Financial Literacy Month is a good time to think about your financial wellness. Throughout the month, TD Ameritrade will be sharing education ideas and resources to help grow investors’ financial literacy.
April is National Financial Literacy Month, which means it’s a good time to ask: do you consider yourself financially “literate?” It’s an important consideration for investors, because the markets are constantly changing. Everyone’s financial plans can use a thorough spring cleaning and review to see what’s working and what isn’t.
According to a 2019 TD Ameritrade survey, investors have some homework to do. For example, among survey respondents, only one in five Americans knew the 401(k) contribution limit (for 2020 it’s $19,500). Only a third of those surveyed knew how much they were paying in fees for their 401(k) accounts, and just 35% knew the contribution limit for traditional IRAs ($6,000 for the 2020 tax year).
What grade would you give yourself? Regardless of your answer, remember that everyone has something to learn. Even money managers and other market professionals with decades of experience might tell you that they’re still learning about markets and investing, and that nobody really has all the answers. Again, investor education is a lifelong journey.
With that in mind, here are a few key questions to jump-start your financial literacy exploration.
Here are a few more figures worth noting from the survey of about 1,000 U.S. adults with at least $10,000 in investable assets (conducted by the Harris Poll in 2019):
52% were aware they can contribute to both 401(k) and traditional IRA accounts (11% didn’t think this was possible; 21% said they didn’t know).
57% understood that “maxing out” their 401(k)s for the year means meeting the annual IRS contribution limit.
57% considered a company match for their 401(k) accounts as “free money.”
40% mistakenly believed that you need to be in a certain tax bracket to qualify for contributing to a traditional IRA.
22% knew the correct contribution deadline period for their IRAs.
38% were aware of the required minimum distributions (RMDs) for IRAs. Note: The survey predated the SECURE Act—which raised the RMD age for most workers—so the RMD statistic might be even lower today.
By devoting time to sit down, thoroughly discuss these questions with your loved ones, and seek guidance, you can navigate life’s financial journey.
Like many things in life, your financial journey begins at home—let’s call it personal financial literacy. Have you set up a budget to monitor your income and expenses? Many financial pros suggest that as a good place to start. Separate your monthly expenses into needs, wants, and wishes (and let’s not forget taxes). Do you have an emergency fund you can tap into in case an unexpected expense were to come up?
If you’ve squared away your home finances—including the setting up of savings goals—and you’re ready to begin investing, it might be time to move on to the next phase. For many investors, that first step is a company-sponsored 401(k) plan—a defined-contribution plan that allows employees to make contributions from their paychecks before federal tax. Contributions go into your own 401(k) account, and you’re typically able to choose among investments provided under the plan.
Employers may offer a matching contribution, usually as a percentage of your contributions. If your employer offers a match, and you can swing it, consider investing at least up to the matching limit to get the most bang for your buck.
Don’t have a company 401(k)? Or are you contributing to the max and want to invest even more toward retirement? Consider the Individual Retirement Account (IRA). IRAs allow tax-deferred growth on funds invested and, depending on personal circumstances, contributions may be tax deductible. Withdrawals from traditional IRAs are taxed at current rates.
Do you have children? It’s never too early to begin teaching them the value of money and the power of compounding (which can help savings grow, but can also make debt harder to pay off). And don’t forget about saving for college, perhaps with a 529 plan or a Coverdell Education Savings Account.
Although there are many instruments you can invest in, they can mostly be boiled down into a few major types: stocks, bonds, ETFs, and mutual funds.
If you’re invested in a company 401(k), your choices may be limited to a few mutual funds. But if you have an IRA, or if you’ve opened up a brokerage account, you have a much wider set of choices.
Recall the questions above, specifically the one about risks and risk tolerance. If you’re looking for exposure to more asset classes, and you’re comfortable with the risks, you might consider options, futures, and forex markets. Keep in mind these products may not be right for everyone.
Options, futures, and forex markets are complex instruments requiring special privileges in your trading account. Not all accounts will qualify. Plus, these instruments involve leverage (margin), which can amplify gains and losses alike.
Financial knowledge is indeed powerful stuff. Although there are bound to be a few gaps in anyone’s financial literacy, the good news is that there's a wide range of investing education resources to help:
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