Learn your ABCs and you’ll play your cards right

My profession is financial advice. Some of the questions I get are basic, while others require substantial in-depth information before I can offer an accurate answer. Over the years, it seems that financial issues have become more and more complex.

And as they do, I firmly believe it’s a good idea to periodically review some of the basic ABCs of money management. Starting with “What is money?”

The simplest definition of money is that it’s a stored value of wealth. For example, you can enter a store with money, pick out an item, give some to the cashier and, presto; you’ve just bought something.

If you have more money than you need at any given time, you can deposit some in a bank account and earn interest. That way, there’s minimal risk that you’ll lose any principal. Or, you can invest your money. That puts your principal at risk, but offers the potential for greater gains than money sitting in a bank account.

Again, using a bit of oversimplification, you can be a loaner with your money, which is exactly what the banks do with it. Or you can be an owner, which is what you are when you invest in stocks or real estate, for example.

When a person takes out a loan, they’re entering into a contract with a financial institution to borrow money at a cost with the legal obligation to pay it back with interest from future earnings.

Major obligations, such as home mortgages and auto loans, require you to review a number of legal documents and necessitate a signature. And while it may not seem as significant, that credit card you carry in your wallet is also a legal obligation with a financial institution.

I’m sorry to say that a large segment of the American public is not doing too well with their credit card obligations. Another reason why I think that many households would benefit from a thorough review of the ABCs of how to handle money.

According to recent data from The Federal Reserve Bank, the U.S. consumer is carrying in excess of $1 trillion in credit card debt. Although that figure is staggering, there is a flip side to the story. Experts estimate that roughly half of credit card debt is paid off monthly without incurring any interest cost. So, many consumers are disciplined and money savvy.

They may be using a credit card to pay for obligations such as utilities or a child’s college tuition. In other words, essentially as a convenience and perhaps for any perks that might be associated with a particular credit card. Such perks include deals on airline tickets and car rentals or even cash back.

The fact remains, however, that roughly half of credit card users are not paying off their monthly balance. By not doing so, they’re incurring extremely high loan interest rates. A recent CNBC publication stated the average annual percentage rate at year-end 2023 was 22.8%. Bottom line, if you’re paying interest on a credit card, you’re simply throwing money away.

Please remember that every time you use your card you’re shouldering a risk. If used judiciously, it’s convenient and can have perks. Used recklessly, you’re wasting money at a time when prices are already sky high.