First- What is financial literacy?
In my understanding it is having an understanding of money and how it works, especially in relation to ones self.
or - Thank you Wikipedia
Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
Boom, heck ya- This is the main motivation and purpose behind this blog.
There are three terms that help us to understand why we want this and what it means to us. We must next define and then calculate our personal financial goals. To do this we need to understand what the terms financial security, financial independence, and financial freedom mean.
Financial Security- This is very personal but, basically it means the ability to pay the bills every month with the income one earns. In addition to "being able to pay the bills" I feel, and experts agree, that to be financially secure one must be essentially debt free and have 3-6 months worth of expenses covered with cash in the bank. This cash is your emergency fund and is only to be touched during an emergency and only to cover basic living expenses. Being debt free could mean just that, zero debt. That would be great! Most importantly though it means to have no credit card debt and to have the money for a mortgage, student loan or any other kind of normal debt covered by that 6 month emergency fund. That emergency fund is your financial security blanket. It should be able to house and feed your family in the event of a job loss or serious illness or even death, God forbid. One can just consider the bare essentials but, having enough to maintain your current standard of living will be a lot easier on everyone involved. In order to calculate this number you will have to sit down and add up all your bills. Do not leave out variables like health care, grocery, veterinary costs, and hobbies such as kid's extracurricular activities. Of course during a time like that it is likely that you may want to simplify and cut out some expenses but, the "security" is to have it covered.
Financial Independence- Again the specific number is going to be very personal but, by definition financial independence means to have sufficient personal wealth to live, without having to work actively for basic necessities.[1] For financially independent people, their assets generate income that is greater than their expenses. Sounds great! This should be everyones goal for retirement.
Financial Freedom- is the ability to not only be financially independent but, to also be able to do whatever the fuck one want to do with their money. Private Jet? Vacations around the world? Give to all your favorite charities? Yes please! Here we get even more personal. Everyone will answer the "what would you do if you won the lottery?" question very differently. But, this question is really fun to think about. And you might be surprised to find out that it isn't completely out of reach for you if you work on it.
There is an app created by Tony Robbins to help you calculate your personal numbers for each level at financeapp.moneymasterthegame.com. It's free and also our homework for this week. I will share my numbers and hope to hear from some of you also.
Ok, now that we have an idea of where we are going with this study of finance and why, we need to define some common terminology used by financial professionals. Understanding these terms will help us to read financial magazines, newspaper sections, have intelligent conversations with an adviser, and not get taken advantage of.
Investment- In finance, investment is buying or creating an asset with the expectation of capital appreciation, dividends (profit), interest earnings, rents, or some combination of these returns.
Liability- Basically anything that you own or owe money toward that is not currently or going to make you money. Especially anything that costs you money or will cost you money.
Asset-Anything tangible or intangible that can be owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).
Stock- A stock is basically a share (a small piece) of ownership in a company. There are several different types of stocks and their description is beyond the scope of this blog. This excerpt from Wikipedia will help clarify the "piece of ownership".
"The owners of a private company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private use. They can achieve these goals by selling shares in the company to the general public, through a sale on a stock exchange. This process is called an initial public offering, or IPO.
By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. The owner may also inherit debtand even litigation.
In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company.
In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows other shareholders to be out-voted – effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control of the company."
Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument.
Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors in the event of bankruptcy.[3] Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond, such as a consol, which is a perpetuity, i.e. a bond with no maturity.Stock broker-A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission. Stockbrokers are known by numerous professional designations, depending on the license they hold, the type of securities they sell, or the services they provide. In the United States, a stockbroker must pass both the Series 7 and either the Series 63 or the Series 66 exams in order to be properly licensed.
Financial advisor- A financial adviser (or advisor) is a professional who renders financial services to clients. According to the U.S. Financial Industry Regulatory Authority (FINRA), terms such as financial adviser and financial planner are general terms or job titles used by investment professionals.[1] FINRA describes the main groups of investment professionals who may use the term financial advisor to be: brokers, investment advisers, accountants, lawyers, insurance agents and financial planners.[2]
Fiduciary-
A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other asset for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has entrusted funds to the fiduciary for safekeeping or investment. Likewise, asset managers —including managers of pension plans, endowments and other tax-exempt assets— are considered fiduciaries under applicable statutes and laws.[
401k- basically it is a tax deferred retirement account. That means that the income put into that account will not be counted toward your taxable income now but, the income you withdraw from the account during retirement will be taxed. There are limits to how much money you are allowed to save in a 401K. This has to be offered by an employer and may or may not be vested. Also, there are only a handful of investment options for the money. The investments are lumped in risk categories similar to mutual funds.
Roth- Roth accounts are not tax deferred. This means that you will pay taxes on the money you deposit now but, will not pay taxes on the money that you withdraw in retirement.
IRA-Individual retirement account-This account does not necessarily come from an employer and allows the individual to decide on specific investments such as stocks and bonds. IRA's can also include other types of investments like real-estate. But, it can only be funded by cash. There are restrictions and limits on how much money can be contributed annually. This link will break it down for you. It depends on if you have a retirement account from an employer and how much you make ect. https://www.irs.gov/pub/irs-pdf/p590a.pdf
529- this is a tax code describing the rules around another type of tax deferred savings account. This account is not used for retirement but, for education expenses foe ones children.
Commodities-one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, sugar, rice. Soft commodities are goods that are grown, while hard commodities are ones that are extracted through mining. A commodity's price does not depend on the "brand" or popularity of one certain type of it. For exampe, a cell phone is not a commodity because and iphone will be worth more than a track phone.
Capital gain-A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. Short term capital gains are taxed at the normal income tax rate but, if the asset is held for over a year the gain may be taxed at a lower rate or carry no tax at all depending on ones income.
My apologies for the delay in delivery of this blog! The definitions although largely copied from Wikipedia were tedious to collect and tiresome to commit to memory. This is however, why I have decided to do this in the first place. These are terms that everyone should be familiar with. Everyone must be familiar with these terms in order to use these financial tool;s to save for retirement and create financial security and beyond. This is information that I did not learn in high school and that is where it ought to be taught.A capital gain is a profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price.
I reiterate that I do not claim these are the most accurate or even simplest definitions and I do plan to edit them in time as my own understanding and experience grows.Nor is this list comprehensive and I do plan to add to it. I know that at this time I do not have blog "followers", especially since this was supposed to take me a week and it has taken me a month! I do hope to have future followers and promise to do my best to keep up with the blog weekly. I have baby #3 on the way in January so bear with me:)
