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FINANCIAL LITERACY

Financial Literacy

Money is one of the most influential tools in modern society, yet few people are ever taught how it works.

Financial literacy is not about becoming rich. It is about making informed decisions, reducing unnecessary stress, understanding risk, and allowing your resources to support the life you want to build.

 

Whether you are opening your first savings account, investing for retirement, or simply trying to understand the language of finance, this section offers accessible explanations to help you make informed decisions.

Why Learn About Finance?

Finance affects nearly every aspect of our lives.

 

It influences where and how we live, what opportunities we pursue, when we retire, how we care for our loved ones, and the freedom we have to spend our time.

 

Despite its importance, many people leave school having never learned the fundamentals of saving, investing, debt, inflation, taxes, or risk.

 

The goal of this section is not to tell you what to buy or sell. It is to help you develop a framework for making thoughtful financial decisions throughout your life. We will work together to ensure that everyone knows how to establish savings, develop an investment portfolio, and understand basic risk.

 

The more you understand finance, the more confidently you can navigate an increasingly complex world.

Definitions

Money
  • Social technology: an agreed-upon system for storing value, exchanging goods and services, and coordinating economic activity over time.
  • Money itself has little intrinsic value—its usefulness comes from the shared belief that others will accept it in exchange for something valuable.
  • The total value of everything you own minus everything you owe. 
  • This measure of personal wealth includes far more than cash and may include investments, property, businesses, collectibles, and other valuable assets.
  • Anything that has value and can provide future economic benefit.
  • Examples include cash, investments, real estate, businesses, artwork, and intellectual property.
  • A financial obligation or debt owed to another person or institution.
  • Examples include mortgages, student loans, auto loans, and credit card balances.
  • Money borrowed with the agreement that it will be repaid, usually with interest.
  • Debt can be used productively (education, business investment) or destructively (high-interest consumer debt).
  • Ownership. 
  • If you own shares of a company, you own equity in that company. If you own part of your home after paying down your mortgage, that portion is your home equity.
  • Setting money aside for future use while preserving its value.
  • Savings generally prioritize safety and liquidity over high returns.
  • Using money to purchase assets expected to increase in value or produce income over time.
  • Investing accepts a tradeoff between risk in exchange for the possibility of long-term growth.
  • The frequent buying and selling of financial assets in an attempt to profit from short-term price movements.
  • Unlike investing, trading generally focuses on shorter time horizons.
  • The possibility that an outcome will differ from expectations.
  • Higher potential returns generally require accepting greater uncertainty.
  • Spreading investments across different assets, industries, or countries to reduce the impact of any single investment performing poorly. 
Compounding
  • Growth that builds upon previous growth.
  • Returns begin earning returns of their own, allowing wealth to grow exponentially over long periods.
  • The gradual increase in prices over time, reducing the purchasing power of money.
  • If inflation averages 3% annually, money sitting idle effectively loses value unless earning the minimum 3% to maintain the initial value.
  • The value of what you give up when choosing one option over another.
  • Every financial decision involves tradeoffs.
  • The collection of investments and other financial assets held by an individual or institution
  • An investment or strategy is a risk management tool used to reduce or offset the potential loss from another investment or financial exposure 
  • A hedge is a way of protecting against an unfavorable outcome
  • A collection of investments packaged into a single fund that trades like a stock.
  • ETFs allow for integrated diversification within a category under a single investment.
  • How accessible the value of an asset is in exchange for goods and service – an easily convertible into cash asset without significantly affecting value is high liquidity.
  • Cash is considered most liquid, while assets such as real estate or cars are less liquid because they generally require more time and effort to sell and subsequently transform into cash.
  • A payment made by a company to its shareholders, typically from the company’s profits. 
  • Not all companies pay dividends, the amount may change over time and is considered a signal to a company’s performance.
  • The increase in an asset’s value between its purchase and sale. A capital gain is realized when an asset is sold for more than its original purchase price. 
  • If the asset has appreciated in value but is unsold, that is an unrealized capital gain. The inverse is true for realized or unrealized capital losses.
  • Money earned from investments, including interest, dividends, and other distributions. 
  • Capital gains may also contribute to investment returns, although for tax purposes they are generally distinguished from investment income.

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