Financial Concepts
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Financial Concepts
We Talk To People Everyday And The Common Theme That We Encounter Is That Too Many Americans Are Unaware Of Basic Financial Concepts That Affect Them Everyday. That Is Why At MyGuarantyLife, We Want To Help Teach America The Basic Financial Concepts That Most People Do Not Learn About In School.
4 Steps To Financial Strength
Focus On Simple And Achievable
Like anything worth having in life, achieving financial strength requires discipline and focus. However, many people are not taught about “practical” ways to improve your financial situation in school. You may have taken an economics course and learned about fancy concepts like Pareto optimality, but unless you are an economist or MBA, it is unlikely that you use those concepts in everyday life.
We want to help make it easier for you to become stronger financially, so we have put together a number of organized steps that will make it easier to actually USE and APPLY financial concepts to improve your financial strength.
Make Better Decisions With Your Money
If you are like most people, than you have a limited amount of money, but lots of bills and dreams. One obvious step to take is to make better decisions with the money that you do have.
Don’t Spend More Than You Make
Generally, your household expenses shouldn’t exceed 33% of your income. Debt payments should not exceed 30%.
Buy only what you need. Ask yourself, “Do I really need it?” before buying.
Manage Your Debt
Credit cards make it easy to spend money you don’t have. Don’t use them unless you can pay off the balance every month.
Pay your bills on time. Remember that fees and interest can add up quickly.
If possible, consolidate debts for lower interest payments. Save the difference or pay down other debts.
Create An Emergency Fund
Set Short-Term, Mid-Term, and set aside enough money to get through 3-6 months of unemployment or major emergencies.
An emergency fund will help you get through tough times without getting into credit card debt.
Set Short-Term, Mid-Term, and Long-Term Financial Goals:
What Do You Want To Achieve…
6 Months From Now?
1 Year From Now?
10 Years From Now?
What Are You Willing To Do To Reach Those Goals?
Compound Interest and Rule of 72
Understanding Compound Interest
One of the fundamental money concepts is Interest.
Interest, to give a very basic example, is often a “price” that is paid to borrow money. Compound interest is when interest is added to the starting amount, or principal, so that the interest that has been added also earns interest.
With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved can add up to big money. Whether you realize it or not, the concept of interest is a big part of your financial life because the possibility of earning interest is why people lend and borrow money.
What Does This Mean?
Your money can work for you when “your money earns money”. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. When you get your money back, you get it back plus “interest.” Your money can make an “income,” just like you. You can make more money when you and your money work.
Three Enemies of Growing Money
Inflation
What Is Inflation?
The simplest way to think of Inflation is as an increase in the price you pay for goods and services. In other words, a decline in your purchasing power.
Every year, the United States Department of Labor takes prices of a variety of products and services. This information is used by many economists to calculate an average inflation rate. The average annual inflation rate since 1913 has been 3.2% per year.*
This means, 10/20/30 years from now, ordinary goods will likely cost more and you will be able to buy less with the same amount of money as today.
What Does This Mean For Me?
Based on historical averages, your buying power is going to decrease an average of over 3% every year. That means when you plan for the future, you have to take into account that your money in the future will probably buy less than it does now. In other words, in the future, you might need more money to buy the same things as you can today with less money.
What Can I Do?
One thing to consider when investing or accumulating assets is to think about whether the interest you are earning is going to be higher than the rate of inflation over the same amount of time. If your rate of return is lower than inflation, you may not really be “growing” your money.
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Taxes
Most people have heard it said that nothing is certain except for death and taxes. However, most people probably don’t realize how literal this statement is.
For example, if you have a large estate when you pass away, the value of your estate above an exemption amount is subject to an estate tax. This means some people can’t even avoid taxes by dying.
While many realize that state and federal taxes take a large bite out of their paychecks, most people don’t realize that there are taxes for more than just the money you earn.
An important part of accumulating assets is to plan and strategize to minimize the effect of those taxes on your financial goals.
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Market Risk
What Is Market Risk?
One factor that most people do not consider carefully when investing their money is the concept of Risk.
Market Risk refers to the possibility that the value of your investment will go down because of changes in the broader economy that you cannot control. Examples of these changes include stock prices, interest rates, currency exchange rates, commodity prices, and many other factors.
What Does This Mean For Me?
Many people may not realize that the success or failure of their financial future might be tied to market risk. For example, many Americans use 401(k) accounts to save for their retirements. 401(k) accounts are often used to purchase stocks and other securities.
Because stocks can lose value based on the market conditions we listed above, that means these 401(k) accounts are subject to market risk. It’s important that you go into any investment with a full understanding that you could lose some or all of your money in any one investment.
What Can I Do?
In many cases, the investments or strategies that offer higher rewards, also have higher market risk. It is important to balance possible reward with possible risk when making plans for the future.
There are financial solutions available that help establish a stable financial future while protecting against the downsides of market risk.