5 Key Steps Toward Financial Literacy

Financial literacy, financial capability, financial understanding.

Whatever the name, the core idea is the same: being equipped with the knowledge, skills and tools to manage your money and secure your future.

That’s no easy task, but here are five key money topics you’ll need to understand andput into action to make financial literacy a reality:

• Budgeting. Financial security starts with prudently managing your money on a day-to-day basis. That means spending less than you earn and saving consistently. Try to save at least 15% of your gross pay for short-term goals, long-term goals and unexpected expenses. Do it first and not with what’s left of your paycheck. Track all your expenses and set reasonable spending guidelines. Finally, don’t get caught up in how others are spending and undermine your own budget.

• Insurance. With so many different types of insurance — auto, renters, homeowners, life, disability, health and long-term care — and so many variations of each, insurance can appear daunting. But financial pitfalls abound if you’re not adequately covered. Insurance is at the foundation of any good financial plan. Learn the basics and get the coverage you need to protect your financial well-being.

• Emergency reserves. Stuff happens. And one of the best ways to keep that stuff from throwing you off course or burying you in debt is to set aside money in a separate savings account for emergencies.

• Debt and credit. Debt can be a useful tool, but it can also be a dangerous trap that undermines your financial health. Minimize your use of debt and understand the world of credit and credit scoring.

• Investments. Stocks, bonds, mutual funds, CDs, annuities — the universe of potential investments is massive. Not to mention the dizzying array of account types: taxable, IRAs, Roth IRAs and company retirement plans like 401(k)s. But, confusing as this may appear, investing is not rocket science. Read and learn. And remember, it’s never too early to start investing.

This isn’t a comprehensive list, but if your goal is financial literacy, it pays to gain a basic grasp of these five elements. If you’re not there yet, keep working toward the goal. If you have gaps, find a person or organization you trust to help close them.

Most importantly, turn your knowledge into action.

The USAAVoice Team is committed to providing information that helps to facilitate the financial security of the military community. The advice in our content is grounded in the principles of sound money management and covers a range of topics, including personal finance, retirement, investments, auto, home, life, health and other areas relevant to our business and the audience we serve.

Investing in securities products involves risk, including possible loss of principal.

Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA.

This document is not legal, tax, or investment advice.  It is only a general overview under the federal tax laws.  The law concerning retirement plans is complex, the penalties are severe, and the laws of your state may differ.  Consult your tax and legal advisers regarding your specific situation.

USAA means United Services Automobile Association and its affiliates.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

Source : www.forbes.com

The basics for investing in stocks

Over the long run, stocks have beaten the performance of any other major asset class by a wide margin (refer Box 1). Stocks have proved their worth and deserve a prominent place in any long term investment plan, such as a retirement account. Yet as stocks are volatile which means that by their nature value rises and falls invest with caution. Ideally, stocks should be held to meet medium and long term goals. In other words, money invested in stocks should not be money that you might need in three to five years.




Stocks tend to deliver handsome returns over the long run, but volatile markets may not cooperate with your short-term cash needs. Ordinary shares represent a share of ownership in the company that issues the shares. Stock prices move according to how a company performs, how investors perceive the company’s future and the movement of the overall stock market. The following is a guide to understand stocks and how to invest in them.

Different flavours of stocks


Growth stocks
Growth stocks are shares of companies with the potential to consistently generate above average revenues and profit growth. These companies tend to reinvest most or all of their earnings in their businesses and pay out little or none of their profits to share holders in the form of dividends.Growth companies expand faster than the overall economy, yet you can sometimes find these companies in mature industries. Note that even fast-growing companies are not necessarily good investments if their shares are overvalued.

Cyclical stocks
Cyclic stocks are shares of companies whose sales and earnings are highly sensitive to the ups and downs of the economy. When the economy is performing well, cyclical companies tend to shine.Acontracting economy typically hammers the sales and profits of these companies and hurts their stocks.

Defensive stocks
Defensive stocks describe shares of companies whose sales of goods and services tend to hold up well even during economic downturns. Examples of industries that are substantially insulated from the business cycle are government contractors and producers of basic consumer products, such as food, beverages and pharmaceuticals.

Income stocks
Income stocks pay out a relatively high ratio of their earnings in the form of dividends. The companies that issue them tend to be mature and have limited opportunities for reinvesting their profits into more attractive opportunities. Stocks that pay large dividends are usually less volatile because investors regularly receive cash dividends, regardless of market gyrations.

Small company stocks
Small-company stocks have generated better returns over time than stocks of large companies. Young, small companies tend to grow faster than their larger brethren. But there’s a tradeoff: Small-company stocks are much more volatile than shares of big companies. There are a number of ways of defining what constitutes a small company.

Diversification means spreading your money among many investments to lessen risk. The idea is to avoid a situation in which your investments are concentrated in a few stocks that big declines in the value of just one or two of them wreck your portfolio. You might strive for a mix of stocks that tend to fare well in different economic environments, such as strong, stagnant and inflationary economies.

Perhaps you will want to blend growth and income stocks in the portfolio. The appropriate blend of stocks depends on personal circumstances, including your time horizon (when you’ll need to spend the money) and your tolerance for risk and volatility (your ability to sleep at night when stock prices fall).

How to pick stocks
Broadly speaking, there are two basic approaches to stock picking: one based on an assessment of economic and market factors (known as a top-down approach) and one based exclusively on analysis of individual stocks (a bottom-up approach). Investors— including professionals such as fund managers sometimes combine both approaches in selecting stocks.

Top-down approach
The investor begins with an analysis of the economy, markets and industries. Trends in the economy (employment and interest rates) substantially influence company earnings. As some companies operate all over the world, the analysis must often be global in scope. Stocks tend to perform differently at various points in an economic cycle. For instance, financial companies often do well early in an economic recovery or even in anticipation of a recovery. Commodities-related companies often perform well in the late stage of an economic cycle.

Bottom-up analysis
There are numerous ways to pick individual stocks, some of them quite complex. In general, though, investors prefer companies that deliver solid earnings growth or those whose share prices are cheap relative to the perceived value of the company. Finding the best of both worlds is an even better formula for successful stock picking.

Of course, that is much easier said than done. It’s crucial to understand how stocks are valued. By itself, a stock’s price tells you nothing about its value. A stock that trades for a nickel a share can be expensive, while a stock that trades for Rs 500 per share can be cheap. As mentioned earlier, what matters is how much the share price compares with a fundamental measure, such as a company’s profits or sales. The article published on the 23rd of February 2015 discussed important elements of Fundamental Analysis.

Finding growth
There are many ways to find great growth stocks. Perhaps the simplest is through your own observations. You may dine at a restaurant chain with an interesting new concept that seems to be opening a new facility every week.

Your teenage kids may tip you off to a new store that all their friends are patronizing. Or it could be a technology company that turns out one blockbuster product after another. As a rule, you should invest only in companies that you can understand. You can find past growth rates and estimated future growth rates for earnings and sales in brokerage reports and on the internet.

When to sell
The decision of when to unload a stock is as important as deciding which stocks to buy in the first place. But the decision to sell is often harder than the decision to buy. That’s because once you own a stock, emotional factors come into play. If you own a stock that falls in value, you may want to hold on to it whether you should or not because by selling and locking in the loss you confirm that you made a bad decision. If you own a stock that performs exceedingly well, you may want to hold on because it has treated you so well, even if the stock has become overvalued. The refusal to sell whether due to unrealistic expectations, stubbornness, lack of interest or mere inattention is the downfall of many investors.

As a long-term investor, you don’t want to cash in every time your stock moves up a few dollars. Commissions and perhaps taxes would cut into your gain, and you’d have to decide where to put the proceeds. By the same token, you don’t want to bail out in a panic in the aftermath of a steep market decline. Here are some clues that will tell you when it is time to consider selling a stock, whether or not you’ve made money on it:

Fundamentals change
Whether you own shares in a blue chip company or a company most people have never heard of you need to follow the corporation’s prospects, its earnings progression, and its business success as reflected in such things as its products and services, market share and profit margins. Annual reports, news stories, research reports from brokerage houses and independent analysts, the Colombo Stock Exchange website and investment newsletters are fertile sources of such information. If a company’s basic, fundamental measures start to weaken, it’s time to reconsider your investment. An example might be a fast expanding retail chain whose sales per store suddenly decline after rising for years. Or here’s a more obvious case: Suppose you bought a stock because you had high expectations for a new product. If the product turns out to be a dud, sell.

Dividend is Cut
The progression and security of the dividend are important to any stock’s prospects. A dividend cut or signs that the dividend is “in trouble” meaning that analysts or money managers are quoted as saying that they don’t think the company can maintain its payout to shareholders can undermine the stock price.

Beware, of stocks that give unusually high yields relative to their history or to their industries. The yield may be high because the share price has dropped a lot. This often indicates that investors believe a company will cut its dividend.

You reach your target price
Many investors set specific price targets, both up and down, when they buy a stock; when the stock reaches the target, they sell. Such guidelines can prompt you to take your gains in a timely fashion and to dump losers before the damage gets too painful. Take the simple step of setting a “mental protective stop.” Watch the stock listings and sell any stock that hits your mental stop point.

You can set your sell level anywhere, be it above the current share price or below the current share price. Once you’ve reached your objective, take the money. If the goals you set are very conservative, you might miss some gains from time to time, but that’s better than holding on too long and falling victim to the Wall Street saying: “Bulls make money. Bears make money. Pigs get slaughtered.”

What’s your return?
With any investment, you should judge performance by total return essentially, the change in price plus any dividends you receive while holding the stock. For example, if you purchase a stock for Rs 40, sell it a year later for Rs 50 and receive a Rs2 dividend distribution during the year, your total return is 30% (a 25% capital gain plus a dividend yield of 5%).

Wrap up
Stocks merit a substantial place in your portfolio. Because stocks are volatile assets, they are more suitable for portfolios invested for medium- or long-term goals. Be sure you have a diversified blend of stocks that includes a helping of foreign shares. Do your homework to ensure that you aren't overpaying for the stocks.

http://www.dailymirror.lk/65109/the-basics-for-investing-in-stocks

Before You Invest A Cent, Do This

How can you retire on time and be comfortable in retirement? By saving and investing, of course. But before you put away money in your retirement accounts, you absolutely need to build up your emergency savings account.

More than eight in 10 households (82%) experienced a financial shock in the past year according to new data from the Pew Charitable Trusts. Typical problems included an unexpected decline in income, a hospital visit, the loss of a spouse or a major house or car repair.

More than half of those folks said the resulting financial damage made it hard to make ends meet. Pew talked with 7,000 households and focus groups in three large U.S. cities for the study.

Meanwhile, nearly six in 10 say they are unprepared now for a financial emergency, yet they say retirement remains a major concern.

Here’s the thing: Financial emergencies happen. You will lose the use of your car for some reason. You or a member of your family will end up in an emergency room and need costly care. Somebody will lose a job.

Optimism is great, but at some point in the next five or seven years something could happen. I hope your life is a easy-sailing breeze forever, but you know you will, at some point, have to come up with a few thousand dollars on the spot.

If you have no cash in the bank, that money will come from a relative or from selling something or in the form of a loan you probably don’t want to take out at unfavorable terms. It will hurt you financially and mentally.

If you have already started saving into a 401(k), chances are you will raid the account to get the cash by taking a loan out or by simply emptying it and paying the penalties. That’s what is known in the benefits world as “leakage.”

Be prepared

According to one study, leaks from plans amounted to 40% of our own contributions. That’s real pain over the long term. Aside from the cost of the taxes and penalties, you lose the ability to compound money into a retirement in the future. Time is what you really lose.

How hard would it be to prepare yourself for a nearly inevitable problem? It might take a few months to cobble together the cash, but imagine how much better you would feel sitting on $1,000 in a savings account. Or $2,000.

Keep on going. Before you invest a cent, get your balance up to the equivalent of six month’s salary if you can. Now you’re bulletproof. Your retirement plan or IRA can take in every cent you save and you can rest assured that a short-term emergency isn’t going to demolish your long-term goal — a safe and comfortable retirement.

source: www.forbes.com

7 Things Smart Investors Always Keep in Mind

By Sarika Periwal

1. Have preset goals

Investing your money is a serious business and deserves a well thought out plan. While saving money is always a good idea, you should also know what you are saving money for, and how much you will need to meet that goal. Usual financial goals could include saving enough to buy a home, or planning for investments to supplement your pension, or even having ready access to a certain amount of money in case of medical emergencies. The goals must be set before you can save money for them.

2. Invest first then play
If you clear all your bills before you set aside some amount to invest, you will never have any money left over. What you need to do in a very disciplined manner is to invest regularly in a couple of options and then use the remaining money for your regular expenditures. That way you will always have enough to invest and will work out the difference in your current lifestyle. Skipping a movie a month is a small price to pay for a good investment portfolio.

3. Spread it out over different heads
Just like putting all your eggs in a single basket is ill advised, your investment strategy should also not concentrate only on a single investment option. There are some savings options that you will always find easier to invest in. They are like your comfort zone and if you are not careful you may over invest in an area that does not offer you the best possible returns. Or you may risk much more by investing in a single company’s stocks. Use a commodity trading company after conducting diligent research. That way a single crash in the financial world won’t clean you out completely.

4. Understand your investment
If you are paying a portfolio manager to handle your investments, it is even more important for you to ask what he is doing with your money. You must always understand what you are investing in and the possible risks that you are taking. Yes it is not the most entertaining of subject matters, but financial investments work much better for you if you know exactly what you are investing in. So break out that portfolio and get a gleaning of what every single investment line stands for.

5. Rebalance your portfolio every year
Just as your needs change each year, the focus of your investments may also need to change each year. If you are investing in mutual funds, stocks, or commodities, take time out once a year to see if they are the best performing ones in the field. If they are doing well, leave them alone. If you feel that others are offering better opportunities go ahead and make the change. By simply being aware of what is going on in the market you will be a wiser investor.

6. Pay off loans as fast as you can
A loan is simply making money for the creditor. So you need to ensure that you pay no more interest than is due. If you can collect an annual corpus through wise investing to pre-pay portions of your loans, it is actually a very wise investment in your future.

7. Trust your gut
Though you may not be the best financial wizard in town, you must also trust your own instinct when it comes to taking up investment plans. Just because it sounds good when your broker is hard selling something, is no reason to invest in it. Take a look for yourself. Ask others for their opinion and always trust your gut before making an investment decision.

 

Source:http://www.selfgrowth.com/