Financial Education — A Primer

By Ash Malhotra

Part 2. In this article, I want to continue to set out a foundation for Financial Education.  I am very passionate about educating people – adults & kids – about personal finance and filling in the “gaps” in their financial education. While I would never claim to know everything about personal finance management, I feel that I have a lot to share as a “financial educator”. Treat what follows as my experience and personal opinion, but always – always do your own research on all matters related to investing your money

By the way, if you missed Part 1 of this article, make sure to visit www.indoamerican-news.com for a read.

Last time I covered fundamental concepts of The Traditional Approach to finance and Diversification.  I will pick up from there and discuss some simple mathematical concepts. I love Math, but all you need are some fundamental skills (middle school level) to get these concepts. Let’s get rolling.

Power of Compounding:

A phenomenal wonder of the financial world; Compounding is usually referenced when talking about interest on investments.  Interest generated in one period is added to the initial investment to generate even more interest in subsequent periods. It’s magical, isn’t it.  Depending upon your personal financial strategy, you are either making compound interest or paying it!  You want to be in the camp of making compound interest. I advise on some of these vehicles as well.

The Rule of 72

A fascinating mathematical observation that goes something like this:  Let’s say that you have put some of your money in a financial vehicle that earns some form of interest (profit, etc.). Let’s also assume that the rate of interest you earn each year is “x”. The time it would take for you to double your money is calculated by dividing 72 by “x”.  For Example, it would take 18 Years to double your investment (of any amount) if the rate of interest is 4% (i.e., 72/4 = 18).  So, depending upon your financial/investment vehicle, you will expand your personal treasury over a certain period.

Taxation

Oh Wow!  Now that’s a prickly subject, isn’t it! Whatever your opinion on the how’s and why’s of taxation, even you know that one way or the other we all end up paying taxes.  I’m sure you have heard stories of the wealthy paying very little taxes.  Why is that? Basically, the IRS tax code has enough incentives (loopholes) that taxes can be reduced or avoided.  [Note: never ever engage in tax evasion – that’s a crime]. Financially educated people work with their Financial Advisors, CPAs, Attorneys, etc. to utilize this very IRS tax code to reduce their taxes.  So why not the rest of us? It’s back to the gap in our financial education and defining a proper strategy for our money. The real education in Taxation is developing an understanding of financial vehicles that are Taxable, Tax Deferred, and Tax Advantaged (yes, there is such a thing!) and planning in advance to re-position our investments to take advantage of these provisions. Taxes are a very lengthy subject, and I will get into it in future articles.

To conclude, my team and I are here to educate you on topics pertaining to personal finance, show you how to avail of some of these financial vehicles, and either help you with them or direct you to the professionals that handle certain vehicles that are outside of our professional purview. We are Families Educating Families About financial (FEFAF) success. Let our fantastic team of Financial Mentors expand your vision! Send in your questions or comments to me at amfinins@gmail.com or text me at 832.723.9555.  Let’s talk and discuss your financial goals and fill in the gaps in your financial education.

See you next time for a deeper discussion of some of the practical side of financial vehicles!