Starting from scratch.
Americans tend to score poorly on financial literacy tests, but it's not entirely their fault: School systems don't generally require personal finance classes, and many parents feel ill-equipped to pass on big lessons about spending, saving and investing to their kids. Here are 10 basic tenets you should know in order to navigate today's financial world:
You have to earn more than you spend.
At the end of the day, you have to earn more than you're spending in order to come out ahead. Sure, short-term loans and credit card debt can get you through a crunch period, but on average, you have to bring in more than you're shelling out to stay solvent.
Saving early will help you save more.
You probably remember hearing about compound interest back in elementary school. The gist is that the earlier you start putting money away -- for retirement, a house or just an emergency fund -- then the more will accumulate, thanks to the growing powers of compound interest. Just make sure the money is in an interest-bearing account, or, if it's in the stock market, that you can handle the inevitable ups and downs in the short term.
Higher rewards mean higher risk.
If you want to keep your short-term savings in a safe spot, like a bank account, then you'll sacrifice higher returns in order to do so. If you're willing to take on more risk in the stock market, you will probably earn more over the long term. That's why bank accounts and more conservative investments are best for short-term savings, and riskier securities (via a diversified portfolio) are better for longer-term savings.
Diversification is your friend.
You've probably heard of the adage warning against putting all your eggs in one basket. Well, the same is true of investments. If you put your money in a single stock or even a single sector, you face a greater risk of losses if that sector faces hard times. That's why financial experts recommend putting savings in diversified portfolios, like an index fund.
Protect yourself from scam artists.
Identity theft is a real problem in the financial services sector, and one of the best ways to reduce your risk of being a victim is by monitoring activity on your accounts. By reviewing your monthly account statements and checking for any charges you don't recognize, you can quickly alert your bank if you see a problem. Then, the bank can replace your cards or account numbers if necessary.
Insure yourself against rainy days.
Americans tend to underinsure themselves, partly because we're an optimistic bunch. Nobody likes to dwell on the worst-case scenario. But by taking out appropriate amounts of renters insurance, disability insurance, homeowners insurance, health insurance and life insurance, you can help yourself, and family members, survive tough times. In the meantime, you'll enjoy the peace of mind knowing that you and your loved ones are protected.
When savings are automatically subtracted from a paycheck or bank account and redirected into a retirement or savings account, it's easier to build up significant savings over time because you don't have to think about transferring the funds. You also avoid the risk of spending the money before you save it. Many employers and banks make this kind of automation easy.
Minimize your debt load.
Debt isn't always a bad thing; it can enable people to go to college or buy a home that they otherwise couldn't. But people get into trouble when they take on more debt than they can handle, or fail to make their monthly payments on time.
Track your credit score.
Credit scores are increasingly important in our lives, and they often determine the interest rate you can get on loans. That's why it's important to get your free annual credit report once a year at annualcreditreport.com. You can check for any errors and make necessary corrections.
You're never done learning.
The financial services industry is constantly changing, with new products, new fees and new ways to save and spend money. To make sure you're making the best decisions for your own finances, it's a good idea to read up on any changes to your own account policies as well as stay abreast of changes in the law or industry that might impact you.
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