FUQs : Frequently Unasked Questions on Money and Finance

Scenario #1

Your best friend says that she is the personification Sonia Sanchez, Amiri Baraka, a helping of Lucky Dube and a hint of Erkyah Badu and Public Enemy rolled into one. One night, she invites you to bear witness to her lyrical prowess. Her art. Her craft. At a local poetry cafe. By the middle of the third poem, you realize that her poetry is not only contrived, but also uninspiring. But when she leaves the stage (exit stage left) and returns to her seat and asks the faithful question, “Girl, what did you think? How was it?”  You are tempted to ask her how many credits shy she is from completing her degree in Accounting, but instead, you muster a,  “Girl, you know how you do!” and seal it with a nod and (big)smile.

Scenario #2

Your sister-in-law invites you to a financial literacy seminar. At the seminar, the speaker speaks quickly, but nonetheless, eloquently about the current market forecasts, inflation, the climate of the housing market, and predictions on the future of US economic development. There is a wealth of knowledge, but not easily digested in one setting because the content is dense. Cognizant of this, the gracious speaker opens the floor for dialogue. Hands go up, all except yours. You think your question is too simplistic to ask. So, instead of posing your question, you posture with a nod and smile. For effect, you may throw in, ” She was so amazing!” to a random registrant as the crowd files toward the exit.

Why We Don’t Ask and Answer Questions

We often do it to avoid confrontation. We also do it when we are scared to voice uncertainity, confusion, and express a need for help. Yes, our pride, beautiful and brazen, when not tempered gets in the way of us being our most evolved and informed selves. The crippling agent, fear, coupled with insidious societal need for conformity and latent need for acceptance dwarfs the rate at which we take risks, go against the crowd, and stand alone.

When it comes to elevating our financial acumen, we have to ask questions. And the more basic, the better. A solid financial foundation that is built on the mastery of seemingly trivial, rudimentary concepts and facts will allow you to easily incorporate the more complex, complicated ideas into your fiscal schema.

FUQs: 5 Frequently Unasked Questions on  Finance and Economics

Q. What type of economy does the United States have?

A: Technically, the United States is said to have a mixed economy because both privately owned businesses and government both play key roles in its growth. It, however, moves and acts like a free market or market economy. A market economy is characterized by an emphasis on private ownership, not government ownership. In fact, private business produces and distributes the majority of goods and services in the country. What also makes the American economy free-market in nature is its belief in the power of supply and demand to determine the prices of goods and services.  The prices of goods and services, in turn,  inform  businesses what should and should not be produced, making way for the entrance of businesses “competitive enough” to produce  and the exit of businesses unable to compete in the free enterprise system.

Q: What is the Federal Reserve? Why is it so important?

A: The Federal Reserve System is the central banking system of the United States. The Federal Reserve, as a central banking entity, is responsible for the country’s monetary policies and decisions, which include monitoring, managing, and controlling the supply of money and trading it in the foreign exchange markets.  The former Chairman of the Federal Reserve was Alan Greenspan. The current Chairman of the Federal Reserve is Ben Bernanke.

Q: What is difference between and stock and mutual fund?

A: A stock (also known as an equity or a share) is a portion of the ownership of one corporation or business entity. When you buy stock in a company, you have the right to a portion of the company’s earnings and are subject to  mitigating its losses. Mutual funds, on the other hand, are companies that have fund managers that are responsible for investing a group of investors’ pooled money toward a predetermined investment goal. Mutual funds provide diversity because it allows for investment in a number of investment tools (i.e. stocks, bonds) and allow the investors to have ownership in several companies.

Q: What is an IRA? What is the difference between a traditional IRA and a Roth IRA?

A: IRA stands for “individual retirement account.” A traditional IRA is an account which allows individuals to make investments with tax-deductible contributions. This money can be invested in stocks, bonds, mutual funds, or other investment vehicles and grow tax-free until the person is 59 1/2 years old. Penalties are imposed for withdrawals made before this time. After 59 1/2, account owners are permitted to make withdrawals, but must make withdrawals by 70 1/2 years old. The withdrawals will be taxed at your current tax rate.

On the other hand,  contributions to the Roth-IRA are made with after-tax dollars. They also are not deductible on your tax returns. Since you have paid tax on your money upfront, withdrawals from the Roth IRA will be tax-free. Additionally, unlike traditional IRAs,there is no distribution requirement (i.e. withdrawals) and  individuals can make contributions to their IRA after they are 70 1/2 years old.

Both impose annual contributions limits. If you are 49 years old or younger, you can contribute a maximum of $5,000 in 2008. If you are 50 years old or older, the ceiling is $6,000 for the year.

Q: What is a “rule of thumb” in terms of creating a budget?

A: There are different ways to allocate money for a budget; The most basic I have come across is  the “50/30/20” budget. Fifty percent of your income goes to “must-haves” (i.e. food, shelter, education, transportation), thirty percent goes to “wants” (i.e. clothes, travel, entertainment), and twenty-percent goes to savings. (i.e. retirement, emergency fund, college fund)

If you’re waiting for a sign that it’s time to make a change, consider this it. Money Therapy may be just what you need to break through your financial blocks and release your money guilt and shame.     
 

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