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EPISODE 5 - LISTENER REQUEST: WHAT ARE ROTH IRAS?

Always wondered about Roth IRAs?  Join Tiffany as she breaks down what they are and how to best utilize them.

This is a listener request episode.  If you want to have your question featured, please submit on our website.

 

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NET WORTH


Net worth is calculated by subtracting your liabilities from your assets.  If your liabilities are more than your assets, you have a negative net worth.  If your assets are more than your liabilities, you have a positive net worth.

Why It's Important

We have finally reached the last piece to the formula, net worth!  Everyone wants to work towards a positive net worth.  Keep in mind that a net worth calculation is just a snapshot in time.  Your net worth changes very frequently, sometimes even daily or hourly.  It doesn't provide information about cash flow or your monthly income and expenses.  There are other financial statements for that!  

I calculate my net worth officially once a year.  In between time I may take a peek on RightCapital or Personal Capital (both free apps) to see if I am on track. 

You can see my full net worth calculation for this year here.

The formula is Assets - Liabilities = Net...

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LIABILITIES

Definition

Liabilities are anything that you owe (debt). They can be divided into Current and Non Current Liabilities, depending on how soon you have to return that debt.

Why It's Important

It is important to know what liabilities are on your personal balance sheet because it allows you to make sure you are current with your bills and obligations.  Yes, this includes items that are on your credit report!  If you don't know what you owe, how could you possibly get rid of it?!

Businesses break liabilities down to two categories, current and long-term.  Current liabilities are any debts that are payable within one year while long-term liabilities are payable over longer periods.  To translate this to personal finance, short term liabilities would be your credit card balances (hopefully) and small loans.  Long-term liabilities would be your car and your mortgage.  
 

Knowing what liabilities you hold also allows you to calculate your net worth as I did...

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5 C'S OF CREDIT

Definition

The 5 C's of Credit is a system that lendors use to determine your creditworthiness.  
The 5 C's are:

Character
Capacity
Capital
Collateral
Conditions


Why It's Important

Having all of your "C's" in great shape increase your chances of getting loans and/or better interest rates.  

Character is your credit history.  How have you treated other lendors in the past?  Did you pay on time?  Did you pay at all?

Capacity is your ability to pay back the loan.  What is your debt to income ratio?  Are you already over your head?

Capital can also be called your down payment.  Do you have enough of a down payment to lower the potential risk to the lendor?

Collateral is what you are willing to give up to ensure the debt is paid.  When you get a home loan, the collateral is the house.  When you get a car loan, the collateral is the car.  These are also called secured loans.

Conditions are the terms of the loan.  They...

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401K

Definition

A 401K is a retirement plan offered by most companies to help you save and invest for the future.

Why It's Important

I hope that everyone reading this is contributing to their 401K at work if they have one available (especially if the company matches).  There are two types of 401Ks, Roth and Traditional.  Roth 401Ks allow you to contribute funds post tax but, when you withdraw, money is tax-free.  A traditional 401K allows you to contribute money pre-tax but when you withdraw all funds are taxed.  

So, here is how to pick which one you should invest in.  If you are early in your career and in a low tax bracket, you should pick a Roth.  Why?  Because the money is taxed at the lower rate instead of being taxed higher later when you make more money.  If you are seemingly at the height of your earning years, you should contribute to a traditional because the money is not being taxed as it's going in, it is going to be taxed as it...

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BEAR MARKET

Definition

A bear market is when stocks see a 20 percent decline or more from a recent high.   

Why It's Important

The S&P 500 officially hit bear market status on Monday, dropping 20 percent from its 52-week high. Historically, these periods last about 13 months on average.  So, with that being said, brace yourself for more blood shed in the markets.  The good news is if you have been eyeing a stock for a while, this period may be the perfect time to buy, buy, buy!  If you are worried about losing money in your retirement and you have decades left before it's time to retire, you will be fine!  Usually, the market bounces back and when it does, it typically goes higher than it previously did.  Sit back and enjoy the ride!

Bear Market is mot to be confused with Bull Market, they are different types of markets.


P.S. This is the last Wednesday Word of the Week for the year.  It is also the last one in my stock market series! ...

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PENNY STOCKS

Definition

Penny stocks are stocks that are trading below $5.00 a share. They are highly volatile. 

Why It's Important

Investor beware!  Penny stocks have the potential to make investors a lot of money they also expose investors to a lot of risk.  They key to penny stocks is volume.  Making $0.10 on a single stock does not seem like a lot but when you multiply it by hundreds or even thousands, it adds up!  On the other side, losing $0.10 on a single stock does not seem like much until you multiply by hundreds or thousands.  With that said, be aware of what you are getting into when dabbling in these types of companies and trades.  Happy trading!

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MARGIN

Definition

Margin is when brokers (Charles Schwab, TD Ameritrade, etc.) lend money to investors to make trades (think of credit) so they can leverage their assets to make more money.

Why It's Important

Investor beware!  Although using a margin account has the ability to make you more money, it is very risky.  If you are trading on margin and the investments drop, you still owe that money to the brokerage.  In addition, brokers can initiate a "margin call" where they demand some, if not all, of the money they lent to you right then and there.  They can immediately sell your assets for the debt.  It is best to just use a cash account especially if you are a new investor. 

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DIVIDEND YIELD

Definition

The dividend yield represents the ratio between the stock price paid and the dividend paid. A stock trading at $100 per share, with a dividend that amounts to $5 per year, you would divide the $5 by $100 and turn it into a percentage. In this case, the yield would be 5%.


Why It's Important

You will typically find the dividend yield for a stock when trying to research whether it is a good investment.  Remember, not all stocks pay dividends!  The example below is from Yahoo Finance.  The current dividend yield for GE is 0.50%.  This is extremely low as GE has been having a tough year.  In order for companies to pay dividends, they have to be doing well enough to distribute extra funds.  Always look at the financial statements before you dive into an investment. (Remember, the higher the dividend the better but the statements must also show positive signs) 

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ARBITRAGE

Definition

Arbitrage is the simultaneous purchase and sell of an asset to profit from the imbalance in price.  Using this strategy, takes advantage of price inefficiencies in the market.

Why It's Important

Arbitrage opportunities provide a way to collect high returns with little to no cost to you.  This is how it works:

Let's say a stock is trading on the NYSE (New York Stock Exchange) for $50 a share.  Simultaneously, the same exact stock is trading on the SSE (Shanghai Stock Exchange) at $50.30 per share.  An arbitrage opportunity exists because you can buy on NYSE and turn around and sell on SSE making a profit of $0.30 a share.   

or

You buy a big name stock (like Apple, Alphabet, or Amazon).  In order to create an arbitrage opportunity, you short the S&P 500 Index (SPY).  This way if the stock gains, you win but also if the stock goes down you win.  Big name stocks weigh very heavily on the market and if the stock goes down the...

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