Labor Day signifies a change in seasons, attitude, focus on the last few months of the year, and the beginning of a new school year. There are financial decisions being made daily that can impact your investments and other assets, but we need to help to understand what it all means. It is amazing to know that many people place their money with financial institutions, financial advisors, brokers, and other professionals, but need help understanding the basics of finances or have only a general awareness of policies and events impacting their finances.
Let me provide an example. Do you know, or are you aware that the Federal Reserve System, which is the Central Bank of the United States, is considering issuing what is known as Central Bank Digital Currency? With the rise of digital payment options and apps such as Cash App, PayPal, Zelle, and other available platforms, United States digital currency is becoming more of a practical possibility. While digital currency may not replace coins and paper currency, it will expand the options for global and international transactions. Whether you are a new investor, a highly educated, accountant, a finance person, or the average Joe, today’s conversation is intended to provide a basic understanding of some of the financial terms most commonly used as we move toward the final quarter of the year 2023.
Rule of 72
The rule of 72 is cited in Securities and Exchange Commission financial literature and is often taught or mentioned to investor beginners. This rule simply helps you calculate how long it will take for your investment to double. The rule can be used for other things and not just for financial or investing decisions. The rule is an important calculating factor that could be used in helping you determine where and how much to invest. To apply the rule, divide the number 72 by the rate of interest promised on the investment. For example, if your 401K is providing a 4% rate of return on your investment annually; then it should take approximately 18 years for your money to double. Or, if you are paying 12% interest on your credit card, the amount you owe will double in six years! That’s the point I’m making when it comes to the Rule of 72. The rule is based upon compound interest and not simple interest being earned on your investment or monies owed.
Perhaps one of the lesser-understood terms and concepts used by everyday people is that of rebalancing. To keep it simple, rebalancing is the process of examining your portfolio assets and ensuring that the allocation is in alignment with your investment plan. Sounds complicated? It really is not! What we are talking about here is making sure that a proportionate amount of your money is invested in areas that will result in earning the income needed in your retirement. For example one may have 60% of their investments in stocks; 20% in bonds and 20% in liquid cash or banks. However, in due course, you may notice that your bond holdings are not providing the rate of return you expected in order to retire at age 55. This is where rebalancing your portfolio can play an important role. Rebalancing can also play a role in assessing your investment risk. You should examine your asset allocation annually in order to determine what’s best for you. Calendar rebalancing is probably the least costly, but is also the least responsive to market conditions.
With the constant increase in prices for goods and services, many people may consider withdrawing money from their retirement savings to make ends meet in the short term. A qualified withdrawal is taking a distribution from your retirement account such as a 401(k), 403(b) or IRA. What you should understand is that qualified withdrawals come with conditions and penalties such as you must be 59 1/2 years of age to get qualified distributions with fewer tax consequences; the IRA account must be opened for at least five years before a withdrawal can be made, and any taxable portions of non-qualified distribution are subject to a 10% early withdrawal penalty. There are exceptions to the 10% penalty such as unreimbursed medical expenses, purchasing your home for the first time, and qualified birth or adoption of a child.
Percentage Gain or Loss on Investment
Knowing the percentage gain or loss is very important if you are going to place your money somewhere as an investment and the calculation is pretty straightforward. You don’t need a terminal degree to figure this one out but the information is invaluable. To determine your gain or loss on an investment, all you have to do is take the selling price from your investment and subtract how much you paid for the initial investment, sometimes referred to as your cost or cost basis. The answer to that calculation is your gain or loss. The next step is to take your gain or loss and divide that by the purchase price or the initial cost of your investment. Take that result and multiply it by 100 to arrive at the percentage change in your investment.
Now, you might be thinking wondering, “what’s the value of a calculation like this if I have already sold the investment?” You have a point, and you can always use the formula to determine your percentage of gain or loss on your current investment. Instead of using your selling price, you can substitute that number with the current market price. The resulting number would be your unrealized gain or loss on the investment.
The reason it’s unrealized is because you have not sold the asset.
These definitions and terms are but a very small sample of investment lingo, tools, and jargon used to aid you in becoming a better steward.
That’s What’s Up!
Today’s What’s Up! is about ATM scams. Using ATMs has become so commonplace that we may have a tendency to get complacent when it comes to scams. Here are two interesting scams. If you notice that the ATM keypads are of different colors, there may be something suspicious about that ATM machine. The other scam is what I referred to as “glue and tap.” If you slide your ATM card into the machine but it’s not readable it could be because glue has been placed into the machine reading slot making it unreadable. Your next option is to tap your card so it can be read. The problem is that unless you tap your card again after you have completed the transaction, your account could remain open for the next user. My thought is if you have to tap using an ATM machine, don’t do it! Find another ATM machine to use. And that’s what’s up!
Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.