Financial Literacy - Unit 1

Course Intro

Interactions with money (saving, spending, borrowing, and investing). Our financial well-being depends on the choices we make with money.

4 Course Themes

You are responsible for yourself, your present self impacts your future self, you are better off in a community, investing helps to cope with risk and uncertainty

You are Responsible for Yourself

Being accountable for your actions

Your Present Self Impacts Your Future Self

Need to live in the moment, expectations for the future

You are Better Off in a Community

Collective/shared experience

Investing Helps to Cope with Risk and Uncertainty

Investing is a long term activity, the sooner you start the more time you have to grow your money

Goals

The end result of something a person intends to acquire, achieve, do, reach, or accomplish at some point in the future

Values

A fundamental belief about what is desirable, worthwhile or important

Financial Goals

Specific objectives that are accomplished through financial planning. Acronym - SMART

Financial Planning

Managing money continuously throughout life. It never ends, even in retirement

Emergency Fund

Where financial literacy begins. Having 3-6 months of living expenses covered in a savings account. Life happens, unexpected expenses always crop up (Murphy’s Law - if something can go wrong it will). Gives us flexibility.

Pay Yourself First

A savings strategy used with an emergency fund where an individual saves money first, before paying any expenses. The idea is to save money first to ensure that it happens. If monthly expenses are paid first then the individual will say – ‘I don’t have enough money to save’. The idea is to save BEFORE we pay our expenses.

Well Being

Feeling good about yourself

Characteristics of Well Being

• Being in a community

• Healthy relationships

• Loving what you do

• Eating right

• Enough sleep

• Workout

• Positivity

• Finding meaning in life

• Feeling achievement - celebrating accomplishments

Trade Offs

Giving up one thing for another

Opportunity Costs

The value of the next best alternative that must be forgone as a result of a decision. (What you're giving up)

Domains of Well Being

PISEF

Physical

Taking care of your body

Intellectual

Gaining and using knowledge

Social

Having a network of friends and family

Emotional

Feeling worth and purpose, coping with problems (how you feel)

Financial

Managing money positively

Specific

State exactly what’s going to be done with the money involved

Measurable

Write the exact dollar amount (2 million goal for retirement)

Attainable

Step by step plan on how the goal can be reached

Realistic

Think through trade offs and opportunity costs to analyze the consequences of your goal to make sure its attainable

Time Bound

State when the goal will be reached

Sallie Krawcheck

Owns her own firm, worst advice came from her ex husband to brother: don’t bother investing, you don’t make enough for it to matter

Kakeibo

The Japanese art of saving money that involves being more mindful about spending. Emphasizes the important of writing by hand and is simple

How to Achieve Kakeibo

• Leave item for 24 hours

• Don’t let blowout sales tempt you

• Check bank account balance regularly

• Pay for items in cash

• Put reminders in wallet

• Change environment that causes you to spend

Most Valuable Lesson

Track income and expenses

3 Tips to Track Money

1. Adjust your mindset

2. Take control

3. Leave room for error and celebrate the little things

Defined Contribution Plan

An employer sponsored 401k - the contribution amount is defined. For 2024 employees can contribute $23,000.

Defined Benefit Plan

Social security (monthly income), or a company pension. The employer provides employee a monthly benefit (income) at retirement. This puts the burden on the employer to fund retirement benefits of employees. These plans are no longer popular, and employers are moving to defined contribution plans.

Social Security (Entitlement Program)

Income for Retirees. A government sponsored retirement program, contributions deducted through payroll taxes (7.65%), only those paying into plan receive benefits which include being eligible for unemployment insurance. You pay 7.65% AND Employer pays 7.65% for a total of 15.3%. S.S. never meant to fund entire retirement. S.S. is in jeopardy of running out of money.

401K

Pre-Tax Contributions. The contribution amount is defined ($23,000) and it is the employees responsibility to contribute to fund their own retirement.

1. Reduce Taxable Income by the amount of contribution

2. Money grows Tax deferred

3. Company Matching Contributions – aka ‘Free Money’

Traditional IRA

Pre-Tax Contributions but there are income restrictions – may or may not be tax deductible (depends on income level – lose tax deduction if income over $77k), max contribution $7,000/ year. Individuals over income limit can still contribute but can not take a tax deduction

Leaving Job

401K rolls directly to IRA

ROTH IRA

After-Tax Contributions. This is the best retirement account for young people, tax-free growth for life. No income deduction since your contributions are after taxes. You need earned income to qualify (taxes taken out of pay), once income above $150k an individual can NOT contribute. Max contribution $7,000/ year.

Financial Statements

Formal records that reflect business activities, performance, and the overall condition of the business. Investors use these statements to analyze potential investments.

Income Statement

A financial statement that shows the revenues and expenses of the company. Produced quarterly. Revenue minus expenses equals Profit or Loss. It is referred to as the profit and loss statement

Top Line

Revenue/sales minus expenses

Bottom Line

Profit or loss

Forward Guidance

Company remarks about the future business conditions – headwinds/tailwinds. Not on income statement

Balance Sheet

Snapshot of what a business owns (assets) and owes (liabilities). Produced annually. Debt is recorded on this statement which investors should be aware of. It is the preferred financial statement for investors as it is used to compute financial ratios ex: debt to equity ratio, etc.

Federal Reserve (The FED)

The Central Bank of the U.S. is responsible for providing a safe, flexible, and stable monetary system. They conduct Monetary Policy – interest rate policy.

Feds 2 Goals

1. Maximum employment

2. Stable prices (fight inflation)

Federal Fund Rate

The tool the Fed uses to raise/lower interest rates. (Overnight lending rate between banks)

Inflation

General rise in prices, current economy seeing robust inflation. Measured many ways such as CPI and PPI.

Initial Public Offering (IPO’s)

This is the process by which private companies utilize the Capital Markets to go through the listing process and become publicly traded companies. They are risky – they tend to be very volatile and don’t have a track record like more established companies.

Long

Represents ownership, refers to an investor who has purchased shares of stock

Short

Riskiest thing you can do in stocks (potentially exposed to unlimited losses), don’t have ownership. Involves a margin account which uses leverage. Profits when stock drops.

Dividends

Earnings (profits) companies share with investors as a reward for holding the stock. Can be accepted in cash ( are not compound interest) or re-invested as additional shares of stock. We always re- invest them because this contributes to stocks’ total return (growth plus dividends). Most stocks pay quarterly – 4 periods of interest.

Simple Interest

Money invested or deposited (principal balance) earns interest over a period of time. One period of interest. Invest money with the bank in a one-year CD. Your money earns interest over one year – one interest period. Interest is credited to your account after ONE year (one interest period of simple interest).

Compound Interest

Re-invested dividends, interest on interest. Stocks pay dividends quarterly - 4 interest periods per year

2 Most Important Variables for Wealth

1. Time

2. Compound Interest

S&P 500

The best place for young people to invest. This is a diversified Index of many large U.S companies. The Index is comprised of 11 Sectors and countless sub-industries. The Index has average returns of 7%-10% per year over the last 50 plus years. Past performance is no guarantee of future returns. Most widely tracked U.S. Index. The performance of it is a benchmark by which most professional money managers are compared against.

Dollar Cost Averaging

An investing strategy where the same amount of money is invested into stock market/s and p 500 every 2 weeks

Stocks

Equity investments

Bonds

Defensive investments. Slow growing, get money back at maturation

Coupon

Interest rate bond pays

US Government Treasuries

First type of debt - When we spend too much money, debt from US government, safest investment you can make. Risk free rate of return - US treasury 1 month left on duration

Corporate

Second type of debt - Corporations issuing debt

Municipilaties

Third type of debt - Towns/cities issuing debt

60/40 Model

60% in stocks 40% in bonds

Asset Allocation

Investor dividing up the capital into different asset classes

Diversification

Investing strategy to reduce your risk by investing in assets that aren’t correlated. (Choosing individual investments that don’t move together).

Reserve Requirement

All banks required to have because the Fed controls it. Makes deposits you can’t touch

10 Year Treasury

Benchmark/proxy for mortgage rate

Get people to spend

Fed puts interest rates at zero to…

Get people to stop spending

(High inflation) Fed puts interest rates high to…