Financial Literacy

In today’s world, everyone seems to want to own the newest and flashiest assets, knowledge should be the precursor to any purchases.  In this case, we equate knowledge to financial literacy, which gives you an understanding of the upside/downside risks for each potential investment you consider.  Basic financial literacy includes budgeting and saving, but quickly expands into areas of internal expenses, tax ramifications, liquidity and transferability.

Financial literacy, at its foundation, could be summarized as “Don’t spend more than you earn.”  Start by tracking your income and expenses and creating a “realistic” budget.  By having a solid framework in place, you will be able to lay out approximately how much you have available to save and invest each month.  The second step involves utilizing the time value of money to take advantage of exponential growth with compounding interest.

When investing, it is easy to focus on performance and returns, but internal expenses can quietly erode gains.  These expenses may include management fees, transaction costs and expense ratios.  Dependent upon what you invest in will have a direct correlation to the price of these fees and the effects it may have on your long-term returns

Another factor to consider is what account you are implementing these investment strategies in.  A brokerage account will typically trigger long-term and short-term capital gains when you go to sell an investment.  By investing in a tax-advantaged account however, such as an IRA or Roth IRA, these assets will be able to grow tax-deferred or tax-free, reducing your annual tax burden.  Typically, accounts such as these are not very liquid.  Liquidity refers to how quickly and easily it is to convert assets into cash without significantly affecting its value.  It is crucial to have an emergency fund or liquid assets readily available at all times to be prepared for the worst.

Transferability refers to the ability to easily pass or move financial assets to others.  By establishing an estate plan, you can potentially limit the costs and tax ramifications for your beneficiaries to inherit your accounts as easily and smoothly as possible.

Financial literacy is an endless process where each step leads you closer to your goals and the most powerful step you can take is the next one.  Small and consistent actions can lead to large positive outcomes as time goes on.  If you would like to discuss and review your current plan or explore new opportunities, I am here to help you make the most out of your financial potential.