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The correlation between financial literacy and investment success

Knowing how to manage your finances is a skill that can serve you well throughout your entire life. Even as a child, you may have saved money in a piggy bank, and eventually moved up to a checking or savings account. And, even though these may seem like “basic” steps, they are the initial phases of financial literacy.

Unfortunately, though, if you didn’t learn how to manage money in school, you are not alone. In fact, this important life skill typically isn’t discussed at all during grade school, junior high, or even high school. So, becoming financially literate will require you to do some learning on your own, as well as to follow the guidance of online and/or offline financial experts.

Financial Literacy and Debt

One of the best ways to save money is to spend less – and one of the best ways to spend less money is to avoid debt. This begins with only spending within your means. Oftentimes, it might not seem like a big deal to put a few small purchases on a credit card.

But once the door to debt has been opened, it can lead to the breaking down of the floodgates. Credit cards in particular can be extremely dangerous because they usually charge a high rate of interest if you don’t pay off the entire balance every month.

Credit cards charge “revolving” debt, meaning that you can continue to make purchases (essentially borrowing money from the credit card company) as long as you keep making the minimum monthly payment.

In fact, credit card companies prefer it when borrowers don’t pay their balance in full. That’s because these “lenders” can earn an enormous amount of interest – and the longer the full balance goes unpaid, the more that interest charge can rack up.

As an example, if you had a balance of $500 in Month 1 on your credit card, and the lender was charging you 16% annually, the interest rate per day would be 0.044%. This equates to an interest charge of $0.22 each day on your $500 balance.

16% annual rate / 365 days in a year = 0.044% daily rate of interest

So, even if you did not make any purchases in Month 2, the interest charge alone would bring your balance due at the end of Month 2 to $506.60. Over time, the interest charges alone can really add up – especially if you are only making the minimum payment every month.

$0.22 per day X 30 days in a month = $6.60 in interest after Month 2

With that in mind, it is essential for you to make sure that your debt doesn’t get out of hand, and that you are able to pay all of your bills every month with the money you earn.

The Road to Managing Your Money

Managing money is another step in the road to good financial habits. Oftentimes, working with a budget can help you to keep track of how much you have going out, as well as how much you have coming in every month.

In addition to paying your housing, utilities, food, and other bills, good money management can also mean setting aside some funds in a savings and/or investment account. If you work for a company that offers a retirement savings plan, you may be able to contribute funds pre-tax, and have them grow on a tax-deferred basis over time.

Making Sure You Have Income for Life in Retirement

While saving money for the future is certainly one way to plan ahead for retirement, it will be necessary to successfully convert those funds over into a reliable, ongoing income stream that will last for the remainder of your lifetime.

Even though many retirees can count on income sources like Social Security and/or an employer-sponsored pension plan, there could still be a “gap” between the amount of money you have coming in and the amount that you need for covering your living expenses.

One way to fill in this “gap” is with an income annuity. Annuities are designed for paying income for a set period of time – such as 10 or 20 years – or even for the remainder of your lifetime. Working with a retirement income specialist can help you to find the right annuity for your specific needs.

Taking the First Steps with an Experienced Guide

If you have questions about how to take additional steps on the path to financial literacy, we can help. At Annuity Gator, our mission is to educate consumers and financial professionals on how to create the ideal retirement income plan.

To talk with an annuity specialist directly, please feel free to reach out to us by calling (888) 440-2468. Or, you can send us here, any questions that you have. We look forward to hearing from you.

The correlation between financial literacy and investment success

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