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Copyright © 2021 by HSF Publishing LLC, Dover, Delaware.
Note: This material is for review only, and not for distribution
Table of Contents
Chapter 1: The Foundation of Financial Literacy
- Balance sheet
- Income statement
- Cash flow
- Central bank
- The SEC
- Stock exchanges
- Time value of money
- Compound interest
- Rate of return
- Behavioral finance
- Agency problem
- Capital 101
- Opportunity cost
- Sunk costs
Chapter 2: Financial Literacy for Investing
- Asset allocation
- Risk and risk aversion
- Commodities (futures contracts)
- Alternative investments
- Index funds
- Mutual fund selection
- Stock indexes
- Quotes and orders
- Bear market/bull market
- Short selling
- Dollar cost averaging
- Expected return
- Profitability ratios
- Yield and yield curve
Chapter 3: Financial Literacy for Borrowing and Lending
- The Five C’s of Credit
- FICO score
Chapter 4: Financial Literacy for Law and Legacy
- Financial advisor
- Financial fraud
- Living will vs. power of attorney
- Guarantor vs. co-signer
- Earnest money vs. security deposit
- Flexible savings account (FSA)
- Pension plans
- Capital gain/loss
Chapter 5: Due Diligence is Now Due
The fifth chapter is followed by the Conclusion, a section dedicated to Notes (♪), and the Index
Yin and Yang of Personal Finance
Success is getting what you want. Happiness is wanting what you get. – Dale Carnegie
Imagine for a moment that you are in a large room filled with financial planners. They are not like your Uncle Harry or Cousin Sally, who pride themselves on being financially savvy, periodically giving you hot stock tips and advice on managing your credit cards.
No, these are professional planners, who devote 40-60 hours a week to clients willing and able to pay for advice on managing wealth and creating financial peace of mind. Many are professionally credentialed financial advisors.
Walking around the room, casually listening to the chatter, you hope to pick up hot investment tips on the cheap. But you hear nothing of the sort, nothing about stocks poised to double in price, strategies for smart asset allocations, economic forecasts, or the latest rumors on Wall Street.
To your surprise, these planners are sharing anecdotes that could be story lines for some TV soap opera. These are the real stories from the financial-planning trenches: personal anecdotes about the heart-wrenching issues their clients are facing, vignettes of human drama and frailty.
As if a light were turned on, you are presented with firsthand confirmation that wealth solves some problems, but not all of them. In fact, it may create problems. At once, the devastating truth of the Midas touch parable becomes clear: a passionate and obsessive quest for gold may get you gold, but it exacts a too-high price – anguish, heartache, family decay, spiritual poverty.
Welcome to the true workings of financial planning.
A few years ago, we conducted a study with the support of the Financial Planning Association. ♪ We explored the changing role of financial planners, from one focusing exclusively on financial analytics and money management to one encompassing coaching and life planning.
We obtained anonymous and confidential data from a sample of 1,384 financial planners. Seventy five percent of the sample were responsible for managing over $20 million of their clients’ financial assets. The results of this study have been cited in professional journals, summarized at professional conferences, and incorporated into the financial-planning curricula at many colleges and universities.
What we found supports the time-honored truism that personal wealth may come with unintended consequences. The only problem that money will assuredly and unequivocally solve is that of not having money. As Johnny Cash said, “Success is having to worry about every damn thing in the world except money.”
Suicide, depression, addictions, divorce, family turmoil, terminal illness, chronic physical pain, emotional pain, the soul-searching quest for spirituality; this is a list of personal distress you would expect priests, ministers, rabbis, imams, therapists, and professional care givers to wrestle with – not financial planners. Yet our study found financial planners do confront these issues. After all, they are serving human beings who have human problems.
Today, financial planners are challenged to listen to their clients with empathy before offering advice. And when the time comes to counsel, they must go beyond financial algorithms, computer simulations and economic forecasts. Our research shows that possessing quantitative skills – knowing the lay of the economic land – while necessary for serving clients, is not nearly enough to satisfy their human needs and desires.
Yin of Finance, Yang of Personal Fulfillment
This distinction between necessary and sufficient is the premise of our book. It is the logic underlying the yin-yang title of this introduction. Based on ancient Chinese philosophy, the yin and the yang connote the complementary, harmonious fusion of seemingly opposite forces. For example, consider these opposing yet complementary forces: activity and rest, sunrise and sunset, seasonal cycles, oriental martial arts, and yes, financial wealth coupled with psychological and physical health.
The give and take between aggression and submission, active and passive, is the essence of the yin and the yang. Natural forces, according to this philosophy, are not in destructive conflict, but rather constructive growth, resulting in a harmonious whole. Our ability to experience peace and fulfillment is tempered by having lived through turmoil and loss.
Do we need money to survive? Of course, we do. Will financial literacy, understanding the essence of financial management, increase our ability to cope in an increasingly complex world? Yes, it will. But is money all we need to feel fulfilled? Is it sufficient to meet our emotional and psychological needs? That question is answered in the proverb, “Money can’t buy happiness.”
Financial planning thus requires a yin-yang blending of the necessary and sufficient, of the complementary needs, of the financial and soulful, to create a harmonious whole.
And so, we have a powerful lens for viewing and reconciling the duality of acquiring financial wealth while seeking personal growth and fulfillment. Dale Carnegie’s penetrating insight, “Success is getting what you want. Happiness is wanting what you get,” is a testament to the quest for balancing the financial-personal fulfillment duality.
Other writers have stressed the importance of achieving riches without filing for spiritual bankruptcy. They see the Midas touch as a parable that could have been written by Stephen King.
The message of this book supports those writers, but it adds a distinctive, epiphany-inducing format. Financial wealth and personal fulfillment are not mutually exclusive. The quest for a healthy balance need not result in a zero-sum tragedy. A yin-yang harmony creates your total wealth, and that glorious fusion is not only possible, but required for defining the full richness of your life and for achieving your full potential. Our goal in this book is to help you achieve that potential.
Our Yin-Yang Format
You can acquire wealth without selling your soul. We help you achieve that goal by explaining basic financial concepts – the foundations of financial literacy – while framing those concepts in the context of balance, growth and personal fulfillment. To highlight the duality of financial well-being with psychological and spiritual well-being, we examine financial literacy juxtaposed with reflections on humanity.
This book creates a bridge between money and fulfillment, one built on the foundation of moving from a false dichotomy of either/or to a fusion of and/also, from zero-sum to sum. In the pages that follow, you will see a complementary duality: the yin – definitions, examples and prescriptions for acquiring financial literacy – immediately followed by the yang – insights and recommendation for achieving personal fulfillment, conceptually linked to that financial literacy.
Defining and providing examples of some of the yins required cross referencing with other yins. When you see an underlined term, realize that it has its own dedicated yin. Financial literacy incorporates multiple interrelated concepts. Simple cross referencing helps you understand those relationships. We also included a Notes section at the back of the book, not because we are obsessive academics, but because a few of the yins called for an expanded example, or tips for further application. A note (♪) at the end of a yin signifies additional discussion. You will find them helpful.
How to Read This Book
You have multiple options for reading and using this book. The financial terms are presented in four chapters, but the sequence in which you read the terms is up to you. We recommend beginning with the first term (Finance) and reading sequentially until you read the last term (Financial Wealth). We expect many will choose that option. But because the terms may be studied independently, you could scan the Table of Contents and pick and choose terms of greatest interest, terms representing issues that are most pressing or urgent, or even choose terms randomly.
Regardless how you read this book we are convinced the definitions, examples, lessons, quotes, vignettes, and cross referencing will draw you in. You will then have a different perspective of Your Total Wealth, regardless of your financial savvy or size of your portfolio.
Finally, we ask you to open your mind, your heart and your soul to our message. Yes, some of the financial concepts might appear intimidating at first, especially if finance and numbers were never your thing. All of us feel intimidated and insecure when stepping out of our comfort zone. But soon, you will see how financial security and personal fulfillment are within your grasp.
With your heart, mind, and soul open, you now begin a journey to increase your financial literacy. And because you will overcome intimidation and insecurity, you realize, in the words of Eric Hofer, “The hardest arithmetic to master is that which enables us to count our blessings.”
Many stocks pay dividends, which are periodic (usually quarterly) cash flows to stockholders. Dividends are declared by firms’ boards of directors. Dividends can increase over time, decrease or be eliminated.
Firms pay dividends when they have reasonably high profits and cash flow, and they don’t need the money to invest in new businesses, products or plants and equipment. Rapidly growing firms tend not to pay dividends or at least very low ones. Profitable firms with fewer growth prospects tend to pay higher dividends.
As of July 2020, there were 66 “dividend aristocrats” in the S&P 500 Index – 66 companies that have paid increasing dividends every year for at least 25 years.
The “dividend yield” is the annual dividend amount divided by the stock price. Stocks with very high dividend yields tend to be risky because the companies are more likely to cut their dividends. Because of this risk, you should not “chase yield”; i.e., don’t buy a stock simply because it has a high dividend yield.
Are you concerned more with dividend income or stock appreciation? Income-oriented (often older) investors prefer stocks with relatively high-dividend yields, with dividend payouts that are believed to be safe from being reduced or eliminated. Growth-oriented investors prefer stocks that hold the promise of high capital gains; indeed, they often prefer stocks that don’t pay any dividends. Dividends are taxed, while taxes on capital gains can be deferred for as long as you own the stock. Prior to 1950, most of the high rate of return earned by investors in U.S. stocks came from dividends. Since then, capital gains have outpaced dividends.
One of the oldest human needs is having someone to wonder where you are when you don’t come home at night. – Margaret Mead
What is your favorite holiday? If you are like most people, you probably answered Christmas or Thanksgiving. If it’s Christmas, you might have been thinking of gifts, Christmas songs (religious and secular), the anticipation leading up to Christmas day, or the loving chaos of the day itself.
If it’s Thanksgiving, you too might have been thinking of the anticipation, maybe reminiscing about the sight and aromas of a turkey dinner, or the contentment of a day devoted to giving thanks.
What’s common to both those holidays are memorable times people share with their families. Some will travel thousands of miles just to spend one or both holidays with those they love. So special and heart-warming are these times of the year that many people open their homes to guests, just so they can share their joy with others. To these people being rich has nothing to do with expensive meals eaten on a silk tablecloth, under the roof of a house in an exclusive neighborhood. Nor does it involve trendy presents from the chic shops.
Deep down, you know that the real present is the laughter and love of those around you. What you experienced during those “rich” moments was a dividend of a loving family. Not all investments increase in value; some decrease. Not all of them pay dividends. But if you are looking forward to spending Thanksgiving or Christmas with family, you have made a wise investment, indeed.
Continue making that investment and keep looking forward to the dividend. Even if unforeseen events prevent you from sharing the holidays, you will know you are missed, and they know you are missing them. Time will pass and you will forget about the neatly wrapped presents, but you will forever remember the presence of your family. What a priceless dividend!
Wealth is the ability to fully experience life. – Henry David Thoreau
When you die, the final test of how you lived your life will not be the size of your financial portfolio. It will be the legacy you created while you lived – the innumerable decisions resulting in that priceless portfolio.
Your legacy will be the memories your family and friends will have for the rest of their lives, memories about you and your relationship with them.
Life is short, but legacies endure. We wish you wisdom and compassion in creating those memories and that legacy – a legacy that defines you as one who balanced financial wealth with heart and soul.