THESE 7 TERMS WILL SET YOU ON THE PATH TO FINANCIAL LITERACY

Financial literacy month is nearly over, but there’s no need to quit learning. Financial literacy is a lifelong journey. Since this is the last post about it (at least this month!), let’s introduce some terms you can dive into throughout the year. We didn’t get to cover these in our other posts, but each one can be a springboard into deeper learning that helps you reach your financial goals.

Let’s dive in.

Time Value of Money

You’ve probably heard the old cliché’ that time is money. Well, it’s a cliché because it’s true. Here’s why. $1,000 is worth more today than 20, 30, or 40 years from now. That’s because inflation erodes the value of money. But it is also worth more because it can be invested today and start growing for you. And the longer it remains invested, the better the chance it will keep growing. The money you make 10 years from now won’t be worth as much because it won’t have as much time to grow. So, the Time Value of Money is a foundational principle to remember when saving and investing.

Zero-dollar budgeting

This budgeting concept views every dollar you make as a worker. And every worker has a job and someplace to be every month.

Like any good worker, no dollar sits around all month, wondering where it should go. So, when you make your budget, you dedicate every dollar. You either pay yourself with it, invest it, pay bills and debts with it, or have some fun with it.

Zero-dollar budgeting requires you to make plans, set goals, and make your money work for you.

Tax-advantaged accounts

Tax-advantaged accounts are vehicles that reduce your taxable income immediately or in the future. Most people think of retirement vehicles like a Roth IRA, traditional IRA, or 401k when talking about tax-advantaged accounts. But you can also find such accounts for health care and education. There are many options, so it may be best to speak with a trusted tax adviser to see which are best for your situation.

APR

You’ve probably seen this before, especially when buying a car. But what is APR?

It stands for Annual Percentage Rate and tells you how much it costs to borrow money in a given year. That’s different from just looking at an interest rate because APR can include the cost of things like origination fees. The most important thing to remember is that the lower the APR on a loan, the less it costs to borrow.

To see how much APR can impact the cost of a purchase, try plugging a few numbers into this calculator. The results may surprise you!

Debt to Income Ratio

Your debt-to-income ratio, or DTI, is all your monthly debt payments divided by your gross monthly income. It’s a good barometer of your personal financial health. And that’s why lenders like to use it to assess risk when deciding whether or not to offer a loan.

A manageable DTI for most lenders is between 35% and 40%. That may be good for lenders, but you should keep trying to decrease that number. The lower your DTI, the more income you have for yourself.

You can use this calculator to figure out yours.

The Bottom Line

Being a lifelong learner is key to growing your financial literacy. Use these terms as a vehicle to keep improving yours. The more you know, the better you can reach your financial goals.