Mastering Taxes: A Holistic Practitioner’s Guide to Tax Efficiency

[00:00:06.44 --> 00:00:12.12] Most people have heard thatinvesting is the best 
way to accumulate wealth. Investment is the act of  
[00:00:12.12 --> 00:00:18.12] redirecting resources from being consumedtoday 
so that they may create benefits in the future.  
[00:00:18.12 --> 00:00:25.04] More precisely, investment is the use ofassets to 
earn income or profit. The wealthiest individuals  
[00:00:25.04 --> 00:00:30.56] in the world became wealthy throughsuccessful 
investment of their assets. Let’s go over the  
[00:00:30.56 --> 00:00:36.64] basics regarding common ways that peopleinvest.
Stocks and bonds are two of the most common forms  
[00:00:36.64 --> 00:00:41.96] of investment. A stock is arepresentation 
of ownership in a public company. They can  
[00:00:41.96 --> 00:00:47.48] be risky to purchase as their prices canchange 
dramatically and unpredictably, but often the  
[00:00:47.48 --> 00:00:53.56] bigger the risk, the bigger the potentialreward. 
There are two ways for stockholders to make money:  
[00:00:53.56 --> 00:00:59.56] dividends and capital gains. Dividendsare 
profits paid out four times a year to all  
[00:01:00.12 --> 00:01:05.76] shareholders. The size of the dividenddepends 
on the profit of the company. Capital gains are  
[00:01:05.76 --> 00:01:11.08] when a stockholder simply sells their stockfor 
more than they originally paid for it. If the  
[00:01:11.08 --> 00:01:17.40] stockholder made a profit, it’s a capitalgain. 
If they lost money, it’s a capital loss. A market  
[00:01:17.40 --> 00:01:23.44] for buying and selling stock is called astock 
exchange. Brokerage firms are businesses that  
[00:01:23.44 --> 00:01:29.96] help stockholders trade stocks andsometimes 
even deal out stocks. These days, anyone can  
[00:01:29.96 --> 00:01:36.32] easily access the stock exchange on theirphone 
through apps that offer brokerage services. 
[00:01:36.32 --> 00:01:42.36] A bond is essentially an IOU issued by a 
corporation or by some level of government.  
[00:01:42.36 --> 00:01:47.08] When you buy a bond, you are loaningmoney 
in return for a guaranteed payout at a later  
[00:01:47.08 --> 00:01:53.92] date. Bonds are usually a more stableinvestment 
than stocks. There are three components of bonds:  
[00:01:53.92 --> 00:01:59.60] their coupon rate, maturity date, and 
par value amount. The coupon rate is  
[00:01:59.60 --> 00:02:04.56] the interest rate that a bond issuerwill 
pay to the bondholder. The time at which  
[00:02:04.56 --> 00:02:10.84] payment to a bondholder is due is called 
the bond’s maturity. A bond’s par value,  
[00:02:10.84 --> 00:02:17.12] assigned by whoever issues the bond, isthe 
amount to be paid to the bondholder at maturity. 
[00:02:17.12 --> 00:02:22.28] In order for investment to take place,an 
economy first must have a financial system,  
[00:02:22.28 --> 00:02:27.92] which is the network of structures andmechanisms 
that allows the transfer of money between savers  
[00:02:27.92 --> 00:02:32.80] and borrowers. As we learned in theprevious 
tutorial, when people save their money,  
[00:02:32.80 --> 00:02:39.40] they often are actually lending funds toothers. 
Savers and borrowers may be linked directly  
[00:02:39.40 --> 00:02:45.84] through what’s known as financialintermediaries. 
Financial intermediaries are institutions that  
[00:02:45.84 --> 00:02:50.72] help move funds from savers toborrowers. 
They include banks, which we learned about  
[00:02:50.72 --> 00:02:57.24] in the previous tutorial, but they alsoinclude 
mutual funds, hedge funds, and pension funds. 
[00:02:57.24 --> 00:03:03.28] A mutual fund pools the savings of many 
individuals and invests this money in a variety  
[00:03:03.28 --> 00:03:10.48] of stocks, bonds, and other financial assets.A 
hedge fund is a private investment organization  
[00:03:10.48 --> 00:03:16.56] that employs risky strategies that canoften 
make huge profits for investors. In general,  
[00:03:16.56 --> 00:03:21.48] these investors already have tremendous 
wealth and are knowledgeable about investing. 
[00:03:21.48 --> 00:03:26.88] A pension fund is income that someretirees 
receive after working a certain number of  
[00:03:26.88 --> 00:03:33.56] years or reaching a certain age. In some cases, 
injuries may also qualify a working person for  
[00:03:33.56 --> 00:03:39.96] certain pension benefits. Employers setup 
pension funds by collecting deposits, and  
[00:03:39.96 --> 00:03:47.04] pension fund managers then invest thosedeposits 
in stocks, bonds, and other financial assets. 
[00:03:47.04 --> 00:03:53.04] In general, the best way to invest your moneyis 
to put it in a diverse range of securities. This  
[00:03:53.04 --> 00:03:59.84] reduces risk, especially when stock orbond 
prices drop. Therefore, people often invest  
[00:03:59.84 --> 00:04:06.04] some of their money in more risky venturesbut 
invest the rest in more stable funds. It is also  
[00:04:06.04 --> 00:04:11.76] better to invest money earlier in life.This 
is because one of the greatest assets is time.  
[00:04:11.76 --> 00:04:17.56] The longer your money is invested insecurities, 
the more it will grow. Put another way, you make  
[00:04:17.56 --> 00:04:23.20] more money on the money your money alreadymakes.
When investing money, it’s important to consider  
[00:04:23.20 --> 00:04:29.40] the two types of interest, simple andcompound. 
Simple interest is based on the principal amount  
[00:04:29.40 --> 00:04:35.88] of a loan or deposit. Compound interest isbased 
on the principal amount and the interest that  
[00:04:35.88 --> 00:04:42.76] accumulates on it in every period. Thus, itcan 
be regarded as “interest on interest.” Simple  
[00:04:42.76 --> 00:04:48.24] interest is only calculated on theprincipal 
amount of a loan or deposit. The formula looks  
[00:04:48.24 --> 00:04:58.04] like this: A = P(1 + rt) where A is thefinal 
amount, P is the initial principal balance,  
[00:04:58.04 --> 00:05:04.40] r is the annual interest rate, and t is 
time, usually in years. Compound interest  
[00:05:04.40 --> 00:05:10.48] is calculated based on both the principaland 
interest accrued. The formula looks like this:  
[00:05:10.48 --> 00:05:22.68] A = P(1 + r/n)nt where A is the finalamount, 
P is the initial principal balance, r is the  
[00:05:22.68 --> 00:05:29.60] interest rate, n is the number of timesinterest 
is applied per time period, usually in years,  
[00:05:29.60 --> 00:05:35.44] and t is the number of periods elapsed.
Let’s look at an example. Say you loaned  
[00:05:35.44 --> 00:05:40.64] $10,000 to a friend and they agreed to 
pay it back in five years with an annual  
[00:05:40.64 --> 00:05:48.84] simple interest rate of 5%. After five years,the 
amount of interest you would get would be $2,500,  
[00:05:48.84 --> 00:05:55.16] as the total amount they would repay wouldbe 
$12,500, which is the original principal plus  
[00:05:55.16 --> 00:06:01.64] the interest. Now say you loaned $10,000 toa 
friend and they agreed to pay it back in five  
[00:06:01.64 --> 00:06:07.48] years with an annual compound interest rateof 
5%. Because you really want to make some money,  
[00:06:07.48 --> 00:06:14.04] you also make sure that interest iscompounded 
monthly, or 12 times a year. After five years,  
[00:06:14.04 --> 00:06:21.96] the amount of interest you would get wouldnow 
be $2,833.59, and your friend would have repaid  
[00:06:21.96 --> 00:06:31.60] you a total of $12,833.59. This example servesto 
illustrate that compound interest is far superior  
[00:06:31.60 --> 00:06:37.60] to simple interest when investing your money.
Whenever consumers evaluate an investment,  
[00:06:37.60 --> 00:06:42.96] they must balance the risks involved withthe 
rewards they expect to gain from the investment.  
[00:06:42.96 --> 00:06:48.00] In general, the higher the potentialreturn 
on an investment, the riskier that investment  
[00:06:48.00 --> 00:06:56.48] is. In the next tutorial, we will look at oneof 
the riskiest ways to borrow money, credit cards.

‍