In high school and college, most students learn a lot about geometry and calculus but very little about taxes and investing.
In fact, when tested on financial concepts, only 17% of respondents ages 18 to 34 demonstrated basic financial literacy, according to the FINRA Foundation’s 2018 National Financial Capability Study. It could partly be a lack of exposure. Just 29% of those surveyed by FINRA said they’d been offered financial education at a school, college or workplace.
A lack of personal finance education can make navigating money decisions even more intimidating, especially in the face of a $1.5 trillion student loan debt crisis and possible recession on the horizon.
Here are four important personal finance topics you might not have learned about in school:
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“Taxes are a mystery to most of us,” said Billy Hensley, president and CEO of the National Endowment for Financial Education, with a laugh. “Demystifying the language around it is a huge step.”
Those who don’t earn enough in income aren’t required by law to file a federal tax return, but you may want to file anyway because you may be eligible for a refundable credit.
If you have a simple return – where you take the standard deduction, have taxes withheld from your paycheck by your employer and have limited income from stocks or interest and dividend income – then you likely qualify for a free simple federal tax return.
Most major tax preparers, such as TurboTax and H&R Block, offer a free-file service. Here are a few more things you should know about taxes:
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- File on time: Even if you can’t pay the full amount, you should file your return by the deadline. Most taxpayers have until April 15 to file. If you owe the IRS, there’s a late-filing penalty of 5% per month, up to 25% of your unpaid taxes. The IRS has payment plans if you can’t pay everything you owe immediately.
- Know what a deduction is: Deductions reduce the amount of income you have to pay taxes on. If you qualify, you can get tax deductions for student loan interest or medical or dental expenses. Even if you have no other tax deductions, the IRS allows you to take the standard deduction which reduces the amount of income you have to pay taxes on. For tax year 2019, the standard deduction is $12,200 for single filers.
- Your W-4 determines your refund size: The W-4 form from your employer calculates how much tax to withhold from your paycheck. If you withhold too little, you might owe when you file your tax return. If you withhold too much, you might get a refund, but you’ll have to live on less of your paycheck during the year. The IRS offers a calculator to help you figure out how much to withhold.
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Understanding student loans
About one-third of adults under age 30 have student loan debt, according to the Federal Reserve Board’s 2018 Survey of Household Economics and Decision making. But more than half of student loan holders didn’t try to figure out what their monthly payments would be before taking out loans, according to a policy brief from the Global Financial Literacy Excellence Center.
Don’t borrow more than what you anticipate your first-year salary will be, says Brian Page, a high school personal finance teacher in Cincinnati. He also suggests considering potential alternatives, such as starting off at a community college or attending a trade school.
“It’s important to stress that college isn’t for everyone,” he says.
A 2018 survey of high school sophomores from the College Savings Foundation found that about 37% of respondents were considering community college, vocational programs or apprenticeships instead of traditional colleges.
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- Loans might take longer to pay off than you think: The standard federal student loan repayment plan requires borrowers to make equal monthly payments over 10 years. If you consolidate your loans your monthly payment will be lower but it may take up to 30 years to repay, if you don’t pay ahead.
- Not all loans are created equal: Subsidized loans, which Page notes are better for the borrower, are based on financial need. The government or lender also covers the interest on the loan while you’re in school. You don’t have to pay any interest until repayment of the loan begins. Unsubsidized loans are not need-based. But you are responsible for all interest that accrues as soon as the loan is disbursed to the school. You aren’t required to start making payments on either kind of loan until six months after graduation.
- Fill out the FAFSA, no matter what: Students can apply for both of these loans by filling out the Free Application for Federal Student Aid (FAFSA) application. FAFSA applications open on October 1 of each year and must be submitted before June 30. Students must fill out the application every year they are in school.
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Building credit history
Your credit history can affect your ability to borrow money, get a job and find a place to live.
Your track record of paying back loans and credit cards is kept in a credit report maintained by the three national bureaus: Experian, Equifax and TransUnion. Your credit score is calculated based on information in your credit report.
Your FICO credit score – the most commonly used score – considers your payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Borrowers with FICO scores on the higher end of the 300-850 range are considered the least risky, while those with scores on the lower end are the riskiest to lenders.
To maintain a good credit score, Page recommends using 10% or less of your credit card’s line of credit. For example, if your limit is $1,000, use only $100 of it every month and pay off the entire balance.
If you’re trying to build or rebuild your credit history, you may only qualify for a secured card, which requires an upfront, refundable security deposit that equals your credit limit. If you can’t repay what you owe, the lender can take your deposit.
- Pay your bills on time: Payments are considered late 30 days after the due date and missed payments can be “catastrophic” because they will remain on your credit report for the next seven years, Page said. Two missed payments can cause a 60- to 110-point drop in your credit score, depending on your score, according to Equifax. The drop is worse for those with higher scores.
- Surprising things can affect your credit score: Unpaid bills or rent, applying for a new credit card, and closing an account you don’t use any more can all hurt your credit score.
- Know how to check your credit: Everyone gets a free credit report once a year from the three major credit bureaus at annualcreditreport.com. Websites like CreditKarma and CreditSesame offer free credit scores, but they aren’t necessarily FICO scores.
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Create a budget and start saving early
Not saving enough is the top financial stressor for young people, a 2018 Bank of America study found.
“Being able to think through a budget can make all of the difference in the world in terms of achieving financial security,” says Jonathan Clarke, associate professor of finance at Georgia Tech’s Scheller College of Business.
Clarke suggests saving 10% to 15% of your income for retirement or a rainy day fund. If you wait until later in your career to start saving, Clarke estimates you may have to put away as much as 20% of your income to meet your financial goals.
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A few more things you should know about budgeting and saving:
- Save first: You’ll have more success with saving if you “pay yourself first,” Clarke says. Automatically transfer a portion of your earnings from your checking to your savings account when you get paid each month, or have your paycheck split up and direct-deposited into both accounts.
- Start a 401(k): Retirement accounts allow you to save a portion of your paycheck before taxes, and many employers will match part of your contribution, essentially giving you free money.
- Still a student? You’ve got options: Minors who are earning income can open other kinds of retirement accounts like a custodial IRA, which allows them to begin investing until the age of 18 in a Roth IRA that their parents are responsible for, Page says. This can allow their savings to grow through compound interest, or the interest on your interest
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Contributing: Janna Herron, USA TODAY. Follow N’dea Yancey-Bragg on Twitter: @NdeaYanceyBragg