The Treasury Department announced on May 4th that it expects to borrow more than $4.5 trillion in its bid to inject unprecedented levels of fiscal stimulus into the US economy. While these measures are sorely needed, they bring up an unfortunate reality. In many cases, the burden of this dizzying sum of debt will fall onto the future taxpayers – our children and generations beyond. Now, more than ever, we all need some financial literacy tips.
It’s Time to Learn Financial Literacy
This post was written by Amir Raizada, here to help us all improve knowledge with financial literacy tips.
Times like this illuminate the need for children to begin to build sound financial literacy skills. While math and economics are staples of a high school education, many schools overlook critical aspects of personal and microfinance, a calamity that stems from a multitude of forces.
For one, it’s difficult to build financial acumen. The world of finance is filled with jargon, graphs, and mathematics that often present students with a steep learning curve. And it’s not that I blame them — after nearly 20 years as a venture capital CEO of SBV, I sometimes still find my head spinning after reading financial briefs or perspectives.
As we enter the second month of quarantine and find ourselves with an abundance of free time, why not work with your children on the basics of sound financial practice?
To help cut through the jargon and get to the substance, I’ve laid out explanations for three common financial terms that you can share with your kids. Maybe even practice with a game of monopoly!
1) Interest Rates
Credit is abundant. While it often feels like free money, borrowed funds can be difficult to pay back.
When you’re talking about borrowing, the keyword is interest. Lenders need to make money. If they lend you money only to for you to pay back the exact same amount that you borrowed, they make nothing from the transaction.
The interest rate, then, is the rate that you pay back to a lender, in addition to the original sum you borrowed.
For example, if you were to take out a $100 loan from the bank at a 10 percent interest rate…
- you would owe the bank the original $100, called the principal,
- plus 10% of the sum you borrowed, for a grand total of $110.
Put this into motion the next time your kids land on one of your properties in monopoly.
2) Checking vs. Savings
While most children understand that money is usually deposited in banks, an important component of financial literacy is understanding the difference between two of the most common types of bank accounts – checking and savings.
Checking accounts allow you to easily withdraw your money. When one pays for a transaction with a debit card, the funds are usually taken from the consumer’s checking account.
Savings accounts are a little different. Savings accounts can place limits on what you can withdraw, but pay you an interest rate on the funds that you keep in the account. Over time, you will begin to earn a small amount of interest on these funds – and small amounts add up to big amounts over time.
Stocks are a prime example of an easy concept made unnecessarily difficult. When you open up the stocks app on your iPhone, you’ll find all sorts of flashing red and green numbers, strange acronyms, and volatile graphs. At first glance, it looks like an absolute circus.
While markets can be circus-like at times, stocks are quite simple. A stock represents an ownership share in a company. When you purchase a stock, you’ve technically bought a small portion of the company that issued the stock. The terms “stock” and “shares” are often used interchangeably.
A stock exchange is a marketplace in which these stocks are bought, sold, and traded. Stock prices float, meaning that they constantly changed based on the interplay of supply and demand. When the demand for a company’s stock is low, few people wish to purchase it, and its share price declines.
Major stock indices like the Dow Jones Industrial Average and the S&P 500 are aggregations, or combinations, of the prices of multiple companies’ shares. The Dow, for example, captures the share price 30 of America’s largest firms, including companies like Boeing, Apple, and Nike.
And those are your financial literacy tips of the day! I hope you now know more than when you arrived to this post!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.