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Financial Literacy

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While most high school kids don’t fully understand credit cards, they know far less about the impact of taxes on take-home pay. A survey conducted last year shows that most students use their current part-time jobs as a way of estimating future income taxes. A question in the 2000 JumpStart Coalition Survey asked about the dollar amount change in federal income taxes for a student who worked part-time for $15,000 per year and then got a job after graduation paying $30,000 per year. More than 60% of survey participants answered the question incorrectly, saying taxes would “increase a little”, “stay the same”, or even “be lower”. Only 38.3% correctly answered that, in the example, the taxes would “double at least”. Knowing one’s take-home pay is one of 12 personal finance principles for young people included in a new list compiled by the JumpStart Coalition and released this week.
The JumpStart Coalition’s list of 12 principles follows

1) Know your take-home pay — Before committing to significant expenditures, estimate how much income is likely to be available for you. Net income, after all mandatory deductions, is more important to estimate than gross income before deductions.

2) Pay yourself first — Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.

3) Start saving young — Recognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save. The sooner you start saving, the more funds you’ll be able to amass over time.

4) Compare interest rates — Obtain rate information from multiple financial services firms to get the best value for your money.

5) Don’t borrow what you can’t repay — Be a responsible borrower who repays as promised, showing you are worthy of getting credit in the future. Before you borrow, compare your total payment obligations with income that you will have available to make these payments.

6) Budget your money — Create an annual budget to identify expected income and expenses, including savings. This will serve as a guide to help you live within your income.

7) Money doubles by the “Rule of 72” — To determine how long it will take your money to double, divide the interest rate into 72. For example, an account earning 6 percent interest will double in 12 years (72 divided by 6 equals 12).

8) High returns equal high risks — Recognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the interest rate offered to you, the investor, the higher the risk of losing some, or all, of the money you invest. Diversification of assets is the best protection against risk.

9) Don’t expect something for nothing — Be leery of advertisements, sales people or other sources of financial offers promising anything free. Like non-financial opportunities, if it sounds too good to be true, it probably is.

10) Map your financial future — Take time to list your financial goals, along with a realistic plan for achieving them. You can go places you want to go without a roadmap — but seldom on the first try.

11) Your credit past is your credit future — Be aware that credit bureaus maintain credit reports, which record borrowers’ histories of repaying loans. Negative information in credit reports can affect your ability to borrow at a later point.

12) Stay insured — Purchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan.

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