Financial Literacy Basics About Mortgages, Debt, Pensions & Investments

When I left education I had no idea about the importance of pensions and how compound interest affected your savings. I didn’t know how the mortgage process worked and the do’s and don’ts. Everything I know I’ve had to learn over the years, but there are financial literacy basics I feel that everyone should know.

I started this series with six basics but I’m back to talk about mortgages, debt, pensions and investments.

Financial literacy basics- knowing how mortgages work

A mortgage is a loan for a house so if you’re buying a property you’ll almost certainly need one. Most people can’t afford to buy a house in cash so you put down a deposit and borrow the rest from a bank.

Mortgages are paid off monthly, usually over 15-30 years and you do pay interest on your loan. How much interest you pay will depend on how much deposit you put down, your credit rating and the rates that banks are offering at the time.

There are different types of mortgages that you can choose from and no two people’s mortgages will be the same.

To get a mortgage you will need to apply with a financial institute. It’s always worth seeking the advice of a mortgage broker.

Paying off debt

Debt is money that you owe that has to be paid back to the lender. The longer you keep the debt the more interest you will pay.

There are lots of different types of debts including (but not limited to) mortgages, credit card debt, personal loans, buy now pay later, finance agreements and payday loans.

Having debts to pay off will make it harder to save money and move towards your financial goals. Clearing your debt as quickly as possible is important.

There are two popular ways to clear debt; the snowball method and the avalanche method. With both methods, you’ll always pay the minimum charge on the debts. The snowball method of debt repayment focus’ on paying down your smallest debt before moving to larger ones. By doing this you’ll build momentum as you pay it off and each time you pay off a debt you’ll have more to put towards the next one.

The avalanche method focus’ on paying off the debt with the highest interest first. This method will save you money on interest in the long run but you may not see as much instant debt clearance.

Financial literacy on pensions

Unless you’re planning to work forward then planning for your retirement is a great investment to support you in later life. People are living longer than ever before so are needing more money to sustain their lifestyle. Currently, the basic state pension is just £179.58 a week which isn’t a lot of money to pay all your bills, food and live your life.

Retirement may seem like a long way off but the earlier you pay attention the better off you’ll be. If you’re employed you’ll be auto-enrolled into a pension scheme by your employer.

With most companies, they will match your contribution up to a certain percent. So you may put 5% of your wage into your pension and your company will match that. How much the company matches will differ from company to company. If you can afford to do so it’s worth upping your monthly contributions from the standard few percent. The money you’re putting into a pension is invested directly into your pension plan.

Make sure you keep track of your pensions and look into work pension compensation if needed. If you are self-employed or just want a bit extra you can open a private pension to save for your future.

How compound interest helps

The longer your pension savings are put away the more interest it will earn. This is because each year you’ll earn interest on how much is in your account which includes interest from the previous year. For example, if you save £500 a month for 20 years at an interest rate is 3% and you’d have £123,600 saved. But thanks to compound interest you could have £161,222.

This is because at the end of year one you’d have 3% interest on the £6,000 you saved, so £6,180. Then after year two you’d have £12,545.40 which is the money from the end of year one, the extra £6,000 you’d saved and 3% interest on that.

So someone at the age of 18 could put aside a set amount over 50 years and be left with way more than someone at 40 saving the same total amount over 28 years because they’re benefiting from interest on interest each year.

Investments

We all want our money to work harder for us and multiply and that’s where investing comes in.

Investing is the process of buying assets and injecting money into something in the hope that it will increase in value over time and provide returns. There’s almost always a risk involved with investing as your money can go down as well as up. But if you’re able to lock your money away for a longer term then the general trend is upwards.

There are lots of different ways to invest from traditional stocks and shares through to real estate. How you choose to invest will be specific to your circumstances and how much risk you’re willing to take.

Most of us are investing without even knowing it as pension schemes are forms of investment. And by purchasing a home you’re investing money into an asset with the hope that when you come to sell on it will have gained value.

What financial literacy basics do you wish you’d known earlier?

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