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Quick Financial Literacy Guide: For Students by Students

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Quick Financial Literacy Guide:

For Students by Students

Writ 015.04
BY

DANIEL KIM
DIMITRI KATSANOS
 II

Dear Fellow Students,

Our Quick Financial Literacy Guide: For Students by Students offers a crash course in

essential concepts and skills necessary to become financially literate. This guide aims to educate

all levels of financial literacy and is meant to empower our generational peers as they begin to

gain fiscal responsibility and accumulate personal wealth. Upon completion this guide, you will

have a foundational understanding of fundamental financial concepts, a grasp on their personal

finances, and a plan with practical steps to better manage and invest in your future.

On your pathway to gaining financial knowledge, the truth theories, outlined by

philosopher Michael Boylan, in his work The Good, the True, and the Beautiful: A Quest for

Meaning, will assist during your journey. By utilizing the correspondence theory of truth, this

guide will enable millennials to make simple connections (create patterns) to financial concepts

they experience in their daily activities. Further, this guide will encourage students to develop

pragmatic solutions and explanations to financial concepts they may have once perceived as

complicated. Lastly, this guide aims to give students the knowledge to create a coherent linkage

between each respective section of this guide; once this linkage lacks internal falsifications,

students will demonstrate a high-level of financial literacy.

Becoming financially literate will enable you to be self-sufficient with your money and

achieve long-term financial stability and freedom. By reading this guide, you have already

demonstrated the proper initiative and determination to hone your financial skills. Let’s get

started!

Respectfully,

Dan & Dimitri

 III

Budgeting

Budgeting is the most fundamental and basic form of financial literacy. In the most

simplistic terms, it is an essential and basic tool that you cannot spend more than you

have. However, as young people gain more and more financial responsibility, it is

surprisingly easy to accidentally overdraw checking accounts or fall into crippling credit

card debt. Managing your expenses is the easiest way to keep yourself out of financial

trouble.

While there are multiple responsible ways to break down a budget, we recommend

the 50-30-20 rule (Tully). This rule reminds you to set aside 50% of your income toward

your essential needs or the things you can’t live without (rent, utilities, food,

transportation, etc.) (Tully). 20% of your income should go toward financial goals (savings,

investments, credit card payments, etc.) (Tully). Finally, the remaining 30% of your income

should be used for flexible spending on things you desire (dining, entertainment, travel,

etc.) (Tully). Categorizing your budget between obligations, goals, and leisure is a simple

way to be conscious of where you are spending your money.

Recommendation: The app Wally is the simplest way to track your expenses. All you have

to do is take a picture of your receipt of purchase (or manually enter your expenses), and

the app will calculate your expenditures.

 IV

Savings:

Saving is one very essential component of proper budgeting. Creating a savings account

and a brokerage account is the quickest way to becoming financially independent (Hendry).

Saving money and accumulating wealth at an early age will give you the freedom to live

your life on your terms. Your savings is the portion of your earnings not spent on your

current expenditures. Some people may choose to place their money in a piggy bank or

coffee jar (Family Economics & Financial Education). However, this method will not be

rewarding in the long run. One of the safest and wisest investment decisions you can make

is deciding to store your money in a depository institution (a business that offers financial

services to people, like a bank). Unlike the

money in your piggy bank, money stored in

an actual bank is protected from loss, and

depository institutions allow you to store

your money in accounts that earn a small

amount of interest. Interest is the money you receive when you let an institution (like a

bank) securely store your money. When you store your money at a bank, you are taking

advantage of the compound interest effect (interest it paid on the original amount of money

and on the interest it has already earned). This is why it is important to start saving early

because compound interest is exponential.

In addition to a savings accounts in a bank, it is advantageous to open a brokerage

account. A brokerage account is a vehicle that allows you to purchase stocks, bonds, and
 V

mutual funds (all of these will be defined later in the guide). Investing using a brokerage

account will usually give you a higher return than an insured depository institution, but

there is more risk involved. Risk, even if minuscule, contributes significantly to the

compound effect because it generates a higher rate of return (think to gamble, but a lot

safer and everyone does it).

Disclosure/Recommendation: I (Dan) have a savings account with Citibank and a

brokerage account with Fidelity. There are many good banks to choose from, usually in

your hometown, and brokerage firms include Fidelity, E*TRADE, TD Ameritrade, Charles

Schwab. Each possesses their advantages, but they all work to manage your savings.

App: The app “robinhood” allows you to invest in stocks and funds without “commission

fees” which is what the brokerage firms charge clients for the use of their services. This

is an excellent tool for beginner investors.

Equities:

Equity is synonymous with stock (Greenblatt). While we all have heard about the

stock market, it is essential to understand what a stock truly is. For example, if you were

to buy stock in Apple, you are actually purchasing partial ownership of the company.

However, for investment purposes, when you purchase ownership Apple, you buy with the

intention of selling your ownership stake at a higher price.

Purchasing equities/stocks means that you take on risk. To make money, you have

to risk money. Owning one stock means that you are exposed to overarching “market risk”
 VI

(recessions like the 2008 financial crisis is an example of market risk) and you are also

exposed to individual company (“non-market”) risks (Hypothetically, if Apple computers

started to light on fire, Apple’s stock value will probably decrease due to this unexpected

development). As a way to limit this individual company risk, it is a good idea to “diversify”

your stock ownership. Buy stock in more than one company in different industries.

According to Wall Street Wizard Joel Greenblatt, a simple four stock portfolio decreases

non-market risk by 81%, and an eight-stock portfolio decreases non-market risk by 93%

(Greenblatt).

Credit:

From one millennial to another, credit cards can be your ally (Palmer). However, it

all depends on how you treat them. Today, most people own some form of plastic, like a

credit card, debit card, or both. In addition to cash and a bank or brokerage account, what

you do with these tools have a serious impact on your ability to build and establish your

credit. Credit cards give you the ability to develop your credit score (a number that banks

use to determine whether you qualify for a loan, and if you do, how much interest they will

charge you). Credit is money that a bank or other financial institution will allow you to use

and then pay back in the future (Investopedia). Your credit score represents your

creditworthiness (how likely you are to pay what you owe on time). FICO (Fair Isaac

Corporation) was one of the first corporations to evaluate peoples credit history (a complete

record of how you have managed any debts) by offering a detailed report of how you borrow

your money, and how you repay it. At the end of this report, your credit history boils down
 VII

to one 3-digit number called your credit score. Any late payments on your credit card will

negatively affect your credit score. Because swiping a card is much easier than using cash,

it is vital that you do not overspend and start to lose track of the rate at which you are

spending (Palmer). Think of a credit card as just another way to borrow money. But, if

used wisely, can become a powerful tool for you to you to use in the future.

When you apply for a credit card at a bank, your credit account attached to your

credit has an interest rate and fees that are specific to your account. Say you make

purchases totaling $250 in one month, the amount you spent is referred to as your

“statement balance.” When you carry a balance on your credit card, you can pay it off on

your own time. The interest rate attached to your credit card (for example, a 15% annual

percentage rate) is the percentage of your balance that you must pay. Think of the interest

rate as the price you pay for borrowing money (Palmer). However, paying interest on a

card is a choice, and if you decide to pay back the entirety of your statement balance each

month, you do not have to pay any interest fee.

Recommendations: Think of your credit card as a form of borrowing money. If you pay

your monthly credit card bill in full, you won’t have to worry about accruing interest on

your statement balance.

Student Loans

For a vast majority of students, their student loan debt is something that follows

them far beyond the cap and gown (Syphret). Getting rid of student debt can be an arduous

journey. However, there are multiple strategies to help you pay off your loans and become
 VIII

financially independent. One rule of thumb is to pay attention to your loans while you are

still at school. Mark in your calendar the exact date your first payment will be due, and

the amount. In the time between now and when your payment is due, begin to brainstorm

ways in which you can begin saving money to repay your loans. Whether you decide to

work a few hours a week at a part-time job on campus or have plans to work during the

summer, saving to pay off your debt early on will have exponential benefits when you begin

to make payments. That said, pay attention to your payment deadlines! A late student loan

payment reported on your record will reduce your credit score and may affect your ability

to take out a new credit (meaning it may be more difficult to get a new credit card or car

loan) (Syphret). If you miss a payment, no matter how late you are, your first step should

be to reach out to your loan servicer and admit your mistake. This may seem intimidating

but taking responsibility for your inaction is the first step to fixing your problem. You may

be asking, “What if I can’t afford paying this off right now?” Do not freak out just yet! If

you have a late payment due to any form of financial hardship, your loan provider can

assist you (Syphret). Reach out to them, as they can postpone or reduce your payments

based on your situation.

Recommendation: When you begin to make payments, paying more than the minimum

amount set by your lender will reduce the principal (the large sum that you owe). Be aware

of your payment deadline, so you do not have to go through the hassle of contacting your

lender. When repayment is not an option, do communicate with lenders if you are unable,

for any reason, to make payments.

 IX

Annuities

An annuity is a long-term investment (issued by an insurance company) specifically

designed to be used for retirement. Annuities are created and sold by a number of financial

institutions (insurance companies, banks, independent brokers, financial groups, etc.).

They are designed to protect your money and provide you with a secure stream of future

income at a later stage in your life when you may need it most (Nationwide). You want to

buy an annuity, so you do not outlive your income.

Annuities vary in type:

• You can invest a large sum at once or invest small sums over a period of time
• You can choose to begin receiving payments immediately or at some date in the future
• You can select a fixed rate of return
o What you pay and what you earn in the form of payments are both fixed amounts chosen
beforehand
• You can select a variable rate of return
o You choose investments and earn returns based on how those investments perform
• You can select an indexed rate of return.
o You will receive returns based on changes in a securities index, like the S&P 500 Price
Index

One benefit of annuities is the principal investment (the large sum of money you pay

upfront) will grow over time. This is great because you will reap the benefits of earning

more interest on your investment if the principal amount you pay up front is growing.

Further, you do not have to pay taxes on your annuity until you begin to receive payments

from it (Nationwide).

Disclosure: Anyone can buy an annuity, and the sooner you begin to save for retirement,

the more opportunities you will have to grow your resources. Annuities can give you

security when you begin to consider retirement.

 X

Bonds

Bonds are a tool that companies use to fundraise money for their business. Bonds

are a form of corporate debt and are treated essentially like IOU’s

(LincolnInvest). Companies, rather than getting a loan from a bank, will issue bonds to

get funds from the public. Bonds are known as “fixed-income” securities, which means that

when you purchase a bond, you will know the schedule (usually semi-annual) and the

amounts of the interest payments you will receive. Also, bonds have an expiration date,

which is known as a maturity date; once the bond expires, you will be paid back all the

money you initially paid for the bond (this is known as your principal). Finally, the size of

the bond’s interest payment correlates to the bond’s risk (LincolnInvest). The higher the

interest payment, typically the riskier the investment.

One problem with buying and selling individual bonds is that they are expensive

(individual bonds are issued at $1000 each), offer smaller returns than stocks, and they

are hard to buy and sell (illiquid). One way to access the “bond market” without sacrificing

too much money is to buy into bond ETFs and bond mutual funds. These are easier to buy

and sell, more diversified, and usually well managed.

Recommendation: Buying fixed income products like bonds/Bond ETFs are typically less

risky than stocks. Having part of your portfolio include fixed income products is a good,

profitable, and easy way to put some of your money “off-risk.”

 XI

Mutual Funds, ETFs:

Mutual Funds and ETFs (Exchange Traded Funds) are the best way to diversify your

portfolio when you do not have a lot of money. ETFs and Mutual Funds are portfolios

managed by professional investors that you can invest in at a much lower price (Investor).

They can contain hundreds of stocks, and, if used properly, eliminate virtually all non-

market risk. An ETF/Mutual Fund is essentially buying a diversified portfolio through only

one product. You buy an ETF precisely like a stock, through a brokerage account, and

mutual funds are offered by brokerage firms too. For beginning investors, these are the

number one tool for wealth accumulation; taking advantage of the average stock market

return leads to large compounding savings over time (Investor).

Recommendation: The most popular ETF is SPY, which essentially tracks the overall stock

market/US Economy. The stock market, on average, returns about 7% annually (much

higher than bonds or depository institutions).

Warning: It is important to keep some of your portfolio “off-risk.”

Investing in strictly stocks (even if diversified like an ETF), still

has “market-risk.” Even the best investors have around 20-40% of their savings in insured

depository institutions or fixed income products in the event of a worst-case scenario.

IRA, Roth IRA, 401K:

An IRA, Roth IRA and a 401k are all forms of retirement accounts. These accounts

are ways to save money now in preparation for retirement. Having one of these accounts

is the best way to accumulate wealth for retirement. All these accounts offer certain tax
 XII

advantages. However, if you withdraw from these tax-free accounts before to retirement

(59 ½ years old), you will incur some form of penalty.

IRA stands for individual retirement account, and there are two distinct forms of

an IRA. Traditional IRA contributions are usually tax-deductible (meaning you pay less

taxes in the present), however, upon retirement, your gains will be taxed as income

(Investopedia). IRA’s have a maximum annual contribution of $5,500, and it is ideal to

max out this contribution (if possible and within your budget) every year (Investopedia).

Roth IRA contributions are made with after-tax income, but when you withdraw your

money upon retirement, you will face no taxes on the money you have made. Both are

great options for saving, but we recommend opening a Roth IRA because it is more

simplistic than writing off your taxes.

A 401k is an employer-provided retirement fund (Investopedia). Once you’re

employed, you may qualify for a 401k with employee benefits. These accounts function

much like an IRA as they have certain tax advantages, but there are added benefits because

your company may match your 401k contributions up to a certain limit. This simply means

that your employer will give you free money today so that you can enjoy your retirement

in the future. If possible, and when presented with the opportunity, try to max out your

employer’s match limit to take maximum advantage of this “free money.”

Recommendation: Open your IRA or Roth IRA with a brokerage firm or bank, much like

you would open a brokerage account or a bank account.

Recommendation: Open a Roth IRA today or as soon as possible to start taking advantage

of the exponential compound effect.

 XIII

Peer Recommendations:

Beyond what we have decided to include in this guide, we also reached out to the

Executive Customs Dean of the McDonough School of Business Charles Skuba and three

McDonough School of Business students pursuing careers in financial services. During

our interviews, we asked them the question, “If you could offer some advice, either

technically or generally, what would you recommend to a student our age who is not

financially literate?” Here are their raw responses:

David Van Slyke, a junior pursuing a career in Asset Management: “If you don’t have a

Roth IRA, open one right now. There are also a lot of websites, I read a blog called “money

moustache” and it teaches you some about saving money and some about different

philosophies toward finances and how you should be frugal with what you have even while

investing because when you put this money in these securities, you’re going to have the

urge to pull the money out. A lot of investing is learning to control yourself. EQ is as related

to success in finance as IQ. Know yourself, know your own risk tolerance, before going into

the whole world of financial literacy.” (Van Slyke)

Mallory Murray, junior pursuing a career in Sales in Trading: “If you want to invest, ETFs

are the way to go. But, more basically with the advent of financial technologies, there are

some really great apps to manage your budget. I think a lot of people, with such easy access

to credit cards, need to understand that you can’t spend beyond your needs. If it is a one-

time thing, then sure that’s what credit cards are for, but I would encourage people to use

a budgetary app, watch what you’re spending compared to your income and whatever your
 XIV

allowance is from your parents. I know that’s like the most basic form of financial literacy,

but it’s arguably the most essential.” (Murray)

Rishi Kshatriya, junior pursuing a career in investment banking: “It’s important to learn

from your mistakes, and it’s important not to get discouraged. If you look at last year’s

hedge fund performance [the professional investors], they severely underperformed. I

think the average absolute hedge fund return was around 3.7% (the total stock market

returned ~20% this year) so even the professionals swing and miss a lot. Especially in a

field where everything is changing and when you’re not supposed to know everything there

is to know, it is imperative that you don’t get bogged down or discouraged by any small or

big losses. Keep these experiences as learning experiences” (Kshatriya).

Dean Charles Skuba, Executive Customs Dean in the McDonough School of Business:

“Don’t be scared of it, it’s really pretty simple. The money you take in has to be more than

the money you pay out. And the money you take in, a piece of it has to go towards your

planning and your future. You should always be putting part of your money away. Hard to

do the first few years, but even then, I would say you need to do it. You need to be

accumulating at the same time you are spending. The challenge when you’re young and

starting out in your career, many jobs don’t put you in a position to pay for your expenses,

in some cities like New York City or Washington or San Francisco, other places are a little

less onerous. It’s simple. The principles are there, don’t pay out more than you take in,

and if you do, have a plan to get out of that within the very short term, not the long term.

And, begin accumulation and savings as soon as possible and take maximum advantage of

any plan that matches... that prevents you from paying taxes and alleviating your tax
 XV

burden. IRAs and 401ks become critical to you as soon as you can possibly begin. Some

employers will have generous programs, and some will not, but consider benefits when you

go and choose your career” (Skuba).

Conclusion:

This guide has given you the fundamental knowledge that you need to manage your own

personal finances. There are many routes to financial stability, but the common

denominator between all these routes is time and practice. As you begin to start saving,

budgeting, and planning for your future, you WILL MAKE MISTAKES. But, each mistake

you make is a learning opportunity to become a better investor, budgeter, etc. Personal

finance is not at all like the finance movies about Wall Street. It is slower paced, and there

will be many ups and downs. During your upswings and your downswings, maintain the

“long view.” If you do your homework, stay diligent with your personal finances, and

maintain a broader macro-level perspective, you will have all the tools you need to be

financially stable and financially literate. This study is meant to help liberate yourself

fiscally so that you can provide for your own and other people's welfare (Sandel).1 Finally,

do not feel the need to wait any longer, your road to personal financial success can start

today. Trust yourself, and learn from yourself because like your savings, your knowledge

will compound too.

1Example of Justice Theories at Work. Providing for your own and other people is a form of justice, as it involves
maximizing welfare and respecting aspects of personhood (Sandel).
 XVI

Works Consulted

“Can I Deduct My Individual Retirement Account (IRA) Contribution on My Tax Return?” Investopedia, Investopedia, 21 July
2017, www.investopedia.com/ask/answers/081414/can-i-deduct-my-individual-retirement-account-ira-contribution-my-tax-
return.asp.

Boylan, Michael. “Find Out What is True”. The Good, the True, and the Beautiful: A Quest for Meaning. London and New York:
Continuum International Publishing Group, 2008, pp. 89-91.

“Empowering Women Investors.” Small Business Insurance from Nationwide, www.nationwide.com/annuity-investments.jsp.

“Family Economics & Financial Education.” Take Charge America, Inc. 6 December 2010,
http://financeintheclassroom.org/downloads/WhatSavingswhyimportant.pdf

“Financial Literacy.” FINRA Investor Education Foundation, www.usfinancialcapability.org/quiz.php.

“Financial Literacy.” Investopedia, Investopedia, 14 Nov. 2017, www.investopedia.com/terms/f/financial-literacy.asp.

Greenblatt, Joel. You Too Could Be a Stock Market Genius. Touchstone, 1999.

Hendry, Bev. “Financial Literacy Is a Basic Life Skill and a Need to Know - and Now It's More Relevant than Ever.” Business
Insider, Business Insider, 20 Apr. 2018, www.businessinsider.com/financial-literacy-is-a-basic-life-skill-2018-4.

Kshatriya, Rishi. Personal interview. 20 April 2018.

LincolnInvest. “Basics of Investing: Bonds.” Lincoln Investment, www.lincolninvestment.com/resources/reference-

library/bonds.cfm.

Magaziner, Seth, and Kelly Mitchell. “Financial Literacy Is The Key To Solving Economic Inequality.” The Huffington Post,
TheHuffingtonPost.com, 21 Apr. 2017, www.huffingtonpost.com/entry/financial-literacy-key-solving-
inequality_us_58fa7f9ee4b06b9cb916ffb9.

“Millennials & Financial Literacy— The Struggle with Personal Finance.” PriceWaterhouseCoopers, PriceWaterhouseCoopers, 2015,
www.pwc.com/us/en/about-us/corporate-responsibility/assets/pwc-millennials-and-financial-literacy.pdf.

Murray, Mallory. Personal interview. 20 April 2018.

“Mutual Funds.” Investor.gov, www.investor.gov/investing-basics/investment-products/mutual-funds.

Palmer, Kimberly, et al. “How Credit Card Issuers Pursue the Wary Millennial.” NerdWallet, 9 Apr. 2018,
www.nerdwallet.com/blog/credit-cards/credit-card-issuers-pursue-millennials/.

Patel, Deep. “Show Me The Money: Millennials Turn To Apps For Financial Clarity.” Forbes, Forbes Magazine, 10 May 2017,
www.forbes.com/sites/deeppatel/2017/05/08/show-me-the-money-millennials-turn-to-apps-for-financial-
clarity/#2849ea87ec16.

Sandel, Michael J. Justice: What’s the Right Thing to Do? New York: Farrar, Straus and Giroux, 2009. Print

Skuba, Charles. Personal interview. 4 May 2018.

 XVII

Syphrett, Shani. “3 Strategies To Help You Say 'Bye, Felicia' To Student Loan Debt.” Forbes, Forbes Magazine, 8 May 2018,
www.forbes.com/forbes/strategies-to-help-you-say-bye-felicia-to-student-loan-debt%2F&ref.

Tully, Shawn. “The Naked Stimulus: Why Savings Stimulate More Than Spending.” Fortune, Fortune, fortune.com/210/09/09/the-
naked-stimulus-why-savings-stimulate-more-than-spending/.

Van Slyke, David. Personal interview. 17 April 2018.

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