http://www.nytimes.com/interactive/2009/09/12/business/financial-markets-graphic.html

From this simple video, a few important lessons can be drawn, with regards to being financially literate.

Finances are unpredictable
The companies featured in the video are well-established financial institutions with a fleet of accountants, financial analysts and other calculator geniuses to back and support every single one of their money-related decisions. Yet, their finances are so very volatile. We, on the other hand, probably do not possess this high level of support in our financial decisions. While it is most likely impossible for us to purchase companies (as opposed to that new iPod) on any day, one thing we should take note of is that financial situations are highly variable and unpredictable. The money you are spending today, could most likely turn out to be that very exact amount needed for an emergency in future. If we live our lives at the budget constraint (spending all we have), what are we to do if, say, you drop your laptop and have to buy a new one? Or if there is a last-minute event which requires you to attend and pay for? The bottom-line: always prepare for contingency.

Composition
The video shows very clearly how each segment of the US economy affects the financial weather in general. Do we know what makes up our cash inflow and outflow? Are we able to allocate our allowances or salaries in a manner where an increase or decrease in each segment does not affect us too drastically? For example, by careful budgeting and planning, will we be able to cut back on entertainment costs if transport fees exceed the pre-determined ceiling? It is important to know exactly what goes into and out of our pot of finances, and in what proportion, because effective financial budgeting is about prioritizing.

Investing
This short clip has indicated to us that banks are not 100% stable. For those of us who are intending to play the stock market or dabble in investments, the important takeaway is that there are risks involved. In colloquial terms, there is no such thing as a “sure-win” investment. Likewise, in our daily lives, little do we realize it, but we are taking small risks in each buying or selling decision that we make! Even our daily cup of coffee – we are taking a risk in that we are investing a dollar (thereabouts) in exchange for the trust that the drink will meet our caffeine needs. Who knows, it actually be a coffee-flavored beverage we’re paying for! Hence, we see here that financial literacy involves knowing the risks and learning how to take them into account when we are making informed decisions.

-Stella