The first article explains how the human brain is hard wired to prioritize short-term gains over long-term benefits by explaining procrastination, loss aversion, and unwillingness to let go of superfluous expenditures. From this reading, I learned that taking immediate action regarding financial affairs that may not provide immediate benefits, such as a 401(k), can make a substantial difference in the long term, such as in life after retirement. Also, letting go of investments that have proven to be unsuccessful can save a considerable amount of money.
The second article provides advice for people over 40 years old who have neglected their finances, such as buying a house, learning how to fix domestic problems, refraining from buying new vehicles too often, and others. The most important lesson from this article is definitely diversifying investments, by taking a mostly conservative approach but also taking some risks that may prove profitable and, if not, provide a deeper understanding of the market and experience.
The third article explains three common mistakes made by even wealthy individuals. Setting small, achievable, short-term goals can aid in accomplishing long term objectives. Moreover, the article’s approach regarding the diversification of investments is one that I believe should be adopted, as by making smaller, separate investments, losses on one in particular are reduced and thus risk is minimized.
The fourth article provides five helpful tips for building a retirement plan and managing a 401(k). Though one may not have significant experience in finance, it is imperative to sign up to a 401(k) plan after considering all possible options and seeking advice. There are several factors to consider such as fees and tax implications.
Finally, the last article explains that the ideal amount of money to have saved by retirement is at least 10 times the final salary and presents a timeline on how to achieve these savings. In this regard, it is important to consider years in advanced the amount of money to save in order to achieve the final goal by retirement, and adjust expenses accordingly.
Learning from the book “Foundations of Finance”
The most important thing I have learned in this book regards the time value of money. According to Keown, Martin and Petty, money that is available immediately is more valuable than money received in the future, as it can be used to generate more income in the short term. The value of money through time can be calculated by the compound and simple interest equations, as well as future and present value. Compound interest is calculated when the interest paid in each period is added to the total investment, thus modifying the next period’s interest rate. On the contrary, simple interest is calculated when interest is only earned from the original investment.
These concepts are important as their calculation can aid in the assessment or evaluation of investments through time, by either projecting returns in the future or bringing the money back to the present. To achieve this, timelines are designed to visualize cash flow and determine payment periods. In consideration, the future value of an investment can be visualized and calculated to compare how much investment is required in the present versus how much it will return in the future, which can help make smarter decisions. Moreover, these concepts can also help to understand the benefits and disadvantages of different plans for savings accounts or government saving bonds.
References
Dickler, Jessica. "Five 401(k) tips for recent grads." 25 July 2016. CNBC. Web. 02 August 2016.
Epperson, Sharon. "What’s the magic number for your retirement savings?" 11 February 2016. CNBC. Web. 02 August 2016.
Francis, Stacy. "Avoid these 3 big money mistakes in 2016: Advisor." 11 January 2016. CNBC. Web. 02 August 2016.
Keown, A, J Martin and J Petty. Foundations of Finance: The Logic and Practice of Financial Management. Boston: Pearson, 2014. Print.
Newman, Rick. "5 smart money moves in your 40s." 27 July 2016. Yahoo! Finance. Web. 02 August 2016.
Scherzer, Lisa. "How your brain gets in the way of making smart money decisions." 12 July 2016. Yahoo! Finance. Web. 02 August 2016.
