Are you a financial wiz or a work in progress? Making the best decisions about your money takes practice. You can read financial planning books and follow the top personal finance influencers, but chances are that you are still making some of the most common mistakes when it comes to saving, investing, and budgeting. Challenge your financial knowledge with these 10 financial literacy questions from FNBN.
Should you store all your money in a single bank account?
There is no such thing as a one-size-fits-all bank account. Not only does diversification across multiple accounts minimize your risk, it also maximize your returns. For example, if you keep all your money in a checking account, you lose the benefit of earning interest in a high yield savings account. Keeping too much in savings can lead to excessive fees for withdrawals. A healthy financial portfolio features a diverse collection of accounts, each providing a specific service.
Can one bank manage all your financial accounts?
Keeping your checking, savings, investing, and loan accounts in one bank does have its advantages. With a single bank login or in-person visit, you can see all your balances across multiple accounts and easily transfer money from one type of bank account to another. Many local banks offer checking accounts for accessible funds, high-yield savings accounts and CDs for short-term saving, IRAs for retirement planning, and credit cards and personal loans to fit your lifestyle.
Is there a way to pay down multiple sources of debt at the same time?
With a debt consolidation loan you can pay off multiple debts by bundling them together into a single loan. Debt consolidation loans typically offer better interest rates than your current debts, lowering your monthly payment. At The First we help you tap into your home equity to consolidate your loans and free you from the burden of excessive credit card debt. With a convenient single monthly payment and a fixed term, a debt consolidation loan helps you take control of high interest debt.
When are your contributions to an IRA taxed?
There are two types of IRAs and they are taxed at different times. Contributions to traditional IRAs go into the account tax free, meaning you do not pay income tax on the contribution. When you withdraw money from a traditional IRA your contributions are taxed. Many people like to defer the tax payment until later in life even though they will also pay taxes on the interest their account has earned.
Roth IRA contributions are made with after-tax dollars meaning you pay taxes on your entire paycheck and then add the money to your Roth IRA account. Paying your taxes upfront allows you to withdraw money for retirement without the burden of being taxed in your golden years. With a Roth IRA you also benefit from earning tax-free interest.
Is there a difference between a loan and a line of credit?
Car loans, mortgages, and student loans all have one thing in common – they provide a lump sum payment to cover a large purchase. You immediately begin accruing interest on the full amount of the loan. A line of credit establishes a maximum loan amount and allows you to make withdrawals in various amounts over a certain period. A home equity line of credit, for example, allows you to pay for renovations as the work progresses and only charges you interest on the amounts spent. A credit line is like a credit card, while a loan is a one-time money distribution.
How much money should you have in an emergency fund?
An emergency fund is an important part of your financial toolbox and should contain enough savings to cover 3 months’ worth of bills. Should you become unable to work, need major repairs to your home or car, or incur a large medical bill, your emergency fund is in place to avoid disaster. For even more security, experts recommend saving enough money to cover 6 months’ worth of expenses. The easiest way to start an emergency fund is by opening a savings account and direct depositing a portion of your paycheck each month.
Why is compound interest the key to generating wealth?
Compound interest is a double-edged sword. It is great when it applies to your savings and awful when it applies to your debts. When an account earns compound interest it grows interest on top of interest, not just on the principal. Savings accounts with compound interest will help you generate wealth effortlessly.
When carrying debt, beware of compounding interest. Your balance will be calculated with interest charged on top of principal and past interest. Most credit cards charge daily compounding interest on unpaid balances. When you carry a balance on your credit card, every passing day adds exponentially to the total amount you owe.
What is the difference between a debit card and a credit card?
When it comes to paying for your purchases, it may seem as though credit and debit cards are interchangeable. The difference between the two is, however, quite significant. A debit card is a tool used to access funds in your checking account. You can only make purchases with a debit card that are covered by the amount of money currently in your account.
A credit card is a type of short-term loan. You can spend up to your credit limit whether you currently have the money or not. If you do not pay your credit card bill in full at the end of the month you will start accruing interest. Because a debit card directly accesses your checking account, it is much more dangerous when lost or stolen.
What is my credit score?
Tracking your credit score is an effective way to monitor your financial health. There are five factors that determine your score:
- length of credit history
- payment history
- credit utilization/amount owed
- credit mix
- new accounts
Credit scores above 690 are considered good, but experts suggest you aim for a score of 760. Your credit score influences whether you will be approved for new loans and what interest rate you will get. You can improve your credit score by paying down debt, making on-time payments, and avoiding new accounts.
How should you decide which debts to pay off first?
If you are trying to pay off debt, there are two common strategies. The snowball method focuses on paying off the smallest loan amounts first in order to reduce your total number of debts and build momentum. The debt avalanche method focuses on paying off the debt with the highest interest rate first, saving you money on interest payments. In both scenarios, you continue to make on-time payments for all your debts but channel extra funds into the debt you have chosen to pay off first. The best strategy for paying down debt is the one that you are motivated to stick with over time.
Building a path to financial wellness
At The First, we support community members of all ages and financial backgrounds. Our friendly and knowledgeable associates are happy to answer your questions and help grow your financial literacy. If you have questions about choosing the right account, maximizing your savings, or getting the loan you need, stop into one of our convenient locations throughout Bucks County.