The Basics of Money:
Being a financial hipster means understanding money basics and taking control of your finances so you can live your life on your terms. In order to be a bad ass with your money, here is a list of basics things your going to want to know in case you don't already:
What is 'Interest' and getting a 'Return' on my money
You probably know what interest is and what it means to get a return on your money, but let's lay it out plain and simple. Interest is what you pay or get payed back as a percent of the money that is borrowed. IE - I give you 100 bucks at an interest rate of 5% per year, you will owe me 5 a year until you pay me back. Interest you pay is the percent you owe on money you borrow where interest you earn as an investor is the percent paid to you by other people borrowing your money. Obviously the latter is better, but paying interest can work out in your favor if you can use the money you borrow to make more money than what you owe. Some common examples of this is investing in your education or using the banks money to invest in real estate. This is often used in real estate investing.
The return on your money as an investor has many pieces to consider, including taxes, opportunity costs, etc. But we will keep it simple. The return on your money is what you make when you give your money to someone at an agreed upon interest rate to be paid in return or what you return from investing your money into an asset. This usually includes assets like businesses, stocks, real estate, alternative investments, and commodities to name a few.
I remember it took be until sophomore year in high school before my math teacher decided to take a moment to explain what home equity was to our class. Equity is just another word for the amount of your home's value you actually own. If your home sold tomorrow for a given price, you'd get to keep the amount of the sales price you have in equity, minus selling costs. There are two ways for you to gain equity in your home. You can gain equity by paying down your balance on your mortgage or you gain equity by your house rising in market value (appreciation). Remember, that as much as your home appreciation adds to your equity it can also take away from your equity if your home goes down in value.
The payments towards your mortgage are paid down over the life of your loan and with every payment you are paying back some portion of the amount you borrowed. What you pay back on the loan goes towards your equity. Home loans can be a little complicated if you are new to learning about money. In short, your mortgage payment is mostly paying the interest of your loan in the early years and as you continue to pay down your mortgage, you will be paying more and more towards the balance of the loan and not as much in interest.
What you walk away with when you sell a home is the amount that you've paid into the house through your mortgage payments as well as the amount the home sold for amount you paid for it. This is also how people can go under water because if you haven't paid much towards your mortgage balance and your home loses value it eats away at the little bit you owned until you can actually go into the red with your equity in the home. When this happens and the homeowner sells their house, they may even have to bring money to table when selling their home.
What is a stock?
A stock is a share of ownership of a company. When you buy stock in a particular company you are literally buying part ownership of that company. How much depends on the amount of shares outstanding. Its really that simple. As for why it goes up and down? The market determines demand for the ownership of that stock based on investors like you that have placed an order to purchase it and the investors who are selling the stock.
What are Mutual Funds and ETFs?
A Mutual fund is a collection of stocks that is managed by a company or fund manager. They decide what individual stocks are in the mutual fund and the return you get as an investor is a collection of the returns of all those stocks in the fund. Be careful with expense ratios for mutual funds, because unlike stocks, mutual funds will more than likely carry a fee for managing the fund. Ideally you can stay below 1%. Also, Index funds are a great way to start investing.
An ETF is simply a collection of stocks much like a mutual fund, but instead of trading into an ETF like you do a mutual fund, ETF's actually trade like a stock. With a 'stock' price but gives the investor exposure to all the stocks in the ETF. One thing to note when investing in ETF's is you will pay the same fees as you would when buying a stock, which is usually a trading fee set by your broker.
What is a 401k, 403b, etc?
These are employee sponsored plans that are typically provided through your employer. It is common for employers plans to invest some money to match what you put in, typically up to 6% but sometimes more! Though there are many controversial aspect of financial planning, almost every planner agrees you should invest in your employer sponsored plan up to the company match. It's free money that you'll be leaving on the table, all you have to do is invest a percent of what you make, and that extra money is yours. Something to be aware of is you may have a vesting schedule through your plan. All this means is that you only get to keep a percentage of what your employer has contributed to your plan, typically a 5 year schedule, meaning you get to keep 20% more each year of what they put in. For example, if you leave after two years you get to keep 40% of what they contributed to your account. Good news is, you always get to keep what you put in.