Financial Literacy and Stock Market

If I give you $100,000, what would you do with the money?

Buy the latest tech gig.

Travel to my favorite country

Buy jewelry for my wife/girlfriend.

Buy a luxury car.

If your answer lies somewhere within the above, or in short, involves something where you’ll more or less “spend” the money, this is the time you should learn about Financial Literacy. All the above methods only involve “spending,” not “investing.” After wasting your money on any of the above things, soon your money will be over, and you’ll be back to where you were. A financially literate person can double the money in a few years and can further double that doubled money. This is the reason why the rich gets richer.

A fundamental example can be of a simple corporate 9–5 worker, almost every person in such jobs gets the salary increment at least once a year, but most of them remain in their 9–5 till the 60s. As described quite precisely in “The Richest Person In Babylon”, your needs and desires increase more rapidly than your salary increment. The same thing happens with the $100,000 scenario. You’ll waste the money on your temporary gratifying desires. There is plenty of examples, like your pension plans 401k that eats up your money in taxes. Although, alternatives like Roth IRA are available. I’ll be listing some of the key ways how a financially literate person could have used $100,000.

- Index Funds

If you have no knowledge of stock markets and just want to keep your money protected from a single company's downfall, invest your money in index funds. Index funds circumvent most of the risks associated with your normal portfolio, protect your principal amount, and give a solid return. Returns may be less initially, but it's definite and meager chances of money loss. In one of the interviews with Warren Buffett, he said that if someone can’t take any risk and has no knowledge of markets, just put your money in an index fund. They guarantee to fix returns and protect you against inflation.

Like the law of gravity, laws of money are universal and unchanging.

- Passive Income

A one-time investment of your income in a source of passive income can make you rich and richer. Buying a house and renting it is one of the examples. I have also published an article on passive income, which explains how you can earn through passive income. Do check that out !

So, we’re done with your $100,000 scenario. Now what? Is this financial literacy? Absolutely no. You have learned how to make your money earn more money. But, these ways can’t help you buy the latest Rolls Royce, right?

In my opinion, the key component of financial literacy is the stock market and value investing. Maximum people don’t earn millions per month and those who have millions haven’t earned them through jobs.

Stock Market

That’s risky !

This is the thing you hear when you tell someone you are thinking to invest in the stock market. But how are plenty of people earning millions if it's risky? “Maybe they are the specialist”, I know an 18-year boy with no background in marketing who just incremented his money by 33% in 6 months. How can you do this? After reading “The Intelligent Investor” by Benjamin Graham, I came to know a few things 😉

First, analyze your risk tolerance :

High: Manage your own diversified portfolio: Use techniques like dollar-cost averaging, 50–50 bond stock rules.

Low: Invest in mutual funds, Index funds, dividend-yielding mutual funds, dividend-paying stocks.

I’ll be discussing all these methods in my upcoming articles, Stay Tuned : )

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FOOTNOTES:

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