Every April, we celebrate financial literacy month. It’s an important time for everyone to make sure they’re staying knowledgeable about financial topics and using that knowledge to better manage their money.
We want everyone to put aside some time to evaluate his/her own level of financial literacy and to try to learn something new.
The Council for Economic Education has an excellent Economic Literacy Quiz that we think would be a great exercise for Financial Literacy Month. Before you head over there to take the quiz, read on for some “test prep” to help you brush up on your financial literacy.
Here are some basic concepts that form a good foundation for improving economic and financial literacy:
- Interest the amount of money a balance earns over time. It is calculated on a balance on some kind of compounding schedule. For example, if your interest compounds monthly, then the interest you have earned every month is added to the balance and you earn more over time. Debt you repay also carries an interest rate that costs you more over time as that interest compounds.
- Read more about interest
Supply and Demand
- This is a central concept in economics. Supply is how much of a good or service available, and demand is how much of that good or service people want. If you have too much supply, prices go down. If you have too much demand, prices go up.
- Read more about supply & demand
- In economics, incentives matter. Lowering prices or subsidizing any activity will result in more of it. Raising prices or taxes on an activity will result in less of that activity. Entrepreneurs create businesses (and the jobs that come with them) because of the financial incentives at stake.
- Read more about incentives
- When sellers in a market compete, consumers win. Each seller will offer better products, better service, and lower prices in an effort to win the consumers’ business.
- Read more about economic competition
- When two people (or countries) trade with each other, both parties win. If you buy something from a store, you wanted the item more than the money you gave them, and they wanted the money more than the item. In this sense, trade is not a zero-sum game where there is a winner and a loser—both parties to a trade can benefit.
- People use a stock market to buy and sell stocks, which are shares of ownership of businesses. The market brings willing buyers and sellers together so they can invest in businesses that they expect to grow or hold their value. When investing, diversification is important. That means spreading your money out over a number of different companies, rather than risking all of your money on one single investment vehicle.
- Read more about investing
- Any kind of money that is acceptable as a medium of exchange is currency. Currency doesn’t hold its value very well, so it’s better to save money in an interest-bearing investment rather than just storing cash.
- Read more about currency
- Over time, prices of goods and services tend to go up. Typically, the “inflation rate” in the U.S. is 1-3%. That means money is worth less in real value over time. That also means anyone living off of savings or a fixed income suffers as their dollars are affected by inflation. People who borrow at a fixed interest rate, like most home owners, benefit as the real cost of their outstanding loans actually go down due to inflation.
- Read more about inflation
- Insurance is how people mitigate risk. You pay a premium to an insurance company, and if something bad happens, the insurance company pays you to compensate. The cost of insurance is based on how risky the insured person or property is. Therefore, it will cost more to insure property in a neighborhood with higher crime, or to provide health care to someone who is more likely to get sick.
- Read more about insurance
- Different kinds of banks provide financial services and accounts to accountholders (or in the case of credit unions, their members). Consumers should evaluate banks based on their security (are they FDIC insured?), expenses (how much does it cost to maintain an account?), and convenience (do they have accessible locations and business hours?). One might also evaluate a bank based on its reputation for charitable giving, treatment of employees, etc.
- Read more about banking
- Saving is critical to one’s financial well-being. It’s important to have an emergency fund saved in an easily accessed account, and long-term savings in some kind of account that earns interest. Most people save for retirement in long-term IRA (individual retirement accounts) or 401(k) accounts offered by their employers.
- Read more about saving
- This is an important subject for Financial Literacy Month, because tax time is in April. Taxes are collected from people when they conduct economic activity; income taxes are collected from your paycheck, sales taxes when you buy goods, etc. There are ways for people to reduce their taxable income, and if people overpay their taxes, they are entitled to a refund of the overage.
- Read more about taxes
There’s a lot more to know, but this should be a good quick overview. Head over to the Council for Economic Education’s economic literacy quiz and see how you do!
And be sure to set aside some time this year during financial literacy month to read up and learn a little more about your finances. Get started here on credit.org’s blog, and be sure to look through our archives for the latest articles about credit, debt, and personal finance.