April Is Financial Literacy Month: Why Education Never Stops for Investors

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.

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Key Takeaways

  • A TD Ameritrade survey showed that most investors have some homework to do
  • Financial literacy begins with personal finance—budgeting, monitoring expenses, and setting up an emergency fund
  • Beyond the company 401(k) plan—many people’s entry point into investing—lies a whole host of investment alternatives

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).

Investor financial literacy: just 19% of investors would give themselves an A grade

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.

Setting Your Financial Literacy Baseline

With that in mind, here are a few key questions to jump-start your financial literacy exploration.

  • Are you on the right track with your savings, investing, and retirement planning?
  • What kinds of investments can you make, and are those investments properly balanced and diversified?
  • What’s your tolerance for risk, and do your investments reflect that risk tolerance?
  • If you have children, are you teaching them the importance of financial literacy and encouraging them to spend and save wisely?

More from the TD Ameritrade Financial Literacy Survey

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.

Financial Literacy: The Voyage Begins at Home 

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.  

What Can I Invest In? Here’s a Rundown

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.

  • Stocks. Buying a share of stock confers a piece of ownership in a company, meaning you hold a claim on any future earnings of the company (and would also be subject to any company losses, but not beyond the value of your shares).
  • Bonds. Bonds and other so-called fixed-income securities tend to be viewed as a more stable and predictable form of investing compared to stocks. U.S. Treasuries, for example, may help ride out the greater volatility sometimes seen in individual stocks or the broader stock market.
  • Exchange-traded funds (ETFs). ETFs are listed on exchanges and can be traded like a stock. They allow investors to buy or sell shares in the collective performance of an entire stock or bond portfolio or index as a single security. The risks of trading ETFs are similar to those of stocks.
  • Mutual funds. With mutual funds, investors pool assets under the purview of professional money managers who, depending on the type of fund, purchase stocks, bonds, and other securities. Mutual fund investors often include individuals’ 401(k) plans and IRAs.

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.

More Asset Classes for the Advanced Investor or Trader

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. These are contracts that grant the owner (or holder) the right to buy or sell an underlying asset. Options can be used to seek income on existing positions, to try to protect or hedge positions, or to speculate on the direction of the price of a stock, commodity, or other security.
  • Futures. Futures contracts allow users to speculate on the price direction of stock indices as well as commodities such as crude oil, gold, or soybeans. Futures markets can also offer insights on supply and demand in certain markets or signs of economic strength or weakness.
  • Forex. Like futures, foreign exchange (forex) or currency markets tend to carry more risk and volatility and should be approached with caution. Forex rates fluctuate based on global interest rates, geopolitical events, and other factors.

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. 

Looking for Financial Education? One-Stop Shopping

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:

  • Immersive curriculum. TD Ameritrade's industry professionals have designed and developed free online courses to help clients become more informed investors. These in-depth courses are accessible to clients via tdameritrade.com and the thinkorswim® trading platform. They feature lesson plans, quizzes, and even final exams.
  • Articles and videos. Clients can search TD Ameritrade's catalog of more than 200 instructional videos, publications, and tutorials covering investing basics to advanced strategies and pretty much everything in between.
  • Webcasts. TD Ameritrade offers weekly online webcasts for investors of all experience levels. Webcasts allow attendees to interact via live chat with Education Coaches and fellow investors. Can’t make the live events? Most webcasts are available to watch on demand.
  • Streaming video. TD Ameritrade Network features live programming throughout the trading day, plus a selection of on-demand content. This programming doesn’t just bring you the news; the experts interpret market events to help you refine your strategies.

TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.

How to Manage Your Money: Six Principles of Personal Finance

Key Takeaways

  • A TD Ameritrade survey showed that most investors have some homework to do
  • Financial literacy begins with personal finance—budgeting, monitoring expenses, and setting up an emergency fund
  • Beyond the company 401(k) plan—many people’s entry point into investing—lies a whole host of investment alternatives

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