2656: Money Talks, But Do You Speak the Language? by Kathleen Coxwell of New Retirement on Building Wealth

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[00:01:00] This is Optimal Finance Daily, Episode 2656.

[00:01:05] Money talks but do you speak the language by Kathleen Coxwell of NewRetirement.com

[00:01:11] and I'm your host and personal finance enthusiast Diana Merriam.

[00:01:15] Now let's get to today's post as we optimize your life.

[00:01:23] Money talks but do you speak the language by Kathleen Coxwell of NewRetirement.com?

[00:01:30] Have you ever traveled to a place where they speak English but the people have a heavy

[00:01:34] accent and a different dialect?

[00:01:36] You have a vague and slowly formed idea of what they're saying but it can make you feel

[00:01:41] confused.

[00:01:43] Most of us feel that same confusion when dealing with personal finance issues.

[00:01:48] Financial finance uses a whole other language set of rules and way of thinking.

[00:01:54] Money talks but it has its own way of saying things.

[00:01:58] Don't feel bad if you don't always understand.

[00:02:02] Financial concepts you need to know.

[00:02:05] Some financial concepts are indeed complicated but most can be understood if you slow down.

[00:02:11] Here are a few plain language definitions to help you understand what money is trying

[00:02:16] to say.

[00:02:17] We're also supplying links that enable you to easily apply the concepts to your own

[00:02:21] situation.

[00:02:23] Sometimes the best way to understand something is not by listening to a chattering expert

[00:02:28] but through trial and error.

[00:02:30] Here are a few of the financial terms we all have been exposed to but may not fully grasp.

[00:02:37] Number 1.

[00:02:38] Inflation.

[00:02:40] Inflation is when the prices for goods and services go up and the purchasing power of

[00:02:44] the dollar goes down.

[00:02:46] As an example, Sam Ewing is quoted as saying, inflation is when you pay $15 for the $10

[00:02:53] haircut you used to get for $5 when you had hair.

[00:02:58] Most working households can tolerate inflation if their wages are growing at the same rate

[00:03:03] or faster than inflation.

[00:03:05] However, in retirement it can be especially difficult to keep income on pace with inflation.

[00:03:11] We've been lucky over the last 10 or so years because inflation has remained very

[00:03:16] low.

[00:03:17] A dramatic increase in inflation will seem like Ronald Reagan's characterization of it, as

[00:03:22] violent as a mugger, as frightening as an arm dropper and as deadly as a hitman.

[00:03:29] Number 2.

[00:03:30] Assets.

[00:03:32] In the world of personal finance, assets refer to property owned by a person or company.

[00:03:37] However, you would not necessarily include everything you own as assets.

[00:03:42] You would only include things of value that could be available to pay off debts, commitments

[00:03:47] or legacies.

[00:03:49] In other words, nearly synonymous with assets include holdings, resources, investments

[00:03:56] and possessions.

[00:03:58] Number 3.

[00:03:59] Diversification.

[00:04:01] You know about diversity.

[00:04:03] People of different backgrounds and cultures.

[00:04:06] Diversification and finance is similar.

[00:04:08] It simply means having your money in different kinds of holdings.

[00:04:12] If your assets are well diversified, it might mean that you keep your money in a variety

[00:04:17] of ways.

[00:04:18] Cash, stocks, mutual funds and real estate.

[00:04:22] You can also think about how to be diversified within one kind of asset class.

[00:04:27] If you own stocks, you might want to own a wide variety of companies in different types

[00:04:32] of industries.

[00:04:33] And if you own one type of company, you might want to diversify to all companies in

[00:04:38] that category.

[00:04:39] Some professionals think that assets should be diversified because if one type of investment

[00:04:44] is problematic, another one might do well.

[00:04:48] Number 4.

[00:04:49] Hege, hedging, hedges.

[00:04:52] You know what it means to hedge your bets.

[00:04:55] A hedge is a kind of plan B.

[00:04:58] A hedge is a financial strategy that tries to take away risk.

[00:05:02] There are many easy and complicated ways to hedge your finances.

[00:05:07] Having diversified is one way to hedge.

[00:05:11] Number 5.

[00:05:12] Cash Flow.

[00:05:13] Cash flow and personal finance refers to the amount of money being paid out every period

[00:05:18] and the amount of money coming in in every period.

[00:05:22] Positive cash flow means that you're spending less than you're earning.

[00:05:26] Negative cash flow means that you're earning less than you're spending.

[00:05:29] Number 6.

[00:05:30] Rate of Return.

[00:05:32] The rate of return refers to the profit or the loss on an investment over a specific period

[00:05:37] of time, expressed as a proportion of the original investment.

[00:05:42] So if you invested $1,000 and after one year your investment was worth $1,100, your annual

[00:05:49] rate of return would be 10%.

[00:05:53] Number 7.

[00:05:54] Risk Tolerance.

[00:05:56] Risk tolerance is defined on investopedia as the degree of variability in investment

[00:06:02] returns that an investor is willing to withstand.

[00:06:05] If you can afford to lose significant money within a specific time period, then you have

[00:06:10] a high risk tolerance.

[00:06:12] If you need to be able to access the income, then you have a low risk tolerance.

[00:06:18] Number 8.

[00:06:19] Assumptions.

[00:06:21] When you're calculating your finances, you sometimes need to make assumptions.

[00:06:25] Assumptions and financial models are the inputs that we are uncertain about.

[00:06:30] For example, we don't know if our investments will do well or not.

[00:06:34] But if we want to predict how much money we'll have in 10 years, we have to assume some

[00:06:38] kind of rate of return.

[00:06:40] The assumed rate of return is an assumption.

[00:06:44] Assumptions that can dramatically impact your retirement planning include rate of return

[00:06:49] on investments inflation, the cost of goods and services housing inflation, home prices

[00:06:56] do not always rise or fall at the same rate as general inflation and medical costs inflation.

[00:07:04] Medical costs have been rising dramatically faster than general inflation.

[00:07:09] When retirement planning, it's useful to see what happens to your financial security

[00:07:13] with different values for different assumptions.

[00:07:16] Number 9.

[00:07:17] Home Equity.

[00:07:19] Home equity is the value of ownership in your home.

[00:07:22] If you have paid off your mortgage, your home equity is equal to the current value of

[00:07:26] your home.

[00:07:27] However, most people who own their homes also have a mortgage.

[00:07:31] The home is yours but you borrowed money to buy it.

[00:07:34] Home equity is the value of your home less than the amount you still owe on the mortgage.

[00:07:40] The amount of home equity you own grows every time you make a mortgage payment against

[00:07:44] the loan principle.

[00:07:45] Your home equity can also grow as the home appreciates and value.

[00:07:50] Home equity can be a powerful way to fund your retirement.

[00:07:53] You can downsize and release the equity or get a reverse mortgage if you want to stay

[00:07:58] put.

[00:07:59] Number 10.

[00:08:00] Present value or future value.

[00:08:04] This should be simple.

[00:08:06] Present value simply refers to what something is worth now.

[00:08:10] Future value refers to what something will be worth in the future given a set of assumptions.

[00:08:15] It seems obvious but you can get a little bit tricky to think about when you're planning

[00:08:19] your retirement.

[00:08:21] Consider your home.

[00:08:22] It may be worth $400,000 now.

[00:08:25] If you have an assumption of 1.5% for appreciation then the future value of the home in 20 years

[00:08:32] is $550,000.

[00:08:34] However, if it appreciates at only 1%, then the future value is only $500,000.

[00:08:40] Now imagine that you want to downsize at a point in the future to release home equity.

[00:08:45] You need to be able to calculate the future value of your current home as well as the

[00:08:50] future cost of a smaller residence so that you can estimate how much money you'll have

[00:08:55] access to at that time.

[00:08:58] And number 11.

[00:08:59] Lifetime income.

[00:09:02] Lifetime income refers to income that you will receive for as long as you live, no matter

[00:09:06] how long that turns out to be.

[00:09:08] Guaranteed lifetime income will be there no matter what.

[00:09:12] Social security will continue to send you checks whether you live to 85, 105 or longer.

[00:09:19] Social security is reliable guaranteed lifetime income.

[00:09:23] When planning for retirement, you ideally want to establish a lifetime income stream that

[00:09:27] equals your expenses.

[00:09:29] The most common sources of guaranteed lifetime income are social security, most pensions

[00:09:35] and lifetime annuities.

[00:09:37] You might also have unguaranteed lifetime income sources from rental property or other

[00:09:42] investments.

[00:09:47] You just listen to the post titled Money Talks, but do you speak the language by Kathleen

[00:09:53] Coxwell of newretirement.com and I'll be right back with my commentary.

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[00:11:33] This article reminded me of when I first started working on my financial literacy.

[00:11:42] I wanted to learn about investing, but I was completely intimidated.

[00:11:47] And everything I read online made me feel like an idiot.

[00:11:51] But I know that I'm a fairly intelligent person.

[00:11:54] I was a straight-a student who went to college on a full academic scholarship and graduated

[00:11:59] with a 4.0.

[00:12:01] So why was it that investing seemed really challenging to understand?

[00:12:06] I believe it's because the financial services industry benefits when people feel like they

[00:12:11] can't do it themselves.

[00:12:13] If everyone was a DIY investor who bought low-fee total market index funds instead of expensive

[00:12:19] mutual funds or actively managed portfolios, a lot of people would be out of a lot of money.

[00:12:27] Everything I read about investing told me to talk to a financial advisor.

[00:12:31] It was presented as if it was brain surgery and it would be stupid for me to try to do

[00:12:36] it myself.

[00:12:37] That was until I read the book titled The Simple Paths to Wealth by Jail Collins.

[00:12:43] Jail actually wrote the book for his daughter who had no interest in money or investing.

[00:12:49] He wanted to give her an easy-to-follow blueprint for building wealth that would allow her

[00:12:54] to set it, forget it, and move on with her life.

[00:12:59] Not only did he make investing easy to understand, he convinced me that it wasn't only possible

[00:13:05] for me to do it myself.

[00:13:06] It was actually preferable!

[00:13:09] That book gave me the confidence to start investing in the stock market and allow my money

[00:13:14] to make money through the power of compound interest.

[00:13:18] And the rest is history.

[00:13:20] And that'll do it for today.

[00:13:21] Have a great day and start to your weekend.

[00:13:24] Thank you for listening.

[00:13:25] I'll be back here reading to you tomorrow, where your optimal life awaits.