Financial literacy is an essential life skill that helps you take the steps towards achieving long-term financial security. As you begin your journey towards financial literacy, this checklist can help you build a solid understanding of personal finance and take control of your financial future.
Test Your Financial Vocabulary
The first step towards financial literacy is identifying the gaps in your knowledge and educating yourself in those areas. Reading through these checklists is a big step towards a more complete understanding of what it takes to manage your finances with informed decision making.
Financial Literacy Checklist – Basic Finances
These essential financial terms will help you on your path to financial literacy:
- Income: The money you earn from various sources, including salaries, wages, dividends, and interest.
- Expenses: The costs incurred to maintain your lifestyle, including rent/mortgage, utilities, groceries, transportation and entertainment.
- Budget: A plan that outlines your expected income and expenses, helping you manage your finances and track spending.
- Credit Score: A numerical representation of your creditworthiness, used by lenders to evaluate your risk as a borrower. First Fed offers free credit score monitoring through online banking.
- Interest: The cost of borrowing money or the earnings on investments. There is simple interest and compound interest. Simple interest grows based only on the principal amount of money you deposit or invest. With compound interest, you earn based on the principal plus the interest you’ve already earned.
- Assets: Items of value that you own, such as cash, investments, real estate, and personal property.
- Liabilities: Debts and financial obligations you owe to others, such as loans, credit card balances, and mortgages.
- Net Worth: The difference between your total assets and total liabilities, representing your overall financial health.
- Insurance: A contract that provides financial protection against potential risks or losses.
- Emergency Fund: A savings fund set aside to cover unexpected expenses or financial emergencies.
Financial Literacy Checklist – Bank Accounts
These common banking terms will help you as you navigate managing your money:
- Checking Account: A bank account that allows you to deposit and withdraw money for everyday transactions, such as paying bills and making purchases using checks, debit cards, or electronic transfers.
- Savings Account: A bank account designed for saving money, typically offering interest on the balance. It’s intended for funds you don’t need for daily expenses.
- Online Banking: The ability to manage your bank accounts and conduct transactions through a secure website or mobile app.
- Mobile Banking: A service that allows you to access and manage your bank accounts using a smartphone or tablet.
- Interest Rate: The percentage at which a bank pays you (in a savings account) or charges you (on a loan) for the use of money.
- Minimum Balance: The minimum amount of money you must keep in a bank account to avoid fees or maintain the account.
- Overdraft: An overdraft is when you spend more than your available balance in your checking account, but the bank covers the amount of your purchase. A fee is usually charged when you spend more money than is available in your account, and your account will be in a negative balance. An Overdraft Line of Credit can help protect your account from going into the negative by automatically transferring money to your account when you overdraw.
- Annual Fee: A yearly fee charged by some financial institutions for maintaining certain types of accounts or credit cards.
- ATM (Automated Teller Machine): A self-service machine that allows you to perform various banking transactions, such as cash withdrawals and deposits.
- ATM Fee: A fee charged by a bank when you use an ATM that is not owned by or in partnership with your bank.
- APR vs. APY: Annual percentage rate (APR) is the calculation of the interest charged on loans or credit cards. Annual percentage yield (APY) is the amount of interest you make on your interest-bearing deposit accounts – like savings, checking, money markets, and/or certificates of deposit (CDs).
- Routing Number: A unique nine-digit number assigned to a bank or credit union, used for identifying the financial institution in electronic transactions.
- Account Statement: A summary of all transactions, fees, and balances for a specific period provided by the bank or financial institution.
- Certificate of Deposit (CD): A time deposit with a fixed term and usually a fixed interest rate, where you agree not to withdraw the funds until the maturity date.
- Joint Account: A bank account shared by two or more people, who all have equal access to the funds.
- FDIC (Federal Deposit Insurance Corporation): A U.S. government agency that insures deposits in banks and savings institutions, providing protection up to at least $250,000 per account holder per ownership category, in case of bank failure.
- NSF (Non-Sufficient Funds) Fee: A fee charged by a bank when you do not have enough money in your account to cover a transaction.
Tip: Have you stopped by your local bank lately? Relationship bankers are happy to walk you through the different account options and make sure you understand the features available to you with your account.
Financial Literacy Checklist – Payments
These common banking terms will help you as you navigate managing your money:
- Bill Pay (Automatic Bill Payment): A service that allows you to set up recurring payments to be deducted automatically from your bank account to pay bills.
- Credit Card vs. Debit Card: A credit card allows you to make purchases and payments by borrowing money from a financial institution to make purchases. A debit card allows you to make purchases and payments by deducting money directly from your bank account.
- Direct Deposit: The electronic deposit of your paycheck directly into your bank account, provided by your employer or other sources.
- Person to Person (P2P) Payments: An instant transfer from your bank account to another person using their email address or phone number.
- Wire Transfer: An electronic transfer of funds from one person or entity to another, often used for large or international transactions.
- ACH (Automated Clearing House): A network used for electronic money transfers between banks in the United States, including direct deposits and bill payments.
These investment and retirement terms will help as you plan for your future:
- 401(k) / Retirement Account: A tax-advantaged retirement savings account often provided by employers to help individuals save for retirement.
- IRA (Individual Retirement Account): A tax-advantaged retirement account that individuals can open independently to save for retirement.
- Stocks: Ownership shares in a company, allowing investors to participate in the company’s growth and profitability.
- Bonds: Debt securities issued by governments or corporations, representing a loan from the investor to the issuer.
- Mutual Funds: Pooled funds from many investors used to invest in a diversified portfolio of stocks, bonds, or other securities.
- Dividends: Payments made by companies to their shareholders from profits.
- Capital Gains: The profit earned from selling an asset at a higher price than its original purchase price.
- Investments: Assets purchased with the expectation of generating income or appreciation over time, such as stocks, bonds, mutual funds, and real estate.
- Diversification: Spreading your investments across different asset classes to reduce risk.
- Liquidity: The ease with which an asset can be converted into cash without significant loss of value.
- Stock Market: The marketplace where shares of publicly traded companies are bought and sold.
- 401(k) Matching: An employer benefit where they match a portion of an employee’s contributions to their 401(k) plan.
Tip: A great way to gain a better understanding of investments and retirement planning is to talk to an investment services expert. They can walk you through your options, and help you make the best choices for your situation and goals.
On the Path to Financial Literacy
Achieving financial literacy requires commitment and continuous learning. By following this checklist, you can start by focusing on the gaps you’ve identified in your financial knowledge. Navigating these key areas of personal finance and developing your understanding of them is an important step towards long-term financial well-being. Remember, financial literacy is a journey, so take small steps, stay persistent, and watch as your financial future grows brighter with each informed decision you make.
First Fed is a local member FDIC community bank and equal housing lender.