Foundations of Financial Literacy

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Do you remember when you were learning how to read? It took a lot of practice in order to make the transition from being illiterate to literate. Just like learning to read was important as a child, learning to be financially literate is important to ensure your future success as an adult. In order to become financial literate, you must understand some principles of financial literacy. First Security State Bank will talk about four foundational principles in today’s blog.

The Difference between an Asset and a Liability

An asset is anything that puts money in your pocket. A liability is anything that takes money out of your pocket. We will use your home as an example. Many people think of their house as an asset. This isn’t really true because your home takes money out of your pocket each month in the form of taxes, maintenance, etc. If you own rental properties, tenants pay rent, maintenance costs, taxes, and more. This is money going into your pocket each month, making these properties an asset.

Cash Flow versus Capital Gains

Most people invest for capital gains. Just like at the casino, you invest your money and hope that the price goes up.  The problem is that investing for capital gains is a gamble. You don’t have any control over whether the price goes up or down. Investing for cash flow gives you control over your income. For instance, you could buy investment real estate, have tenants to pay the expenses, and collect rent each month. This makes it an asset. If there are capital gains in the end, that is a bonus.

Using Debt and Taxes to get Richer                

Debt and taxes are typically viewed as bad, but both of these can also be used to create wealth. There are basically two kinds of debt – good and bad. Bad debt comes from borrowing money for liabilities like using credit cards to buy big TVs or borrowing a line of credit on your home. You want to stay out of bad debt. Good debt is used to purchase assets. Think back to the earlier example of purchasing rental property. When you purchase that property using the money from a loan, you can collect money from your tenant to pay off debt and then pocket the profit.

Learn How to Make Your Own Financial Decisions

When you aren’t confident in your financial knowledge, always ask experts for help. But learning how to make financially intelligent decisions will help you think for yourself and make wise decisions every day. The wisdom needed to be financially literate only comes from the desire to learn about what courses of action are best.

April is Financial Literacy Month and First Security State Bank is using this as an opportunity to help our customers become wise money managers. If you have any questions, please contact us!