Wes Moss: Brush up on the ABCs of money

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.

Wes-Moss-032011-USE-THIS-VERSIONEconomics and financial planning are all about numbers –- budget figures, interest rates, savings goals. But there are some pretty important letters involved as well, most of which represent… numbers. Here’s a quick primer on the ABCs of money.

GDP stands for Gross Domestic Product, which is the total value of all the goods and services produced annually by a country’s economy. The U.S. GDP is currently around $15 trillion. Ideally, we’d like to see that figure grow at a rate of about 2 percent to 3 percent per year, after inflation.

CPI is the Consumer Price Index, which measures inflation. CPI is a very important number to investors and retirees. Social Security payments, pension benefits and some investments — including I Bonds and TIPS — are tied to inflation as measured by CPI. The Federal Reserve wants to keep this number low; but it also wants to see some growth in prices, preferably about 1.5 percent to 2.5 percent per year. A rate below that range prompts worries about deflation, while higher rates stir concern about hyper-inflation.

EPS means Earnings Per Share. EPS is calculated by dividing a company’s profit by its number of common outstanding shares. If a business earning $2 million in one year has 2 million common shares of stock outstanding, its EPS would be $1 per share.

We’ve just entered earnings season, and it’s off to a strong start. Blue chip companies like Alcoa, JP Morgan, Apple and Coca-Cola have all reported big increases from this time last year. Most estimates expect companies to show a 10-11 percent overall increase in earnings (or EPS) over the same period one year ago.

FTG stands for Filling the Gap, my simple approach to determining how much money your investments need to generate to fund your retirement. First, add up your guaranteed sources of monthly retirement income, such as Social Security and any pensions you’ve earned. Next, tote up all your monthly retirement spending needs. Subtract your spending from your guaranteed income and you’ve identified your Gap.

One of my favorite investment vehicles –- the ETF, or Exchange-Traded Fund — is essentially a vehicle that holds and tracks a “basket” of securities (i.e. stocks, bonds or commodities). These “baskets” are traded on a given stock exchange throughout the day. An ETF may track the broad S&P 500 or only a sliver of the market. For example, SPY is a broad stock market ETF that tracks all the stocks in the S&P 500 — think of it as “the whole pie.” However, a utility ETF like XLU holds only “a piece of the pie,” and consists only of utility related companies. Even though ETFs are “baskets of stocks, bonds, or commodities,” they generally function or trade as if they were stocks, making them a great way to easily diversify your portfolio at a very low cost.

In next week’s post we’ll pop the hood on an important ETF and talk about the underlying components or “ingredients” — the most important part of any ETF recipe.

Are there economic or financial acronyms of which you are unsure or confused about? I’m happy to answer any questions.

– By Wes Moss, for Atlanta Bargain Hunter

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5 comments Add your comment

Ole Guy

July 25th, 2011
9:19 am

Just as important (if not, perhaps, more so) as saving/investing is knowing how/when to withdraw. Contributions to a retirement vehicle (Traditional/Roth IRA/401k) during your 20’s/30’s and on soon (sooner than you may care to think) become distributions. Educate yourself on the “fine point tactics” of these distributions (it’s not at all like cashing your paycheck on Friday afternoon…unless you want it to be, in which case there is the very strong possibility that you could come out on the short end of the straw…the VERY short end.

To be perfectly honest, it can be somewhat confusing and bewildering, but it really need not be. You don’t need a degree in finance to navigate the process and, with all respect to Mr Moss and his profession, you can get all the guidance you’ll ever need by doing your own research. Follow the trends, read the periodicals, analyze the quarterly statements, and you can go, with confidence, from the “bunny hill” to the “big ski slopes”.

scooby-doo

July 25th, 2011
9:56 am

“…with all respect to Mr Moss and his profession, you can get all the guidance you’ll ever need by doing your own research.”

That’s what I’m doing right now Ole Guy. I’m doing my own research by reading articles about money like this one by Wes Moss and getting different perspectives from several resources. I don’t have a “degree in finance”, but I value the advice and input of those that have experience. I haven’t figured it out all on my own simply by reading periodicals and analyzing my quarterly statements to know that I lost money last month. That doesn’t give me a “crystal ball” to look at to tell what the stocks are my best investment. It’s helpful to have input from those that have gone before to assist the average person in navigating the ins and outs of finance. People like Wes Moss, Clark Howard and others deserve some respect for working in the”trenches” every day and giving us their free financial advice.

Ole Guy

July 25th, 2011
7:24 pm

Good for you, Scooby. The big news flash is this…neither you, Clark, Wes, nor anyone else will ever completely “figure it out”. The research is but one tiny piece of the puzzle. Just as with learning to fly aeroplanes, you can “read all about it”, and that certainly helps a great deal when you’re “sitting behind the stick”. The advice/the dual instruction you receive, coupled with your “solo time”/”dabling with the many investment instruments out there, should be enough to instill a little confidence in developing your financial strategies.

It’s often said that the best surgeon is simply PRACTICING medicine. While “practicing” any skill, be it in the medical field or the world of finance, skills are honed, sharpened, and (in theory) get better. However (not to appear goulish), patients do die; the best investment strategies do go sour. In a nutshell…best advice, preparation and experience notwithstanding, THERE ARE NO GUARANTEES. These gentlemen do indeed deserve all the respect in the world, however, the responsibility, ultimately, is yours.

BTW: crystal balls are usually nothing but houses of mirrors, like the funny house at the county fair. What you may (think you) see may or may not be reality.

scooby-doo

July 26th, 2011
10:15 am

Thanks for your clarification on the subject Ole Guy! Your right, there are no guarantees and there is no crystal ball.

Ole Guy

July 28th, 2011
4:20 pm

Investing is anywhere from 90 to 99.9% SWAG/ScientificWildArsGuess. Just make sure the guess is based on educated thought and not what “that nice young man said”. The “nice young man” is there to FACILITATE your financial education, not to spoon-feed your investment strategies.