Cardi B said it best: “All I really wanna see is the money.” Well, while seeing the money is great, what comes after you start to pad out your bank account is just as important as how you got the coins there in the first place. Thus, Shondaland, along with the help and expertise of MGO CPAs & Advisors accounting firm, is launching our financial education series, with the goal of helping anyone and everyone win at getting to your financial “happily ever after.” Designed to help you understand both what's influencing and driving our economy and also the fundamentals of basic fiscal planning, this information is designed to help you take control and effectively manage your finances now and as you plan for the future. You work hard, so, from budgeting to saving to investing, it’s all about making your money work hard for you, too.
Whether you’re building a budget, working on your credit, or starting a savings plan, the goal of gaining financial responsibility isn’t to build a surplus of income so you can live like freewheeling’ stockbroker in the '80s — ya know, cars, boats, planes, champagne, etc. Rather, having a solid money plan now is necessary so that, later in life, you don’t find yourself strapped for disposable income (or inheritance to pass down to your family) as you try to comfortably live out your golden years.
FINANCIAL LITERACY 101
Getting and Building Your Credit
When, How, And Where to Save and Invest
Now, we freely acknowledge the difficulty in training yourself to take any portion of a paycheck and put it away for use years down the line. You work hard now, so why not use it to play a little? Well, there’s nothing wrong with playing a little, but considering the bleak statistics on how much Americans — and Millennials specifically — have squirreled away for their retirement, most of us could use a little reminder on the importance of not just saving and investing, but figuring out how to turn those investments into money-making ventures that continue to bring in revenue and expand your wealth based on just a few smart decisions.
Diversifying 101
From stocks to bonds to mutual funds, smartly setting up personal endowments can ensure that your money goes further that just covering month to month expenses. And to make sure it goes as far as possible, when you’re ready to start investing, top of mind needs to be on diversifying.
Diversified investments are generally part of a portfolio of various assets — stocks, fixed incomes, and commodities — that earn the highest return for the least amount of risk. Building a portfolio with an adviser takes time, conversations, and plenty of consideration to ensure that you’re putting together a collection of assets that work for your financial goals while maintaining value during sudden market changes, which, as we all know as of late, are pretty common these days. In order to get started with diversifying, here’s what you should know before meeting with an advisor to establish your financial vision:
Investment quality over quantity
A fundamental touchstone of investing strategy is understanding that the quality and variety of selected investments is more important to success than the number of investments. In the beginning, you may feel pressured to overly diversify your investments so you think you’ve got all the bases covered. But, really, there’s no set number of possible investments that will guarantee a spectacular return. The diversity of your investing needs to be tailored to your specific needs and interests, which you can determine with your financial advisor. In any case, some areas of traditional diversified investing include:
- Real estate funds (a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies.)
- Stocks
- Bonds
- Cash
- International securities (a tradable financial asset — stocks, bonds, etc. — issued by foreign companies or entities)
Become an educated investor
The world of investing isn’t always easy to understand, but that doesn’t mean you can’t shore up on the different areas of investment to solidify your understanding of how each type of investment works, and what is happening with the money invested in each venture. With that basic knowledge, you’ll feel more comfortable assessing your finances with the proper advisor or team of advisors.
Beyond knowing what you’re doing with your money, you should also know where it’s going. For example, if you’re investing in companies with physical goods, get to know both the brand and its products. Investors can learn a lot from using these goods or services that they are placing a portion of their financial future behind, and with more familiarity comes a healthier understanding of the business, its sector, and its potential for growth and earnings.
Understand financial risk
With any type of investing, there is always, always risk involved. Sometimes its based on poor decision making, and sometimes it’s simply pure risk, meaning instability that cannot be controlled. In any case, understanding and discussing risks before you make financial decisions can stave off damage to your portfolio down the line. Here are the basics for individual risk when it comes to investing:
- Liquidity risk - This type of risk comes in two forms. The first is market liquidity risk, when assets can’t be purchased or sold off rapidly enough to avoid losses when the market takes a downturn. Typically, in this situation there are few buyers but a lot of sellers. The second risk is funding or cash flow liquidity risk, which references the potential harm to stakeholders when a corporation doesn’t have the capital to pay its debt, forcing it to default.
- Speculative risk - This refers to a profit or gain that is uncertain of success. This comes into play when an investor doesn’t conduct proper research before investing, overextends an investment for gains, or invests too much of their net worth into one investment.
- Currency risk - If an investor acquires foreign currencies, they could be exposed to interest rate or fiscal policy changes that can drastically affect the value of their invested money. Further, politics, natural disasters, diplomatic changes, and volatile economies can also put individuals in danger of foreign investment risk.
Establish rhythm in your portfolio
Once you’re comfortable with the diversity of your portfolio, work with your financial team to continue placing more money into investments you’re comfortable with that are performing well. A portfolio should be revisited on a regular basis to assess and expand on how and where money is being divided and invested. Get comfortable collaborating with your financial team so you can develop a portfolio with investments that have different rates of return. The goal is to establish a portfolio with mixed income, growth and market capitalization that will smooth out the inevitable peaks and valleys of the market. In the end, you want gains, and thus personal revenue, that is always steady as you build and then subsist on a portfolio meant to ensure that life is and remains comfortable.
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