Financial Cheat Sheet
Image
Reply
Category Archives: Financial Literacy
You’re Responsible for Managing Your Money
“Don’t be like a ship at sea without a rudder, powerless and directionless. Decide what you want, find out how to get it, and then take daily action toward achieving your goal. You will get exactly and only what you ask and work for. Make up your mind today what is it you want and start today to go after it! Do It Now!” ~ Napoleon Hill
When you understand that you alone are responsible for managing your money and building wealth, everything changes. It’s not up to the government or your neighbor—it’s all on you.
Take control and make it happen.
It is ultimately the choices and actions you take with your money that have the greatest impact on your financial well-being.
It is about developing disciplined spending and saving habits, being responsible with debt, making wise investment decisions, and exhibiting patience and long-term thinking when it comes to financial goals.
Start by thinking about your end financial goal. What is the number (amount needed for retirement) you are aiming for? Once you have that number in mind, consider what actions you need to take now to make it a reality. If you’re unable to invest a lot right now, think about what steps you can take to change that situation.
Break down your goals into smaller, more manageable tasks, and you’ll be surprised at how much progress you can make.
Even if you cannot afford to invest $1,000 monthly, do not allow that to discourage you from investing. Beginning with more modest amounts such as $25, $50, or $100 can be a great starting point. It is crucial to make investing a priority, no matter how little, and then gradually increase your investments as time goes by.
When striving to build wealth and for financial freedom, don’t forget the importance of maintaining good health. True wealth is not only the freedom to pursue personal goals, but also the presence of good health. Without good health, financial freedom holds little to no worth.
While a healthy person desires numerous things, a sick person longs for just one: good health.
April 2023 – Financial Literacy Month
April is Financial Literacy Month. It’s a month to raise awareness around financial literacy and wellness, and highlighting the importance of financial planning and of developing healthy financial habits.
A new National Financial Educators Council (NFEC) survey found that lacking financial literacy — and not knowing how to manage personal finances — carried a high cost in 2022.
The NFEC survey showed that 38% of Americans said their lack of financial literacy cost them $500 or more, and a whopping 23% said it cost them more than $10,000 — a steep increase from the 10.7% who said the same in 2021.
As a result, the estimated average amount of money that financial illiteracy cost Americans was $1,819 in 2022 — the highest average since the first annual survey took place six years ago. This figure correlates with record-high inflation rates and other economic challenges, the NFEC noted.
🤔 How does financial literacy impact investment behavior?
This #FinancialLiteracyMonth, @Nasdaq experts & partners explore financial investment behaviors to strengthen awareness of financial education opportunities.
➡️ Learn more with #SmartInvesting: https://t.co/lYRQNlfoRK pic.twitter.com/hiqFWKz6BV
— Nasdaq (@Nasdaq) April 5, 2023
In terms of common costly mistakes, overdraft fees were prominent: the median overdraft fee on a debit card is $34, according to the Consumer Financial Protection Bureau (CFPB).
According to the survey, which cites CFPB data, most debit card overdraft fees happen on transactions of $24 or less — and American consumers end up spending $17 billion a year on overdraft and non-sufficient funds fees.
References:
Building Wealth
Jack Ma the richest man in China said, “If you put the Banana and Money infront of a monkey. The monkey will choose Banana because the monkey don’t know that money can buy alot of Bananas.
In fact, if you offer Work and Business to most people, they will choose to Work because most people don’t know that a Business can make more money than salary.
One of the reason most people fail to build wealth is because they have not been educated or trained to recognise the entrepreneurial opportunity.
They spend alot of time in school and what they learn in school is work for a salary instead of working for themselves.
Profit is better than wages because wages can support you, but profits and owning assets can make you wealthy.
Source: https://www.facebook.com/109901988144184/posts/165519812582401/
Don’t get financial advice from NFL stars
When it comes to financial investing, investors should not rely on advice from professional athletes who promote crypto-currencies or currency trading platforms.
In November 2021, cryptocurrency market prices were skyrocketing to new heights and Bitcoin was one of the red-hot. Concurrently, two well-known NFL football players, Green Bay Packers quarterback Aaron Rodgers and Los Angeles Rams wideout Odell Beckham Jr., stated that they would accept a portion of their 2021 salaries in the cryptocurrency during a month when Bitcoin hit an all-time high of $68,906 per coin.
As often happens with volatile currencies and investments, Bitcoin market price has crashed from that November peak to a nearly 52 percent dive, reaching a January bottom of $33,076.
If ever there were a case of buyer beware with the products athletes endorse, this would be it. Most especially when that “product” is actually a volatile form of currency that can cost investors massive sums of money.
The sad fact is that the vast majority of people don’t truly understand how cryptocurrency works. And that group also includes most professional athletes who have advisers paid to guide their investments, as well as agents who find commercial opportunities to endorse products like Bitcoin.
It’s been assumed that athlete such as Odell Beckham Jr. has take a substantial financial hit in pay with Bitcoin.
It was reported by Darren Rovell that Beckham’s entire salary is now worth only $413,000 USD equivalent in Bitcoin as opposed to the $750,000 USD guaranteed by the LA Rams football team, excluding taxes. Once federal and state taxes are factored in, Beckham is projected to make around $35,000.
References:
Financial Literacy Education
Financial literacy, quite simply, is a prerequisite for financial freedom. Financial Times
Fixing economic, income and wealth inequality across the nation and globe remains a Herculean task. But, by emphasizing basic financial literacy education — to boost budgeting skills, debt knowhow and investment knowledge— need not be. And basic financial understanding can make a vast difference — not just to economically disadvantage communities, but to anyone in virtually any circumstance.
The correlation between high levels of economic and financial inequality and low levels of financial literacy and understanding is one of the starkest. The problems are worsened by low levels of knowledge about how debt interest is calculated, how it compounds and how to mitigate risk or budget effectively.
From the 2014 S&P Global FinLit Survey, only a third of the world’s population were deemed financially literate, according to analysis by the World Bank.
Financial literacy education, done right, can be a source of emancipation for the economically disadvantaged seeking a way out of deprivation.
Targeted at the young, in particular, it can lay down vital foundations for future prosperity and teaching them about risk and investment opportunity. One of the big reasons to target young people is that later in life they become much harder to reach.
Too many children think money grows on trees. They don’t realise that they have to budget all this money as they get older, they’ve got to pay these bills. FinLit should be one of the things that’s taught to prepare the young for the real world.
“Narrowing the financial literacy gap is crucial for narrowing the wealth gap. But financial literacy clearly needs a boost across the social strata too”, says Aimée Allam, executive director of FT FLIC.
The best investment you can make is in yourself and in your financial education. It’s the obvious starting point to building wealth and achieving financial freedom. And, here are seven reasons:
- Provides dividends for life that nobody can ever take from you.
- Increases your earning potential.
- Increases your return on investment.
- Improves the quality of your life and finances.
- Secures your retirement.
- Defends your portfolio from unnecessary losses.
- Provides peace of mind around money.
To ensure you become financially free, take the income you think you’ll need in retirement and multiply it by 20. That’s what you need to put away in order to live off the interest without touching your principle.
Determine how much risk tolerance you have as you look to compound the money you’ve set aside for retirement. the billionaire’s secret, whereby they get Risk/Growth-like returns with assets that would fall in the Security asset class. The wealthy risk very little and expect substantial returns.
References:
Valuing a Company | Motley Fool
The most common way to value a stock is to compute the company’s price-to-earnings (P/E) ratio. The P/E ratio equals the company’s stock price divided by its most recently reported earnings per share (EPS).
You can calculate it two different ways, by:
- Taking the company’s market cap and dividing it by net income – or,
- Dividing a company’s current stock price by earnings per share
You’ll wind up with the same number either way because in the share price approach, both numbers have already been divided by the total number of shares the company has outstanding. So it’s two different ways to the same place.
A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.
You’ll usually see the P/E ratio quoted two different ways:
- Trailing twelve month (TTM) – which looks at the company’s actual income over the past twelve months.
- Forward – This approach takes analyst estimates of earnings expectations for the upcoming year and using that as the earnings figure.
If a company is growing, its forward P/E ratio will always be smaller than its trailing twelve month P/E ratio, because more income is expected and the denominator will be larger. If you see a P/E ratio out in the wild and it isn’t specified which kind it is, you can probably assume it’s based on the company’s trailing twelve month earnings.
The P/E ratio only works if there’s an E – or earnings. So it’s a helpful tool for companies that have income, but it’s totally useless if a company isn’t currently profitable. That’s why investors also use another tool for unprofitable companies, the P/E ratio would return a negative number, which really wouldn’t be very helpful, so instead investors use the price to sales ratio.
Price-to-sales is a company’s market cap divided by its total sales over the past twelve months. Because the P/S ratio is based on revenue instead of earnings, this metric is widely used to evaluate public companies that do not have earnings because they are not yet profitable.
High growth software companies can have price-to-sales ratios of over 10, while more established businesses are usually in the mid to low single digits. The P/E and P/S ratios are great because they allow you to normalize companies of different sizes and immediately get a sense of what investors are willing to pay for a piece of that company’s earnings or revenue.
You can use these ratios to compare how a company stacks up to the overall stock market, peers in their industry, or itself relative to the past. Generally, businesses that are posting high growth rates are going to have higher price-to-earnings and price-to-sales ratios. That’s because investors expect that company to be considerably bigger in the future, and they have bid up shares to reflect that. That doesn’t mean that they’re bad stocks to own, it just means that people are expecting big growth to continue and if it doesn’t, shares could fall dramatically.
Conversely, stodgy old businesses in crawling industries tend to have lower p/e ratios because they aren’t growing very quickly – for them this year’s earnings will probably look a lot like last year’s earnings. The market isn’t expecting much from stocks with low valuations, so if the outlook gets worse, they’re less likely to take a huge hit, but they’re also less likely to give investors huge returns.
All you’re trying to do with valuation is to get a sense of how much you have to pay for a dollar of earnings or revenue from a company, and what the market expects of that company.
You can look at to see how a company’s valuation compares to the growth the company is posting. The PEG ratio accounts for the rate at which a company’s earnings are growing. It is calculated by dividing the company’s P/E ratio by its expected rate of earnings growth.
Most investors use a company’s projected rate of growth over the upcoming five years, you can use a projected growth rate for any duration of time. Using growth rate projections for shorter periods of time increases the reliability of the resulting PEG ratio.
The generally accepted rule is that a PEG ratio of 1 represents a “fair value” while anything under 1 is cheap and anything over 1 is expensive compared to the growth the company is posted.
For all these ratios there aren’t absolutes, just guidelines.
As investors we’re looking for quality companies with good business models and exciting growth prospects — it’s worth paying a premium for companies like that, these metrics help us understand what the premium looks like and how it fits into the company’s growth story.
References:
Successful Investors and Financial Literacy
Investing is all about: Putting your money to work for you making more money.
One of the most glaring failures in the U.S. K-12 education system is the lack of even basic education in the areas of personal finance, budgeting, saving and investing. We’re becoming a nation in crisis with regard to our schools’ failure to prepare and educate K-12 students in personal finance and decision-making.
Financial illiteracy is an American epidemic and the crisis is growing, according to the non-profit American Public Education Foundation’s national report card on K-12 personal financial education: Vision 2020 Financial Literacy Report Card, 2019-2020. The 50-state review points to a nation in crisis with regard to our schools’ failure to prepare and educate K-12 students in personal finance and decision-making.
“America is facing a growing epidemic,” observed David A. Pickler, J.D., CFP®, ChFC®, CDFA®, an award-winning wealth advisor and education leader and one of Financial Times’ 400 Top Advisors. “Our nation is rapidly sinking into a sea of debt and financial dependency. We have created a collective culture where it is acceptable to pursue bankruptcy as a solution to irresponsible financial behavior and decision making. Each of us has a responsibility to change this culture, to become accountable partners in preparing our children to make sound financial choices, or face the consequences that will undermine America’s future and threaten our economic and national security interests.”
According to The Aspen Institute, 16% of suicides in the US occur in response to a financial problem. Further, a USA TODAY report states that less than one-fourth of young Americans ages 18 to 26 are “very optimistic” about their financial futures.
Financial literacy
One of the most successful traders in history once remarked, “If I’d only been taught in high school what I later managed to learn on my own about investing, I likely could have retired wealthy by age 35.”
Anyone can potentially reap massive financial benefits from simply taking the time to learn the basics about investing as early as possible in life. It’s not too late to begin building a fortune through investing, and the sooner you start, the sooner you’ll achieve your financial dreams.
There are two truths:
- Taking the time to acquire investing knowledge and skills, whether at sixteen or sixty, will put you well ahead of your peers in terms of financial literacy and in terms of financial success.
- An important “secret” about investing and wealth – “You can make a lot more money a lot faster by sending your money to work for you every day, rather than just sending yourself to work every day.”
The best, most successful investors are continually learning and continually honing and expanding their skills at making money in the financial markets.
Stocks, also known as equities, represent fractional ownership in a company, asset, or security. The stock market is a place where investors can buy and sell ownership of such investable assets.
References:
Intrinsic Value of a Company
“Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” Warren Buffett
Intrinsic value is an important concept to evaluate the relative attractiveness of investments and businesses.
Intrinsic value can be defined as the discounted value of the cash that can be taken out of a business during its remaining life, explains investing guru Warren Buffett, Chairman and CEO, Berkshire Hathaway. It measures the value of an investment based on its current and future cash flows. Where market value tells you the current price per share other investors are willing to pay for an asset, intrinsic value shows you the asset’s value based on an analysis of its future cash flows and its actual financial performance.
Essentially, valuing a company intrinsically allows you to look analytically at a business and determine how much cash that business will generate over time, and then you discount the cash flows back to the present day.
Book value vs intrinsic value
In most cases, a company’s book value tends to understate its intrinsic value because many businesses are worth much more than their ‘carrying value’. The ‘carrying value’ is the original cost of an asset as reflected in a company’s books or balance sheet, minus the accumulated depreciation of the asset.
As a result, a company’s intrinsic value often exceed its book value, a result that proves capital was wisely deployed. In many cases, book value is not a reliable indicator of intrinsic value or a true representation of an asset’s fair value or market value. Thus, a company’s book value alone is somewhat meaningless as an indicator of its intrinsic value.
However, intrinsic value tend to be only effective on stocks that are stable and less volatile so that you can reliably valuate. If you see the book value growth and dividends all over the place, your estimates would be very uncertain.
You need 3 factors to determine a company’s intrinsic value:
- Current free cash flow or owner’s earnings
- Free cash flow growth rate over an eight to ten year period. Determine free cash flow growth rates by looking at past 5 year and 10 year growth rate.
- Discount rate to discount future free cash flow to present day.
Discounted future cash flows
Cash taken out of a business in the future is not worth the same as it is today. If you had the money today you could invest it today. Money in the future is partly eaten up by inflation, but more importantly more uncertain if it is there at all.
The calculation of intrinsic value is not so simple. Intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.
To calculate owner earnings, or another way to look and to calculate free cash flow, one adds things back in such as depreciation, changes in working capital and such. Buffett feels that “owner’s earnings” more accurately reflects the actual cash flow that an owner receives.
Net present value for the ten years and your discounted terminal value for the 10th year we can calculate the intrinsic value.
When investing in a company, you first must determine the value of the company according to your estimates of discounted cash flow. You want the biggest difference between its intrinsic value (high as possible) and its market price which is the current price of the stock that is traded on the exchange (low as possible). Over time, you should expect the market value to intersect its intrinsic value.
When you arrive at an intrinsic value it will not necessarily match the current market value or price of the stock. In most cases you will find that there is a vast difference. You have potentially found a great company at a bargain and with a margin of safety. If the market price is much higher than the intrinsic value, it is also great. You can avoid the common mistake made by many retail investors of overpaying for a stock.
Knowing the value of a stock is perhaps the most desired skill. And in summary, intrinsic value is simply the discounted value of the cash that can be taken out of a business during its remaining life, according to Warren Buffett.
References:
- https://einvestingforbeginners.com/intrinsic-value-warren-buffett-aher/
- https://acquirersmultiple.com/2017/02/warren-buffett-how-to-calculate-intrinsic-value/
- https://corporatefinanceinstitute.com/resources/knowledge/accounting/carrying-amount/
- https://www.buffettsbooks.com/how-to-invest-in-stocks/intermediate-course/lesson-21/
Black Wealth Summit
Receiving a College Degree Accumulates Wealth for Whites and Not For Blacks
Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change, according to the Black Wealth Summit. For example, the typical White family has eight times the wealth of the typical Black family, according to the 2019 Survey of Consumer Finances (SCF). The research showed that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016.
Wealth is defined as the difference between families’ gross assets and their liabilities.
Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change.https://t.co/xLSJ2gE0ys
— Financial Planning (@finplan) October 21, 2021
During the Black Wealth Summit, John Rogers of Ariel Investments cited studies by the St. Louis Fed showing that white households with college degrees tend to build wealth while net worth often declines among Black college graduates. The median and mean wealth of Black families is less than 15% of White households’ wealth, according to the Fed’s latest figures from last year.
John Rogers launched the nation’s first Black-owned money management and mutual fund firm when he was only 24 years old. His firm has reached nearly $17 billion in assets under management.
Signs of change amid widening disparities
The data confirms prior research on the role of parental wealth in the transmission of lasting economic advantage: Less-wealthy parents, mostly Blacks, are less able to financially help their adult children, making it more difficult for the next generation to accumulate wealth.
In addition, Black college-educated households are far more likely than their White counterparts to give financial support to their parents. These parents may have entered the workforce at a time when their only employment provided no pension or retirement savings benefits, or even Social Security.
In contrast, parents of White college-educated households have mostly benefited from employment-related retirement benefits. Thus, the pattern among White and Black college-educated households is the opposite: Young college-educated White households are more likely to receive financial support from parents and at considerably higher levels
The findings confirms prior research, which shows that the typical Black college-educated household does not have the same opportunities to add to their family wealth building as their White counterparts, who report large wealth gains at least up to the Great Recession.
Understanding factors such as inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions contribute to wealth accumulation and families’ financial security.
References:
- https://files.stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-achievements-how-a-college-degree-accumulates-wealth-for-whites-and-not-for-blacks.pdf
- https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm