Personal Finance for the naive/unsavvy: Banking/Investing

WARNING, THIS GUIDE INVOLVES READING, AND IS DESIGNED FOR MATURE (ISH) AUDIENCES INTERESTED IN ADVANCING THEIR KNOWLEDGE OF FINANCE!

If you are reading this guide, then you are either extremely bored, or you have taken an interest in your own personal finance. If it is the second reason, then well done! This will (excuse my pun), pay out dividends in the long run! This guide will give you the BASICS of personal finance, from spending, saving, and more. Read on young grasshopper, and increase thy knowledge.

This is part one of a finance series I am making. Currently part 2 is out, and it centers on knowledge regarding credit and debit cards. The second segment of this guide can be found HERE

First of all, let us solidly define the concept of personal finance. Personal finance is the steps and methods one takes to ensure that they are financially viable and secure, with the goal of financial independency after retiring. In order to obtain this, it will take a degree of hard work and good choices if you want to live comfortably. But enough about being old and wealthy, you want to know what you can do about it now, right?

All things banks​

Although in the current economic state, and the fact that several banking institutions have recently failed, it is still a relatively good idea to obtain a bank account. Why would anyone want a bank account you may ask? Well to start, it is more secure than hiding your money under your bed or in your sock drawer. In the event of a natural disaster (fire, earthquake, etc) then your money is secure, and you will not be held responsible for the loss. Consequently, most banking institutions pay the government to secure their funds for them. For example, here in the US, most banks have federal backing for any account up to $100,000, meaning that in the event of a bank failure, the government coughs up the dough, up to that amount.

There are two common types of banking accounts, checking and savings. Checking is normally your everyday use account, which accrues little to no interest. You get a checkbook with this account, and it allows you to pay various stores and merchants with these checks. Savings accounts are the other common type, and they are designed to hold your savings (brain boggler, I know). Savings accounts normally have a small degree of interest attached to them (~3% in most cases), enough to beat the rate of inflation. Savings accounts also act as a safeguard in the event that your checking account goes under.

Say you write a check from your checking account, and the account has no money, Savings accounts can be set up with overdraft protection, which would take funds from the savings account and put the needed amount back into checking. Another reason is that banks have relatively convenient methods of accessing your money. The larger banking institutions normally have banks in almost every city, so you can easily withdraw funds. On top of that, if you obtain a debit card attached to your account, you can make cash withdrawals from ATMs, which can be found EVERYWHERE (more about debit cards later).


(a Wells Fargo bank)

Lastly, another handy thing that banks provide is the use of direct deposit. This is a method in which your employer can instantaneously deposit the money they owe you directly into your account. Without this, they would normally write you check, which takes time to clear, and requires effort on your part to check. If you’re lazy like me, direct deposit is the way to go! Well that wraps up the basics of banks and bank accounts; let’s move on, shall we?

[For more information on HOW to open a bank account, place a call to your local branch office, or find some generic information here http://www.ehow.com/how-does_4779144_teenager-open-bank-account.html]

Investing​

Ah investing, the place where you can make or break your financial success. There are so many aspects to investing, but since this First of all, what is investing really? Investing is when you put the money that you have somewhere else, whether that be a bank savings account which yields interest, a stock, a bond, heck even loaning money to an individual can be an investment. Basically, to invest your money means to put your money into something else now, with the expectation of receiving that money, plus more, at a later date. We already discussed one method, the savings account, but this method has such a low interest rate, that we won’t really discuss it. If you want to know more about interest from a savings account, ask your local banker. It is NOT the best choice to invest all of your money into a savings account. The two other main types of investments are stocks and bonds. We will now discuss each.

Stocks​

Stocks, these are the money makers that the big boys like to play with. These can make you a lot of money very quickly, or clean you out. Of course, there are different methods to investing in stocks, some more aggressive, and some more conservative. These methods are too advanced for the purpose of our guide, so I will simply explain what a stock is and how to purchase it. A stock is basically a small percentage of a company, which you literally buy. For example, let’s say a company has issued 5 million stock certificates. If I bought 1 million of those stocks, I own 20% of the company. If I owned 5 stocks, I would own a much smaller percentage, but nevertheless, I own a small portion of the company. Since you are purchasing a degree of ownership in with stocks, they are called ownership investments. Other types of ownership investments would be buying a business, or real estate.

When you purchase a stock, you become an owner of that company, no matter how small. This gives you the right to attend company shareholder meetings, and vote on certain propositions put forth by the company. The amount of sock you own determines how many votes you get. Also, as a shareholder, you will have a say in electing the governing board and leadership of the company. Even though all these options are given to you, chances are you will not own enough stock to make an impact, so it’s at your discretion really.


(an actual copy of a Microsoft stock. After purchasing stock, most companies will issue you a hardcopy if you desire, although ownership can be maintained electronically, without the hassle)

The way that stocks make you money is this. When you buy a stock, you purchase it for a certain price per stock. Provided that you have researched and bought from a good company, then the company will grow, increase sales, and become more successful. When a company experiences growth, the stock follows suite. After some time, ideally the stock’s price will have grown, leaving you with more money than you had before. You can sell a stock whenever you want, but making a habit of buying and selling stocks quickly is not a good habit. You will also be taxed on how much money you make off the stock, and depending on how long you held the stock for.

If you bought the stock for $5, and sold it for 10%, the government will tax the profit you made. If you owned the stock for more than a year, than the taxes will be lower than if you had owned the stock for more than a year. Stocks are tracked through different things called indexes. One of the most popular and widely recognized indexes is the DJOW, or the Dow Jones. An index is basically just a place that lists a certain type of stock. There are indexes for listing big companies, small companies, or a specific type of company. Stocks, when used correctly, can lead to wealth and financial independence, but they require a lot more understanding than provided here, so go do your own extra research!


(a graph showing the Dow Jones index and its performance over a certain time period)

Bonds​

Bonds are a different type of investment than stocks. The main difference is this; with a stock, you are buying part of the company. With a bond, you are loaning the money for a set period of time, after which you will be paid back your initial investment, plus interest. Bonds are really (in my opinion) a much simpler concept. Bonds are offered by lots of companies, banks, and even the government offers bonds (called treasuries, or T notes). Basically with a bond, you will agree to lend an amount of money (say $1000 for example). The terms of the bond will list how much money you are lending, what percent interest you are lending it at, and when the loan ends.

Say we loaned that $1000 via a specific bond. The bond was a 6 month bond, at 6% interest. That means, after the 6 months, we would be payed back $1060. Pretty simple right? Similar to stocks, bonds come in all different shapes and sizes. The main difference with bonds is that, even if the company experiences huge growth, you don’t get a cut of it. All you get is the interest on the loan, plus the initial investment amount. Bonds are not as risky as stocks are, but typically will not give as a good a return as stocks will.


(hard copy of a bond. Similiar to stocks in the sense that you can request the actual certificate if desired)

Knowing the basics about stocks and bonds will help you in the future; often times when you finally establish yourself in a career, your employer will offer various benefits, which include pension plans, stock options, 401k plans, IRA benefits, etc. These are all more advanced concepts, but know the basics of stocks and bonds will set you up for success in these more advanced areas later in life. Please continue on to my second finance guide to get a grasp on credit and debit cards, and how they are used. Thanks!

NOTE
The former article I wrote, and had published, on triond. The entire article can be found here http://bizcovering.com/business/gui...eens-young-adults-or-the-financially-unsavvy/ Please note at the bottom the name (-Nate), which is me. If the authenticity of this being my guide comes into question, I will gladly supply screenshots of me logged into my triond account, with this article as one of mine that i submitted

 

First of all, I'll take the time to thank you personally for writing a guide as sophisticated as this.

It's a great guide, you've gone into a lot of detail and you show a lot of knowledge on the topic. (It's obvious that you haven't used a source, etc.)

I really like the way how you got into a lot of detail, I don't really see a lot of guides as high of a quality is this. If there is any advice I can give you, it does look a bit dull, maybe you could lay it out a bit different so it's easier to read. Overall, fantastic guide and I look forward to looking at part 2.

I hope you apply for the user education team when you've done 5.

 

Thanks for the criticism, always good to hear what you can improve on, and thanks for the encouragement as well! Pming you now for some specific details : D

 

*removed*

 

What you are referring to is called commodities, and the trading of those materials is a BIT too complicated for the spectrum of this guide to handle perhaps in another guide though.

 

It's a nice introduction, but still a bit basic. You may have talked a bit about dividends, index funds, and the foreign exchange market.

 

Thanks for the input Sin, as soon as I get out of classes tommorrow I am going to do some re-formatting of the visuals of the thread, along with adding a few more tid bits of information. I initially decided to not include some aspects to avoid making a HUGE post that no one would read, but if people are interested enough, they can read what they want too.

 

Cool man, I'm going to be studying Banking, Finance and International trade starting March 1st, I have close to 0 knowledge on the subject so far and I enjoyed the read. Will be checking back to see if you add anymore .

Thanks

 

Glad you enjoyed!