Modern Financial Literacy

Finance is different nowadays than it was in previous eras, due to the advent of technology. So, it may be smart to keep up with the newest concepts in personal finance, AKA, Modern Financial Literacy. See some key terms and definitions below if you want to be ahead of the curve.

Modern Financial Literacy

  • Dividend Stock
    • A company pays a dividend every quarter, which is a small percentage of the profit that the company made during the quarter. A dividend is a little pay out or a little tip for investors, usually around $1 per share. That is not a lot, unless you save up those dividends over time or reinvest those dividends back into the company to buy even more shares, and thus more dividends over time. This is a form of compound interest, in an abstract way.
  • Stable Coins
    • This is a type of cryptocurrency that is pegged to a specific value or a set price. The company or group that issues the stable coin plays with the monetary policy, such as the amount of coins in existence based on market demand, to keep the price constant. A lot of existing stable coins have issues sticking to a set price, so there is progress to be made. JP Morgan Chase released their own stable coin for clients in early 2019, but you can only use their coin with Chase bank, so it’s kind of like a Chuckie Cheese coin, because you can only use that coin with that establishment.
  • Federal Funds Rate
    • The base monetary policy rate set by the Federal Reserve. All other interest rates are based off this rate. Other interest rates meaning interest rates for mortgage loans, student loans, car loans, business loans, etc. A group of people decide the Fed Funds Rate, which ultimately decides how expensive borrowing money will be for everyone in the economy. This has a massive effect on the economy, which was shown in December 2018. The Fed increased the Fed Funds Rate, which made money more expensive, and the stock market tanked. The Fed updates this rate a few times a year. They can choose to increase the rate, decrease it, or hold steady. It is common monetary policy practice to decrease increase rates during recessions, because cheap money helps stimulate the economy.
  • Negative Interest Rate Policy (NIRP)
    • This is a specific scenario where the Federal Funds Rate is NEGATIVE. The Fed Funds Rate determines the savings rate that people get in their bank account. With NIRP, people would get a -1% savings rate, which means you would have to pay the bank 1% of your money every year. This has been occurring in Japan and Sweden for the past couple years and might come to the United States during the next recession.
  • Impact Investing
    • This means putting your money towards achieving social good while trying to receive a solid return on investment at the same time. 3 types of impact investing are Sustainable Environmental Practices to Improve Global Health, Reduce Global Poverty, or Empower Minorities and Improve Racial Equity. This form of investing in popular with younger people. You can fund a company trying to cure cancer, a company engaging in sustainable environmental practices or a solar farm, for example. You can get involved with this through ETFs.
  • Modern Monetary Theory (MMT)
    • MMT is all about government spending. This economic theory is centered on the government spending money for government related projects and entitlements, to put money into the economy for public projects and for the public good. But, when you spend this government money, how do you pay for the money? Where does the money come from? Does the government simply print the money out of thin air, or does the government issue a bond / loan to create the money, which the government later pays back, primarily through taxes? Well, MMT states that the government has a monopoly on currency creation, so the government can print as much money as it wants and spend it on anything it wants, no questions asked. Well, if the government can print money for free, do we still need to tax citizens? MMT states that citizens need to be taxed anyway because taxes create a demand for the currency, because citizens need the currency to pay taxes (weird logic, I know.) MMT also states that taxes are needed because it reduces the aggregate demand for goods in the economy (people don’t have as much money to spend) and this will help reduce inflation. If you hold everything in the economy constant (economic demand and supply) and then add trillions of spending from the government, prices will sky rocket because market demand increased so much while supply stayed the same. Thus, MMT states that citizens need to be taxed to accommodate government spending so the economy doesn’t spiral out of control. Ultimately, MMT sounds A LOT like what already goes on in our central bank based economy, where citizens take the economic brunt for the government, but it just goes by a cooler name, MMT.
  • Yield Curve Inversion
    • This is a major recession indicator. This indicator went off in March 2019. The yield curve inverted for 3 month and 10 year US government treasury bills, AKA, government bonds. You can get a higher yield (pay out) on a 3 month treasury bill than a 10 year treasury bill. This means you can make more money giving your money to the government for 3 MONTHS than you can by giving your money to the government for 10 YEARS. It makes no economic sense. This happens when investors expect investments returns over the next decade to be very low, so this is a recession indicator. The last two times the yield curve inverted were 2007 before the Great Recession and 2000 before the Dot Com Bubble.

Bonus FinLit Points

  • Tesla CEO Elon Musk on Cryptocurrencies
    • “Crypto is a far better way to transfer value than a piece of paper, that’s for sure.” This quote from Elon Musk during the Ark Invest podcast reveals that Musk holds digital currencies in a positive light, but he also has reservations. Musk is concerned about the energy usage required in order for cryptos to operate properly. Another concern is the amount of scams and lack of education involved in crypto. Lastly, Musk made a joke about people who try to make a crypto to accomplish social good, but end up doing nothing. Tesla has no plans to integrate bitcoin into their business anytime soon.
  • SIM Swap Cyber Attacks
    • Today, criminals use sophisticated methods to steal money. Most wealth today is stored digitally, instead of in cash, so cyber security is critically important. One type of cyber-wealth attack nowadays is the “SIM Swap.” A hacker will call your cellphone network provider and ask them to change your phone number to a new SIM card. If the network agrees, your phone shuts off and the hacker controls your phone number on a new device. Then, they can penetrate your 2nd-factor authentication for online accounts. They can change your email address password, hack into any online account you have and steal your money within minutes. Law enforcement is still figuring out how to combat this attack.
  • ASSETS VS. LIABILITIES – What’s the difference?
    • The definitions say an asset is “something you own that can provide future economic benefits” meanwhile a liability “presents future obligations.” In other words, an asset puts money into your pocket, while a liability takes money out of your pocket. “But Cian, isn’t a house an asset?” IMO, if you are paying down a mortgage and living in the house, it’s a liability. But if you have paid off the mortgage or you are renting the house out and collecting rent, then it’s an asset. Cheers.
  • Three Types of Bitcoin 
    • Bitcoin (BTC) – this is the most secure version of Bitcoin but the transactions are slow. In theory, good store of value but poor medium of exchange.
    • Bitcoin Cash (BCH) – this is the second most secure version and the transactions are fast. Solid store of value and good medium of exchange.
    • Bitcoin SV (BSV) – The man leading this project, Craig Wright, is the closest living thing to Satoshi Nakomoto. This project aims to put the internet on the blockchain. Transactions are ludicrously fast. SV stands for Satoshi’s Vision, as they claim to most resemble the original bitcoin released in 2009. This crypto carries the most risk.
  • Credit Unions vs Banks
    • Credit unions are like banks, except they usually serve a community in a specific location. Banks have more physical locations, which is convenient for customers. Credit Unions typically give customers superior interest rates on savings accounts and loans. Most credit unions and banks charge fees. In the end, credit unions are the underdogs. May they roar for eternity.

Test Your Financial Literacy. In February 2019, the Bank of Canada released the findings of a survey related to citizens’ behavior regarding cryptocurrency. The survey had the people answer these three questions to determine their financial literacy. Below are the questions, are you financially literate?