Financial Literacy Apps: Teaching Money Management Through Technology

Financial literacy is the knowledge and skills needed to make well-informed and effective financial decisions. It is comparable to learning how to play a complex sport. Like athletes who need to master their sport's fundamentals, individuals also benefit from knowing essential financial concepts in order to manage their wealth and create a secure future.

In the complex financial world of today, people are increasingly responsible for managing their own finances. Financial decisions, such as managing student debts or planning for your retirement, can have lasting effects. The FINRA Investor Educational Foundation conducted a study that found a correlation between financial literacy, and positive financial behavior such as emergency savings and retirement planning.

However, it's important to note that financial literacy alone doesn't guarantee financial success. Critics say that focusing solely upon individual financial education neglects systemic concerns that contribute towards financial inequality. Some researchers claim that financial education does not have much impact on changing behaviour. They point to behavioral biases as well as the complexity and variety of financial products.

Another perspective is that financial literacy education should be complemented by behavioral economics insights. This approach recognizes the fact that people may not make rational financial decisions even when they possess all of the required knowledge. Some behavioral economics-based strategies have improved financial outcomes, including automatic enrollment in saving plans.

Takeaway: Financial literacy is a useful tool to help you navigate your personal finances. However, it is only one part of a larger economic puzzle. Systemic factors play a significant role in financial outcomes, along with individual circumstances and behavioral trends.

Fundamentals of Finance

Basic Financial Concepts

Financial literacy is built on the foundations of finance. These include understanding:

1. Income: Money earned from work and investments.

2. Expenses - Money spent for goods and services.

3. Assets: Items that you own with value.

4. Liabilities: Debts or financial obligations.

5. Net Worth: Your net worth is the difference between your assets minus liabilities.

6. Cash Flow (Cash Flow): The amount of money that is transferred in and out of an enterprise, particularly as it affects liquidity.

7. Compound Interest is interest calculated on both the initial principal as well as the cumulative interest of previous periods.

Let's dig deeper into these concepts.

Earnings

The sources of income can be varied:

• Earned Income: Salary, wages and bonuses

• Investment income: Dividends, interest, capital gains

• Passive income: Rental income, royalties, online businesses

Understanding the different income streams is important for tax and budget planning. In many taxation systems, earned revenue is usually taxed at an increased rate than capital gains over the long term.

Assets vs. Liabilities

Assets are items that you own and have value, or produce income. Examples include:

• Real estate

• Stocks and bonds

• Savings accounts

• Businesses

In contrast, liabilities are financial obligations. Liabilities include:

• Mortgages

• Car loans

• Card debt

• Student loans

In assessing financial well-being, the relationship between assets and liability is crucial. Some financial theories suggest focusing on acquiring assets that generate income or appreciate in value, while minimizing liabilities. You should also remember that debt does not have to be bad. A mortgage for example could be considered a long-term investment in real estate that increases in value over time.

Compound interest

Compound interest is earning interest on interest. This leads to exponential growth with time. The concept can work both in favor and against an individual - it helps investments grow but can also increase debts rapidly if they are not properly managed.

Imagine, for example a $1,000 investment at a 7.5% annual return.

• After 10 years the amount would increase to $1967

• After 20 Years, the value would be $3.870

• After 30 years, it would grow to $7,612

Here's a look at the potential impact of compounding. However, it's crucial to remember that these are hypothetical examples and actual investment returns can vary significantly and may include periods of loss.

Understanding these basics allows individuals to create a clearer picture of their financial situation, much like how knowing the score in a game helps in strategizing the next move.

Financial Planning and Goal Setting

Financial planning is the process of setting financial goals, and then creating strategies for achieving them. The process is comparable to an athlete’s training regime, which outlines all the steps required to reach peak performance.

Financial planning includes:

1. Setting SMART Financial Goals (Specific, Measureable, Achievable and Relevant)

2. Creating a comprehensive budget

3. Developing saving and investment strategies

4. Regularly reviewing and adjusting the plan

Setting SMART Financial Goals

SMART is an acronym used in various fields, including finance, to guide goal setting:

• Specific: Having goals that are clear and well-defined makes it easier to work toward them. For example, "Save money" is vague, while "Save $10,000" is specific.

• Measurable: You should be able to track your progress. You can then measure your progress towards the $10,000 goal.

• Achievable: Goals should be realistic given your circumstances.

• Relevance: Goals must be relevant to your overall life goals and values.

• Setting a specific deadline can be a great way to maintain motivation and focus. Save $10,000 in 2 years, for example.

Budgeting for the Year

A budget helps you track your income and expenses. This is an overview of how to budget.

1. Track all sources of income

2. List all your expenses and classify them into fixed (e.g. rental) or variable (e.g. entertainment)

3. Compare the income to expenses

4. Analyze the results and consider adjustments

The 50/30/20 rule has become a popular budgeting guideline.

• Use 50% of your income for basic necessities (housing food utilities)

• Enjoy 30% off on entertainment and dining out

• Save 20% and pay off your debt

It's important to remember that individual circumstances can vary greatly. Some critics of these rules claim that they are not realistic for most people, especially those with low salaries or high living costs.

Savings and investment concepts

Saving and investing are key components of many financial plans. Here are some related terms:

1. Emergency Fund: This is a fund that you can use to save for unplanned expenses or income interruptions.

2. Retirement Savings. Long-term savings to be used after retirement. Often involves certain types of accounts with tax implications.

3. Short-term savings: Accounts for goals within 1-5years, which are often easily accessible.

4. Long-term Investments (LTI): For goals beyond 5 years, which often involve a diversified portfolio.

There are many opinions on the best way to invest for retirement or emergencies. These decisions depend on individual circumstances, risk tolerance, and financial goals.

The financial planning process can be seen as a way to map out the route of a long trip. Understanding the starting point is important.

Diversification and Risk Management

Understanding Financial Hazards

Risk management in financial services involves identifying possible threats to an individual's finances and implementing strategies that mitigate those risks. The concept is similar to the way athletes train in order to avoid injury and achieve peak performance.

The following are the key components of financial risk control:

1. Identifying potential risks

2. Assessing risk tolerance

3. Implementing risk mitigation strategies

4. Diversifying your investments

Identification of potential risks

Financial risks come from many different sources.

• Market risk: The possibility of losing money due to factors that affect the overall performance of the financial markets.

• Credit risk is the risk of loss that arises from a borrower failing to pay back a loan, or not meeting contractual obligations.

• Inflation is the risk of losing purchasing power over time.

• Liquidity risks: the risk of not having the ability to sell an investment fast at a fair market price.

• Personal risk: Specific risks to an individual, such as job losses or health problems.

Assessing Risk Tolerance

Risk tolerance is the ability of a person to tolerate fluctuations in their investment values. Risk tolerance is affected by factors including:

• Age: Younger adults typically have more time for recovery from potential losses.

• Financial goals: Short-term goals usually require a more conservative approach.

• Income stability: Stability in income can allow for greater risk taking.

• Personal comfort: Some people are naturally more risk-averse than others.

Risk Mitigation Strategies

Common risk mitigation strategies include:

1. Insurance: Protects against significant financial losses. Insurance includes life insurance, disability insurance, health insurance and property insurance.

2. Emergency Fund - Provides financial protection for unplanned expenses, or loss of income.

3. Debt Management: By managing debt, you can reduce your financial vulnerability.

4. Continuous Learning: Staying in touch with financial information can help you make more informed choices.

Diversification: A Key Risk Management Strategy

Diversification, or "not putting your eggs all in one basket," is a common risk management strategy. By spreading your investments across different industries, asset classes, and geographic areas, you can potentially reduce the impact if one investment fails.

Consider diversification like a soccer team's defensive strategy. In order to build a strong team defense, teams don't depend on a single defender. Instead, they employ multiple players who play different positions. Diversified investment portfolios use different investments to help protect against losses.

Diversification Types

1. Diversification of Asset Classes: Spreading your investments across bonds, stocks, real estate, etc.

2. Sector diversification: Investing across different sectors (e.g. technology, healthcare, financial).

3. Geographic Diversification is investing in different countries and regions.

4. Time Diversification: Investing frequently over time (dollar-cost averaging) rather than all in one go.

Although diversification is an accepted financial principle, it doesn't protect you from loss. All investments involve some level of risks, and multiple asset classes may decline at the same moment, as we saw during major economic crisis.

Some critics believe that true diversification can be difficult, especially for investors who are individuals, because of the global economy's increasing interconnectedness. Some critics argue that correlations between assets can increase during times of stress in the market, which reduces diversification's benefits.

Diversification is still a key principle of portfolio theory, and it's widely accepted as a way to manage risk in investments.

Asset Allocation and Investment Strategies

Investment strategies guide decision-making about the allocation of financial assets. These strategies can also be compared with an athlete's carefully planned training regime, which is tailored to maximize performance.

Investment strategies have several key components.

1. Asset allocation - Dividing investments between different asset types

2. Spreading investments among asset categories

3. Regular monitoring of the portfolio and rebalancing over time

Asset Allocation

Asset allocation is the act of allocating your investment amongst different asset types. The three main asset types are:

1. Stocks: These represent ownership in an organization. Investments that are higher risk but higher return.

2. Bonds Fixed Income: Represents loans to governments and corporations. Generally considered to offer lower returns but with lower risk.

3. Cash and Cash Alternatives: These include savings accounts (including money market funds), short-term bonds, and government securities. They offer low returns, but high security.

A number of factors can impact the asset allocation decision, including:

• Risk tolerance

• Investment timeline

• Financial goals

You should be aware that asset allocation does not have a universal solution. While rules of thumb exist (such as subtracting your age from 100 or 110 to determine the percentage of your portfolio that could be in stocks), these are generalizations and may not be appropriate for everyone.

Portfolio Diversification

Within each asset class, further diversification is possible:

• For stocks: This can include investing in companies that are different sizes (smallcap, midcap, largecap), sectors, or geographic regions.

• For bonds, this could involve changing the issuers' (government or corporate), their credit quality and their maturities.

• Alternative investments: Many investors look at adding commodities, real estate or other alternative investments to their portfolios for diversification.

Investment Vehicles

There are several ways to invest these asset classes.

1. Individual stocks and bonds: These offer direct ownership, but require more management and research.

2. Mutual Funds: Portfolios of stocks or bonds professionally managed by professionals.

3. Exchange-Traded Funds (ETFs): Similar to mutual funds but traded like stocks.

4. Index Funds: Mutual funds or ETFs designed to track a specific market index.

5. Real Estate Investment Trusts: These REITs allow you to invest in real estate, without actually owning any property.

Active vs. Passive Investment

The debate about passive versus active investing is ongoing in the investment world:

• Active Investing: Involves trying to outperform the market by picking individual stocks or timing the market. It requires more time and knowledge. Fees are often higher.

• Passive Investing: Involves buying and holding a diversified portfolio, often through index funds. This is based on the belief that it's hard to consistently outperform a market.

This debate is ongoing, with proponents on both sides. Active investing advocates claim that skilled managers are able to outperform the markets, while passive investing supporters point to studies that show that over the long-term, most actively managed funds do not perform as well as their benchmark indexes.

Regular Monitoring and Rebalancing

Over time some investments will perform better than other, which can cause the portfolio to drift off its target allocation. Rebalancing is the process of periodically adjusting a portfolio to maintain its desired asset allocation.

Rebalancing, for instance, would require selling some stocks in order to reach the target.

It's important to note that there are different schools of thought on how often to rebalance, ranging from doing so on a fixed schedule (e.g., annually) to only rebalancing when allocations drift beyond a certain threshold.

Think of asset allocating as a well-balanced diet for an athlete. As athletes require a combination of carbohydrates, proteins and fats to perform optimally, an investment portfolio includes a variety of assets that work together towards financial goals, while managing risk.

Remember: All investments involve risk, including the potential loss of principal. Past performance does not guarantee future results.

Plan for Retirement and Long-Term Planning

Financial planning for the long-term involves strategies to ensure financial security through life. Retirement planning and estate plans are similar to the long-term career strategies of athletes, who aim to be financially stable after their sporting career is over.

The following components are essential to long-term planning:

1. Understanding retirement options: Understanding the different types of accounts, setting goals and estimating future costs.

2. Estate planning is the preparation of assets for transfer after death. This includes wills, trusts and tax considerations.

3. Plan for your future healthcare expenses and future needs

Retirement Planning

Retirement planning involves estimating how much money might be needed in retirement and understanding various ways to save for retirement. Here are some of the key elements:

1. Estimating Retirement Needs: Some financial theories suggest that retirees might need 70-80% of their pre-retirement income to maintain their standard of living in retirement. But this is a broad generalization. Individual requirements can vary greatly.

2. Retirement Accounts

• Employer sponsored retirement accounts. Often include employer matching contributions.

• Individual Retirement Accounts, or IRAs, can be Traditional, (potentially tax deductible contributions with taxed withdraws), and Roth, (after-tax contributions with potentially tax-free withdraws).

• Self-employed individuals have several retirement options, including SEP IRAs or Solo 401(k).

3. Social Security, a program run by the government to provide retirement benefits. It is important to know how the system works and factors that may affect the benefit amount.

4. The 4% Rule: A guideline suggesting that retirees could withdraw 4% of their portfolio in the first year of retirement, then adjust that amount for inflation each year, with a high probability of not outliving their money. [...previous text remains the same ...]

5. The 4% Rule - A guideline that states that retirees may withdraw 4% in their first retirement year. Each year they can adjust the amount to account for inflation. There is a high likelihood of not having their money outlived. This rule has been debated. Financial experts have argued that it might be too conservative and too aggressive depending upon market conditions.

Retirement planning is a complicated topic that involves many variables. The impact of inflation, market performance or healthcare costs can significantly affect retirement outcomes.

Estate Planning

Estate planning is the process of preparing assets for transfer after death. Among the most important components of estate planning are:

1. Will: A legal document which specifies how the assets of an individual will be distributed upon their death.

2. Trusts are legal entities that hold assets. Trusts are available in different forms, with different functions and benefits.

3. Power of attorney: Appoints another person to act on behalf of a client who is incapable of making financial decisions.

4. Healthcare Directive: Specifies an individual's wishes for medical care if they're incapacitated.

Estate planning can be complicated, as it involves tax laws, personal wishes, and family dynamics. The laws regarding estates are different in every country.

Healthcare Planning

Planning for future healthcare is an important part of financial planning, as healthcare costs continue to increase in many countries.

1. Health Savings Accounts: These accounts are tax-advantaged in some countries. Rules and eligibility may vary.

2. Long-term Insurance: Policies that cover the costs for extended care, whether in a facility or at your home. Cost and availability can vary greatly.

3. Medicare: Medicare, the government's health insurance program in the United States, is designed primarily to serve people over 65. Understanding the program's limitations and coverage is an essential part of retirement planning.

Healthcare systems and costs can vary greatly around the globe, and therefore healthcare planning requirements will differ depending on a person's location.

This page was last edited on 29 September 2017, at 19:09.

Financial literacy is a vast and complex field, encompassing a wide range of concepts from basic budgeting to complex investment strategies. In this article we have explored key areas in financial literacy.

1. Understanding fundamental financial concepts

2. Develop your skills in goal-setting and financial planning

3. Diversification is a good way to manage financial risk.

4. Understanding different investment strategies, and the concept asset allocation

5. Estate planning and retirement planning are important for planning long-term financial requirements.

These concepts are a good foundation for financial literacy. However, the world of finance is always changing. Financial management can be affected by new financial products, changes in regulations and global economic shifts.

Financial literacy is not enough to guarantee success. As discussed earlier, systemic factors, individual circumstances, and behavioral tendencies all play significant roles in financial outcomes. Financial literacy education is often criticized for failing to address systemic inequality and placing too much responsibility on the individual.

Another viewpoint emphasizes the importance to combine financial education with insights gained from behavioral economics. This approach acknowledges the fact that people may not make rational financial decisions even when they are well-informed. Financial outcomes may be improved by strategies that consider human behavior.

There's no one-size fits all approach to personal finances. What's right for one individual may not be the best for another because of differences in income, life circumstances, risk tolerance, or goals.

Learning is essential to keep up with the ever-changing world of personal finance. This may include:

• Keep up with the latest economic news

• Reviewing and updating financial plans regularly

• Finding reliable sources of financial information

• Consider professional advice in complex financial situations

Although financial literacy can be a useful tool in managing your personal finances, it is not the only piece. To navigate the financial world, it's important to have skills such as critical thinking, adaptability and a willingness for constant learning and adjustment.

Financial literacy's goal is to help people achieve their personal goals, and to be financially well off. It could mean different things for different people, from financial security to funding important goals in life to giving back to your community.

By developing a solid foundation in financial literacy, people can better navigate the complex decisions they make throughout their lives. However, it's always important to consider one's own unique circumstances and to seek professional advice when needed, especially for major financial decisions.

The information provided in this article is for general informational and educational purposes only. It is not intended as financial advice, nor should it be construed or relied upon as such. The author and publishers of this content are not licensed financial advisors and do not provide personalized financial advice or recommendations. The concepts discussed may not be suitable for everyone, and the information provided does not take into account individual circumstances, financial situations, or needs. Before making any financial decisions, readers should conduct their own research and consult with a qualified financial advisor. The author and publishers shall not be liable for any errors, inaccuracies, omissions, or any actions taken in reliance on this information.