Financial Literacy
Financial literacy is something I embraced from an early point in my career. Even as a teller at a large credit union, I loved giving clients a little more knowledge about their money or how the banking system worked. Not only is knowledge power but knowledge is confidence. A few concepts, like the ones listed below, can really help you to better understand the nightly news and even your own financial statements. Whether you have heard these terms for years or you are hearing them for the first time, it never hurts to see them. The more exposure you have to concepts you don’t use on a daily basis, the easier they will be to remember when you need them. Below I have explained a few common concepts that are important for building a wealth of financial knowledge.
Stock
Stock means ownership. When you have stock in a company, you are one of the owners. The amount of ownership (stock) is measured in shares. How many shares of stock you own determines how the size of your ownership. For most of us our ownership in well-known companies is fairly small. But we are owners, none the less.
Mutual Funds
A mutual fund functions similarly to a woven basket. This “basket” is full of stock in a variety of companies. Instead of owning the stock directly, you own a strand of the woven “basket.” As the value of the stocks in the basket increases, the value of the basket increases. And henceforth the value of every strand increases as well. Mutual Fund ownership is also measured in shares.
Bonds
As stated above, stock is ownership, a bond is a loan to a company. When you invest in a bond you are loaning money to a company or entity that they can use to build their value or company. Perhaps your community has sold bonds in order to build a new stadium or school or other public venue. If you were to buy the bond, the community would use the money you “loaned” to them to build the new facility. In this bond arrangement, you would be paid back by tax dollars or perhaps revenue earned from the use of the venue.
Fiduciary
The term fiduciary refers to a person or entity that has a legal financial obligation to put the needs of others ahead of themselves. Some examples are an executor of an estate, a power of attorney, a trustee of a trust and some financial professionals. (Like me, and other certified financial planner professionals®.)
Contribution
A term used for deposits made to accounts that receive special tax treatment such as an employer-sponsored 401K or retirement plan, an IRA, a ROTH IRA or a College529 Plan.
Traditional Individual Retirement Account (IRA)
An IRA is an account set up specifically for retirement. Sometimes a smaller employer will set up IRAs for its employees instead of a 401K plan, but mostly IRAs are set up by individuals for additional retirement savings. In most circumstances you can have a 401K plan with your employer and an IRA. Contributions to an IRA may be tax deductible. Withdrawals are taxed as ordinary income and may incur a penalty if withdrawn before age 59 ½. Money in the account grows tax free.
Roth IRA
A ROTH is a different type of individual retirement account (IRA.) The money put in a ROTH IRA has been taxed as income previously, so there are no income taxes due when the funds are withdrawn. ROTH IRAs carry special rules regarding the longevity of the money in the account that should be considered before making contributions. Similarly to the Traditional IRA, money in the ROTH IRA also grows tax free. However, when a withdrawal is made from a ROTH IRA, the withdrawal is tax fee as well. (Geeky moment…Are you wondering why it is called a ROTH IRA? The name comes from former Delaware senator William ROTH who helped design the original idea of this account. )
What else do you want to learn?
If this information has been helpful to you, please shoot me a quick email using the form below. And, let me know if there are other concepts you would like explained.
