areas. Familiarizing yourself with these five key concepts through Park Place Financial can help lessen potential pitfalls on your journey toward investing in a bright future.

1. Credit and Debt

As an ever-changing force in almost any budget, credit and debt are at the core of money management. While debt may seem the same across the board, not all debt is created equal. Your credit score depends on the type of debt accrued and how it’s been managed over time. Common forms of debt include:

• Credit cards
• Medical bills
• Student loans
• Auto loans
• Mortgages

Your credit score is used as proof of trustworthiness to lenders, and it plays a major role in lending. Scores range from 300 to 850, and the higher the score, the more likely you are to get approved for a loan and the more you’ll save in interest. Knowing your credit score can help you plan ahead for major purchases and significant investments.

As a reflection of your account and payment history, this report shows what information credit bureaus consider when calculating a credit score. Every 12 months, you may request a free credit report from AnnualCreditReport.com. In doing so, you can ensure your information is correct and up-to-date.

2. Interest Owed vs. Interest Earned

Interest is a piece of the financial puzzle that can either work with you or against you. When it comes to debts, interest is a small fee charged to the borrower throughout the lifespan of a loan. This fee compensates the lender for the risks of letting you borrow. Two types of interest include:

Simple Interest

Simple interest is calculated as a flat percentage based on the principal balance: Principal x Interest Rate x Time = Total Amount of Interest.

Compound Interest

Compound interest builds over time. It’s calculated based on the principal and previously earned interest: (Principal + Interest Earned) x Interest Rate = Total Amount of Interest for Year X.

On the other hand, interest can benefit you in terms of saving. If you deposit funds into a savings account that accrues interest over time, you’re making money on the principal balance. Harnessing the power of compound interest to your advantage can help you save more in the long run.

3. Time and Money

Successful money management is often linked to time management. Staying on top of the little expenses that add up each week and keeping your big picture in view can help you in the long-term. Along with planting the seeds on a nest egg that will take you through your golden years, setting financial goals and tracking your progress is a great way to start. From apps with helpful tools to a simple spreadsheet, there are several ways to track income and expenses.

In terms of investment planning and saving, it’s never too early to start. TVM (Time Value of Money) refers to the earning potential your nest egg has over time and depends on a variety of factors, such as:

• Future value
• Present value
• Interest rate
• Number of compounding periods
• Total number of years

In deciding which financial plans to make, TVM is used to help determine how to maximize returns in the long run.

4. Purchase Power and Inflation

Just like interest, inflation can either work with you or against you. The rate at which the value of money falls over time relative to the rising value of goods and services is known as inflation. That means the power of your dollar today may not be as great in the future. There are three types of inflation:

• Built-In Inflation: Rising prices cause wages to rise to maintain living costs
• Demand-Pull Effect: The demand for goods/services exceeds production capacity
• Cost-Push Effect: The cost of production increases prices

In calculating the rate of return on your investments, considering inflation will give you a realistic value. For example, if you earned 5% on your investment and inflation was 2%, the rate you actually earned was 3%. On the other hand, someone who owns property, stocks, and other tangible assets may look forward to a little inflation because these assets can potentially be sold at a higher price than originally purchased.

5. Credit and Debt Identity Theft and Digital Financial Security

Today, smart financial planning is often linked to smart account management. Banking, shopping, bill pay, stock trading: it can all be done at home or on the go. As convenient as this is, digital money management isn’t without its fair share of risks. There are many ways to protect your assets, including:

• Closely monitor bank and credit card statements for evidence of fraud
• Take advantage of instant transaction alerts via text and email
• Use a password manager to create and store complex passwords
• Shred financial documents with personal information
• Use a digital wallet for online transactions
• Invest in identity theft protection
• Annually monitor your credit report

Accidents may happen, even when care is taken to protect against identity theft. Still, taking steps to defend yourself can provide more than just peace of mind.

Invest in Your Future

With these fundamentals of financial literacy in mind, you can look forward to a brighter future. Are you confident in your overall financial well-being? Receive your complimentary financial checkup from Park Place Financial in Bellaire, Texas to learn more. From financial plans to everyday money management, make our team of professionals part of your strategy for success. Contact us for a consultation.