Knowing Some Terms of Financial Literacy
By Ryan Hayden, Beyond Wealth Advisors
We all like little bits of information that help us know what we want to know, forget what we want to forget, and make good decisions.
I’d like to suggest there are four types of money, four places to put it, and four terms you may want to know.
The four types of money are … income, expenses, surplus and emergency. We all know the first two. We all wish there was more of the third. And sometimes we keep the fourth, which we are supposed to leave for bonified emergencies!
There are four places for money. You can … bury it, bank it, insure it, or invest it.
“Bury” can be a hole in your back yard, a spot in your wallet, under the mattress, etc. When you bury something, if you’re the only one who knows where it is, it’s very secure! But it also loses purchasing power due to inflation, and … if someone else finds it … they can take it.
Bank money is pretty handy in the digital age, and it is FDIC insured to an amount that adjusts upwards every so often, so if someone takes it fraudulently, you will get your money back up to a certain level. Bank money can often pay interest, but often also does not keep up with inflation.
Insured money can be what we call an annuity. An insurance company or investment firm will take your money, invest it at their risk, promise you some of the profit (either predetermined or not) and they make another portion of the profit on your money.
Or, you can invest it yourself either using a professional you pay, or an online source that may or may not have a visible fee structure. You will notice that each one is a theoretical step up in risk and reward.
Four terms to know. Stock, Bond, Mutual Fund, and Annuity. Stock is “ownership” in some form of business. Bond is “loanership” where you are effectively buying the debt of an entity (a business, a city, etc).
Thus, you are loaning them money and they pay it back according to the terms of the bond document. A mutual fund is most often a “pile” of ownership and or loanership.
You get diversification due to a multiplicity of things owned or loaned. And an annuity is a “promise.” There are terms and conditions set forth and you often get some level of guaranteed protection and performance for your assets.
Income, Expense, Surplus and Emergency Bury, Bank, Insure or Invest Ownership, Loanership, a Pile and a Promise.
How do they all fit in your world?
Any opinions are those of Ryan Hayden and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Currently, the FDIC limits the insured amount (including principal and interest) for all deposits held in the same capacity to $250,000 per depositor, per insured depository institution and $250,000 for certain retirement accounts. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office. Variable annuities are long-term investment alternatives designed for retirement purposes Withdrawals of taxable amounts are subject to income tax and, if made prior to age 59 1/2, may be subject to a 10% federal tax penalty. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may also reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in variable annuities involves risk, including possible loss of principal. The contracts, when redeemed, may be worth more or less than the original investment. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.
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