The Dangers of Financial Illiteracy

Written by Rebecca Diaz on May 25, 2010 – 5:24 pm

Financial illiteracy is a growing problem throughout the world, and as the recent housing crisis has brought to light, it can have dangerous consequences. There are a few basic financial tips that everyone can use to increase their financial literacy the easy way, and many of these tips can help you save thousands of dollars over a period of just a few years. Let’s take a look at what you need to know:

1. Checking accounts must be balanced.

If you are not taking the time to balance your checkbook every month, your risks for overdrafts may rise and you may be spending more than you would like. Set aside one day a month to completely reconcile and balance your checkbook.

2. How much house is too much house?

This problem resulted in countless foreclosures and it is continuing. Generally, you’ll want to take your regular yearly income and multiply that by three. That is the dollar amount that you can afford to pay for a house. Although it’s tempting to try to get a very nice house, it can also lead you to financial ruin if you are not careful.

3. Credit card interest rates can cripple you.

How many times have you actually read the interest rate on a credit card application before sending it in? Many now charge rates that are more than what a loan shark would charge, and this can quickly add up, especially over the long term. If your interest rate is over 12%, (which is still quite high) you may want to consider finding a new card with a better rate and transferring your balances over to it.

4. Good debt is useful.

Although the word debt has a bad connotation, there are forms of good debt that will help you grow your monthly income. Remember, good debt is debt that will help you increase your income. Bad debt is the kind of debt you get into when you spend too much and end up with a bunch of things that will only lose value and never repay you the purchase price.

5. Budgeting is essential.

In the midst of this credit crunch, it is clear that more people need to learn how to budget. It is not difficult once you get stated and by taking a more proactive role in your finances, you can see big results.

6. Adjustable rate mortgages can be dangerous.

In the best of times, an adjustable rate mortgage can be a very good thing. In the worst of times they can suck your bank account dry and leave you homeless. If you are about to get into an ARM loan, think long and hard about just how much interest you want to be paying, and what you would do if it suddenly rose.

7. Emergency funds are lifesavers.

It is a good idea to put at least three months of your salary away in a savings account to help protect you from those rainy days, lay offs and firings.

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