During my time at the University of Redlands, I studied for a Global Business degree, and two of the requirements for this major were that you must study abroad for a semester and be fluent in two languages. Becoming fluent in UofR's minds means you must pass level 400 (equivalent to 4 years of study) in your second language by senior year. For some odd reason, I decided French would be my language of choice and began learning from freshman year on. By Junior year, I felt great, and like a fluent French speaker, I was then nominated by the department to participate in a language immersion program in the rural countryside of France. Of course, I took the opportunity and got on my first plane for a summer abroad in France! In a small town that would be considered suburbia here in the US, I quickly realized that the destination for my program was not exactly a tourist hot spot for European travelers, a.k.a. English was not commonly spoken around. I arrived at the Airport and began looking for the baggage claim but saw no English words in sight. I began to panic as I stood in the airport, realizing I had no idea what to do, where to go, or how to get there.
It was time for my first attempt at using my French language. I saw a local worker and needed to ask for help as to where the baggage claim was. Before speaking, I froze as all prior French knowledge was left back in the US, and my mouth could not move, only to then have English blurted out. Naturally, I was laughed at and greeted with intentionally disapproving looks and snooty French mumbles of words I couldn't even understand. As expected, this was not a warm French welcome to this American girl. After some time and some tears, I finally found a few students in the program and our teacher for the summer who was picking us up from the airport. He spoke English to us at first but reminded us that the contract states that no English was allowed to be spoken once class starts. You could tell he was expecting a student that was much more advanced than me. Later on, I arrived at my host family’s home where I would be staying for the next three months, with a host mom who spoke no English and a sister who had some idea as to what English nonsense I was saying. It was humiliating to start as I had no idea how to say, "how do I turn the shower on?" where is the food" Does this place have a washer? Where is the metro? How do I survive?" This is the equivalent of the southern Bless Your Heart moment.
Thankfully, my host sister and I utilized google translate and taught each other English and French, however, she gave me some great advice along the way to navigate myself around France. She taught me the most common phrases and words I would need to use in French daily and that would help my confidence and further French pronunciation flourish. She was absolutely right. This lesson got me thinking; maybe Finance is the same way. It can almost seem like a foreign language and can be overwhelming the more complex the situation becomes. So, I thought I would provide the advice my French host sister gave me and give some of the most common words and phrases you need to navigate the financial world.
1. Emergency Fund
Before you start down the road of investing or your personal finance journey, this usually stops #1 on the monopoly board. No matter what, life throws us curve balls we aren't expecting, so it's vital that we financially prepare through an emergency fund. The funds are intended for unlucky life events such as loss of your job, illness, or a major repair to your home or car. The best size for an emergency fund depends on a number of factors, but a good rule of thumb is to have three to six months' worth of your monthly expenses put away in your emergency fund.
2. Employee Retirement Plans
When employees sign up for the plan, they agree to have a percentage of their paycheck paid directly into an investment account. The employer may match part or all that contribution. You are in the driver's seat as far as what your contributions are invested in. The tax advantage of this plan is that employee contributions are deducted from gross income. As a result, the employee's taxable income is reduced by the total amount of contributions for the year. No taxes are due on the money contributed or the investment earnings until the employee withdraws the money, usually in retirement.
3. Individual Retirement Accounts
An IRA is an individual retirement account that allows anyone with earned income (and even their spouse) to save for retirement on a tax-advantaged basis, similar to a 401k but not offered through an employer. There are two main types:
Traditional IRA - You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement.
Roth IRA - You make contributions with money you've already paid taxes on (after-tax), and your money may grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
A beneficiary is a person or entity that is listed to receive a particular asset in the event of a person’s death. If you forget or don’t choose beneficiaries for your assets, such as investment accounts, real estate, and bank accounts, then the decision about what happens to the assets will be made by someone other than you. It is important to double-check that your assets have beneficiaries listed.
5. Investments - Stocks, Bonds, ETF, Mutual Fund
Many investment options are available for investors, but the overall goal is to gain positive returns and grow your wealth. There are varying investment vehicles that can be low risk and others that can carry a greater degree of risk. Listed below are a few different investment options investors choose to hold in their portfolios. The main ones are stocks, bonds, ETFs, and Mutual funds.
ETFs: Exchange-traded funds are a type of fund that is bought as a single investment but contains a basket of varying assets. Meaning it can own hundreds or thousands of stocks across various industries, or it could be isolated to one industry or sector. It is passively managed and more affordable than most mutual fund options.
Mutual Funds: a financial vehicle that pools assets from investors and then is given to a fund manager to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. Due to this, these funds are more expensive to buy as they are actively managed by a manager trying to get greater investment returns.
6. Investment Time Horizon
An investment time horizon is a period one expects to hold an investment until they need the money back. Investment goals and strategies largely dictate time horizons. For example, saving for a down payment on a house, for maybe two years, would be considered a short-term time horizon, while investing for retirement is a long-term time horizon.
When an investment experiences periods of unpredictable, sometimes sharp, price movements this is called volatility. From changes in commerce to politics to economic outcomes and company's earnings and actions, the financial marketplace has volatility when the world reacts to all this incoming news. We never know what tomorrow holds, meaning we can’t predict market reactions. Hence, why we don’t have a crystal ball, so it’s crucial to know that volatility is normal and an integral part of investing. When investors understand this and are not shocked by spurts of volatility in their portfolio, they are less likely make an irrational emotion decision on market emotions and rather decide to react rationally and remain focused on their long-term investment goal.
8. Risk Tolerance
All investments involve some degree of risk and knowing your personal risk tolerance level helps investors and their advisers plan out an appropriate investment strategy that won't make your stomach turn when the markets go sour and keep you on course with your investment strategy. Your risk tolerance is typically classified as aggressive, moderate, and conservative. An example is an aggressive investor will be riskier with a 100% stock allocation, whereas a moderate investor may choose to invest in a 60/40 structure with 60% allocated to stocks and 40% in bonds.
In investing, diversification involves spreading your money around among multiple investments to limit your exposure to any one investment. The practice can reduce the volatility of your portfolio because when one asset is falling, others may be rising, offsetting some of the losses on the declining asset. Diversifying your portfolio helps balance risk and reward in your investments.
The moral of the story here is that even though I studied and thought I knew my French, once I was engulfed or "immersed' it all became blurry. The moral of the story is that even though you think you may know, outside circumstances can make your personal finance journey overwhelming, leaving you feeling like you have no idea what to do, where to go, and how to get there. That's why it is always best to talk to a professional when you're learning the language of personal finance because it can be scary and complex. In the meantime, before you meet with us, hopefully, these words can help you in your personal finance journey!
~ Claire Olmstead
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.