Explaining personal finance can be pretty dull. That’s a problem, if you need to learn about personal finance.
On a plane from St. Louis to Seattle, I decided to try and fix the problem. What if I could wrap some personal finance concepts inside of a quirky (even funny) short story? My goal here is to present some information, and then add another step in the story. So, when you get to the end, you’ve been reminded of an personal finance concept- but you’ve received the information in a light-hearted way.
Anyway, that’s the goal here. The stories are written in chapter order, so that there is a logical flow for the reader. Enjoy!
There’s always a certain amount of tension you can feel when you walk into an airport terminal.
Personal finance book: 2017 Click here for sample chapters and other content.
Greg scanned the travelers as he used the American Airlines kiosk. A lot of rushed, concerned looks, he thought. The flight to LA boarded in 40 minutes, so he had enough time to get through TSA, grab coffee and get to the gate.
Tony called as he walked to the TSA line. “So, you got the 401(k) investment choices. Were you able to make sense of it?”
“Well, it’s a little overwhelming. Don’t get me wrong- the materials they provided are laid our well. The investment choices are color-coded: green for growth stock mutual funds, red for certain bond funds, other colors are used, too. The problem is that there are so many choices that I don’t know where to begin.” Greg glanced up to a screen and checked for his gate. “Lemme call you back once I get through TSA.”
For some reason, Greg was magically moved into the TSA Pre-Check line. What drives that decision, anyway?, he thought. He got though screening and called Tony back.
“OK Greg- so you’ve decided to use for 401(k) to get the benefit of investing pre-tax dollars and to defer taxes on your earnings. You also get the matching investment contributions from your employer. So, now you have to decide on the specific investments for the dollars contributed.”
Greg leaned toward the Starbucks as he listened. “Tony, hang on- hi, can I get a small black coffee, please?” The barista glared back. Darn it, he forgot to use Starbucks lingo.
“You mean this size, right sir?” The barista held up a small cup with a smirk on his face. Greg nodded.
“Sorry, Tony. Yeah, so I set up the savings account and I’m still moving money into that account each month, but it’s cash. I haven’t invested the savings balance, and this is the first time I’ve used a 401(k). So, help me get started on making an investment decision.”
It was 20 minutes until boarding. Greg set down his backpack and took a sip of coffee. “Just start with the basics”.
Tony thought for a minute. “Here’s where I always start. There are two basic ways that companies raise money to run their businesses. They issue stock or sell debt. When you purchase stock, you’re an owner- you own a small amount of equity in the business. The company can reward you in several ways. They can pay you a dividend, which is a share of company profits. If the firm does well and generates a profit, you can benefit from the stock price increasing. You can sell the stock for a gain. Does that make sense?”
People were lining up for boarding. “I see what you’re saying. Wow- you should hear all of these membership programs that allow you to board early. Premium, platinum, gold, advanced members…pretty funny.” Greg chuckled.
“Yeah- there’s definitely a class system when it comes to air travel.” Tony shifted gears. “So the other way the businesses raise money is by issuing debt- just like an individual. You can invest in bonds issued by a corporation. The bond pays interest to the investor twice a year, and returns your original investment at maturity.”
Tony paused for a moment. “Now, just about every investment is based on stock, debt or some variation. I’ll ignore real estate and precious metals for now. The point is that each investment listed in your 401(k) marketing material contains stocks or bonds. So, that’s the starting point.”
Greg grabbed his backpack and adjusted his sweater. “Ok, that a good start- I’ll think about that while I look at the investment choices. Wow- 26 degrees when I left the house today- I wonder if I brought any lighter clothes for LA?”
As always, this information is for educational purposes only. Consult a CPA or a financial advisor for more information.
Action Steps To Consider
Make sure that you understand what each 401(k) fund invests in, which may mean stocks, bonds or some combination of both.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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