Financial Literacy Guide: A Crash Course for Students

It seems like more and more, you're expected to make huge, life-changing financial decisions when you're young, despite not having access to a lot of information. How are you supposed to know how to manage money as a teen when you usually don't even have a salary yet? It always seems easy at first, but it feels more complicated the more you look at spreadsheets. It's hard not to worry about money, and it's pretty much impossible to stay out of debt. So what can you do to manage the next few years? The same thing you do in school: learn.

So how does one get important financial knowledge? Sometimes, it's by-the-book studying. Sometimes, it's simply unavoidable life experience. Hopefully it's less of the latter, but there are plenty of of resources on personal financial literacy for high school and college students out there that you can learn from, luckily.

Financial Literacy 101 Financial Literacy

Let's go over some basics of finances and get us up to snuff!

First Off, What Is "Financial Literacy"?

Financial literacy is a colloquial term referring to the overall understanding of personal finances. While that's the traditional financial literacy definition, it can stretch to refer to other aspects, too: general money management, investing, or small business finances. When someone is "financially literate," they have a key understanding of terms, a collection of important skills (like tracking your spending), and often a set of positive habits.

Why Is Financial Literacy Important?

Money comes and goes at such a rapid pace, so why obsess about it? How does financial literacy help you in the long run?

A handful of good habits and decisions can free up many opportunities for new experiences. Watching and saving more during the year can mean another vacation. Being smart when you're getting your first job can mean retiring a few years earlier. Tracking your spending can mean finding identity thieves faster. Why is it important to be financially literate? It's important because it should give you more freedom, not less.

Key Financial Literacy Terms College Students Should Know

Just like any other class, financial literacy has its own vocabulary. Here's just a handful of the dozens and dozens of finance and accounting terms out there. (Don't worry; we'll talk about them more in the next few sections!)

  • Accrue: This is a verb that means to accumulate periodically, and it's usually used to refer to interest. For example, "I accrued interest on my loan."
  • Annual Percentage Rate (APR): This is the amount of interest you'll pay annually on a loan amount. You'll see these with mortgages and many types of loans. Usually, credit cards have a high APR, like an APR of 24%, which means that you'll likely pay nearly a quarter of the total amount in bank fees. Note that there are types of APRs, like an introductory APR, which may be a bit deceptive.
  • Bankruptcy: When debt has piled up to an unreasonable amount that's impossible for the debtor to pay off, bankruptcy, which refers to a formal government filling, is the only way to get out of it. Usually, that means the debtor must find ways to "liquidate" funds (such as selling a house) and end up with a clean slate. The two most common forms are Chapter 7 and Chapter 13 bankruptcy.
  • Bond: You know what's better than owing someone else money? If you loan other people the money. Then, companies and governments can owe you a return for it. Bonds are considered slightly more stable investments than stocks, and there are many different types of bonds.
  • Budget: Colloquially, a budget simply refers to a way of organizing your money situation, typically by cleverly categorizing your income and expenses. It's your road map, your plan, and your financial report card all in one. Will you get an A+?
  • Collateral: In order to get certain loans, like a small business loan, sometimes, a good-faith security pledge is needed. That's referred to as a collateral. It's to help the bank prevent a loss if you default on your loans. For instance, in order to get a small business loan, some people have to put up their house as a collateral in case the small business fails.
  • Credit: This is a simple term that can refer to many different things in accounting. It's generally used to refer to money lent to you with the expectation of future payment.
  • Credit Card Bureaus: The credit card bureaus (aka credit reporting agencies) are three different organizations that collect your financial data to be shared with banks. They are TransUnion, Experian, and Equifax. They produce your credit reports.
  • Credit Score: Your credit score is not compiled by the credit agencies but by the Fair Isaac Corporation (FICO). Credit scores are between 300 and 850, with anything above 700 being considered good. It's a good idea to have a good credit score.
  • Credit Report: Banks look at data on you to determine if you're trustworthy enough to get a loan, and looking at your credit report also helps them set interest rates based on how likely you are to pay them back. These are compiled by the credit card bureaus, and you should check them yearly with the official resource: AnnualCreditReport.com.
  • Deductible: A deductible refers to insurance. It's the total amount that you need to pay before the insurance kicks in. So a low deductible is good, especially for health insurance.
  • FAFSA: This is a really important term for good financial literacy for college students; if you're hoping to go to college soon, you need this! It's referring to the Free Application for Federal Student Aid.
  • Identity Theft: People can steal your personal information and use your digital data to drain your bank account or max out your credit cards. That's why it's important to be on the lookout for red flags.
  • Income: Income is simply money earned. Income can be taken in from a salary or other sources.
  • Insurance: This term is thrown around a lot for a lot of things. At its core, it's a contract in which someone agrees to pay in certain scenarios (from a death to a theft to a car accident) in exchange for a regular fee (which can be due monthly, weekly, or yearly). Each contract has its own quirks and stipulations.
  • Interest: Interest is the cost that the borrower charges you for letting you borrow their money. Usually it's a percentage of the total amount you borrow, or an interest rate.
  • Investment: This isn't spending or earning, really, but money put aside in the hopes of turning a profit.
  • IRA: An IRA is a type of tax-free savings account used for retirement. There are traditional, Roth, and rollover IRAs. It's never too early to start saving for retirement!
  • Loan: This is a sum of money to be paid back with interest, usually used to buy big things like homes or cars.
  • Payday Lending: There are many forms of predatory lending, and this one has gotten infamous in recent years for skyrocketing interest rates of 300% or more.
  • Ponzi Scheme: This is a money-making crime based on fraudulent claims about a nonexistent business that depends on finding new members.
  • Principal: The principal is the amount of money still owed on a loan (and the amount you want to focus on paying back to avoid accruing more interest).
  • Salary: This is income that specifically results from work.
  • Savings: When you set aside money for future spending or investing, it's considered savings.
  • Stock: Stocks are part of a larger discussion, but the absolute basics of stocks are that they're essentially a piece of a company that you purchase.
  • Taxes: Taxes are required payments to the government used to provide public goods and services.
  • W-2/W-4: These are required tax forms for employees. When you start a job, you must fill out a W-4 form, and you'll receive a W-2 to do your taxes.
  • 401(k): This is a profit-sharing plan for saving for retirement, with lots of options.

The Absolute Basics: How to Balance a Checkbook The Absolute Basics: How to Balance a Checkbook

Just like the light side and dark side bringing balance to the Force, there are two ways to get your money situation under control: reduce your spending, or earn more. That's it! Your financial situation might get complicated, and as you get older, it might get a great deal more complicated, but you're always working with a system of pluses and minuses.

To learn how to watch these things, you must first understand where your money is going and where it's coming from. So let's figure out how to balance a checkbook together.

It might seem really antiquated - why would you need physical checks when you have a debit card? - but physically writing out numbers while balancing a checkbook is a good idea to do for the first few months of having your own account. That way, you can get the swing of things and see how it works.

Track your transactions as they happen in the debit column (for example, $50 for a dress). Then, put that number with a minus sign in the balance section (-$50) and subtract it from your current balance.

If you used a check to pay for something, write the check number next to the date you wrote it. Checks frequently take a few days to be processed, so it's smart to write this down as you're writing the check itself. If you promised more money in your check than what you have in your account, it will bounce, which is big trouble. You don't want to overdraft your account and end up with fees!

Track your income as it happens. Put that in the deposit column (for example, you got $100 from selling your art) and add it to the end with a plus sign (+$100). Then, add it to your current balance.

This is smart to do while you're filling out your deposit slip at the bank.

At the end, you should have the same amount in your account that's on your bank statement. You can double-check by adding everything in the deposit column and subtracting everything in the debit column and then adding in your starting balance. Make sure to stop at the date when your statement was issued, and don't factor in any checks that you've written out before that date that aren't listed on your statement as having been cashed.

If something is off, double-check your work. If you've checked it several times, check your bank statement to make sure there aren't any suspicious purchases.

Of course, if you're using online banking, you'll be able to simply log on and look at your expenses as they happen. You don't have to balance your accounts by hand as much these days, but physically writing things out for the first few months you have a bank account can help you get a better feel for things.

Secrets of Spending: Sneaky Fees, Interest, and Debt Secrets of Spending: Sneaky Fees, Interest, and Debt

So you can spend as much as you want, but once you hit zero in your checkbook, you're done, right? You can never actually purchase beyond what you don't have, right? Once you're at zero, you can't do anything else, right? That's what living within your means means, right?!?

Of course, we don't actually live in a world like that! Your accounts can and will go into the negative, sometimes as a result of fees. One of the most common types of fees is an overdraft fee, which happens when you try to take out more money than you have. Not only are you going to be at zero, but the bank will charge you even more!

And besides fees, there's also the fact that you will likely be in debt at some point in your life. About 80% of Americans are currently in debt, but that's not always a bad thing.

In life, there are going to be a lot of things you want to buy - a car, a house, an education - that you simply won't be able to afford on your own, even if you saved for years. Debt is necessary in America, and if you're wise with your debt, it should help you achieve more in your lifetime, rather than hold you back. That being said, digging yourself into a hole by taking on unnecessary debt with no thought of the consequences can get you in a lot of trouble.

This is the unfortunate reality: Debt is necessary, but it's risky. It's really important to understand how it works.

How Interest Works

Let's say you took out a loan for $10,000 at an annual interest rate of 5%, and you wanted to pay it off in one year. First off, wow, you're ambitious! But you wouldn't just be paying back the $10,000. When you calculate 5% of $10,000, you get $500, so you would need to pay at least $10,500 when you include interest. This ignores other factors, such as tax and compound interest.

Higher rates and longer-term loans result in the borrower (you) paying more. For example, let's say your interest rate was 10% instead of $10,000. You'd need to pay $11,000 to pay it off after a year. But that's not quite how it works out...

Interest isn't calculated once a year. Usually, for both credit cards and student loans, it's calculated daily and then the extra total is used to calculate more interest. Let's say you have that 10% on $10,000. Card issues would take your APR and divide it by 365 days in a year (10% divided by 365 equals 0.02739%). That seems like a tiny amount, but it's added daily. So tomorrow, the balance will be $10,002.74. That will be used to calculate the new interest the next day ($10,0002.74 times 0.02739%). At the end of the year, you'll pay more in interest than if it was compounded just once a year.

Another important piece of the puzzle is minimum payments, which are designed by the credit card company so that the bank will get as much interest as possible. It can take years to pay off even small purchases while paying minimum payments. You'll almost always be paying mostly on the interest, not the principal amount, which is metaphorically like wiping snow off of a mountain rather than chiseling at the mountain you're supposed to be moving.

Let's say you have a $10,000 loan with a 10% interest rate, and your monthly minimum payment is $100. It would take more than two decades to pay off, depending on other fees!

Building Credit and Debt Basics

All of this might sound scary, but credit is necessary in order to prove that you're trustworthy enough to invest in in the future. If you want a house someday, you'll want to have a good credit score and a good credit report, both of which you should check yearly for accuracy.

How much debt should you take on?

One good rule of thumb is the 28/36 Rule, which states that absolutely no more than 36% of your monthly income should go to debt. That's all debt, from car loans to student loans to other types of debt. The 28% number represents how much you should spend on housing.

Another rule states that to build good credit, you consistently should use less than 30% of your credit limit. But since this is personal financial literacy for teens or young adults rather than 40-year-olds, spending well less than a third is generally a good idea.

How It All Comes Togethers

Having a small about of debt on credit cards and regularly paying it off is one of the best ways to get a good credit rating and a good credit score.

If you have good credit, you're more likely to get a better interest rate on your next loan. If you have bad credit, you'll likely get a high interest rate on your loan.

You can see how the rich can get richer and the poor can get poorer within this system, right?

So if you're not confident in your ability to pay it back, don't buy it. It's safer to be cautious than to be stuck with spiraling credit card debt. But buying a soda from a vending machine and paying it off every month is perfectly fine. Just don't pay only the minimums, and don't pay late.

Learning to Earn: Income, Investing, and Ways to Earn Learning to Earn: Income, Investing, and Ways to Earn

While you'll likely spend more money in the next few years, you'll hopefully earn more money as well. Here are some possible avenues to consider for earning money. The biggest thing to consider is how to earn the most money for your time. How can you make your time generally worth more?

There are two different methods of earning money: active income and passive income.

Active Income

Active income means putting in work and getting money for a service as you do it.

Your Paycheck

After taxes, Medicare, and Social Security costs have been taken out of your check, you have your income. While there are ways to talk up your salary and handle negotiations wisely, how much you make is usually set by your employer and not really changeable.

Side Gigs

Millennials and Gen Z-ers are considered to be the "1099 generation," as they frequently have side jobs or side business (such as a craft store on Etsy) to help them get by.

Commissions or Tips

Whether you become a Manhattan-based finance guru or a waitress, the added benefits of certain sales can definitely add to your earnings.

Passive Income

Have you ever heard the phrase "make money in your sleep"? Well, some people can actually do this because they invested in the right things.

Stocks

Stocks are essentially a tiny piece of a publicly traded company, and if your investment is successful, you might get dividends every quarter (four times per year). The stock market is a risky endeavor with constantly changing variables, but investing a small amount can lead to more income over time. There are several ways to get started, and many brokers will have investment ideas for college students.

Bonds

In essence, you can behave as a bank and lend money out to companies. Then, they pay you back with interest. Usually, the safest investment is a government bond.

Pulling it All Together With a Budget Pulling it All Together With a Budget

We've talked about balancing a checkbook. We've talked about necessary debt and spending. We've talked about different ways to earn. Now, let's look at how you can look at all of this information critically.

A budget is simply an organizational tool you can use to look at your financial situation at a glance. Are you consistently at a net loss every month? Balancing your checkbook can tell you that it's happening. A budget can tell you why.

Budget Creation Tools

There are several different ways you can create a budget.

Now, you can see the full picture of your personal finances. You might be working hard to pay for college, but are you buying more expensive lattes than you should?

Once you have a budget, you can see some of the most obvious places to cut back or where you should start hunting for coupons. For instance, if you're eating out too much, you can cut back a lot by cooking more or you can look on Cently for restaurant coupons. You can save on your favorite websites with helpful coupons as well.

Filing Taxes, Protecting Yourself, and More Personal Financial Literacy Resources to Check Out Filing Taxes, Protecting Yourself, and More Personal Financial Literacy Resources to Check Out

Personal financial literacy for teens isn't considered to be as complicated as adult financial literacy because adults usually have to deal with more taxes, more insurance, and more sporadic payments. But it's just as important for you to know about these things when planning for the future.

The Sleeper Expense: Insurance

As far as financial literacy topics go, insurance is considered to be one that gets more and more complex every year, especially health insurance. Insurance is basically a contract that's meant to protect you in certain scenarios, like a car accident (car insurance), your death (life insurance), a robbery (renter's insurance), a work-related injury (disability insurance), or even business property damage (liability insurance). These different options are a way of protecting yourself and your assets, but there are many different companies, prices, and rules to compare. Take your time and try to learn as much as you can about the coverage available, how much it costs, and what you get for the money; don't only focus on price.

For the Future: Taxes

A significant amount of taxes will be taken out of your paychecks over the next few years, so it's an important cost to factor in while planning the future. Most average Americans will only need to worry about W-2 forms and 1099 forms. It's important to get in the habit of saving your paperwork - at least seven years' worth.

Facts About the Financial Literacy of America's Youth

These sobering financial literacy statistics might seem scary, but knowledge is power.

More Resources for Learning About Finances