Category Archives: Budget

The Debt Ceiling and Congressional Brinkmanship

Posted on by

“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, Chairman and CEO, Berkshire Hathaway

Around October 18, Treasury Secretary Janet Yellen and the U.S. Treasury Department have warned Congress that the government will no longer be able to pay all its bills unless the $28.5 trillion statutory debt ceiling is increased or suspended.

Source: Congressional Research Service, Congressional Budget Office, and the Treasury Department. Data as of 05/01/2021.

Moreover, Secretary Yellen believes the economy would fall into a recession if Congress fails to address the borrowing limit before an unprecedented default on the U.S. debt.

While the U.S. has never failed to pay its bills, economists say a default would tarnished faith in Washington’s ability to honor its future obligations on time and potentially delay Social Security checks to some 50 million seniors and delay pay to members of the U.S. armed services.

“If you ask the question of Americans, should we pay our bills? One hundred percent would say yes. There’s a significant misunderstanding on the debt ceiling. People think it’s authorizing new spending. The debt ceiling doesn’t authorize new spending; it allows us to pay obligations already incurred.” Peter Welch (D-VT), U.S. House of Representatives Democratic Caucus Chief Deputy Whip

Increases to the debt ceiling aren’t new. They’ve occurred dozens of times over the last century, mostly matter-of-factly, a tacit acknowledgement that the bills in question are for spending that Congress has already approved.

One thing separating today’s debt debate from those of the past is the larger-than-ever national debt, according to Fidelity. Publicly held US debt topped 100% of GDP in 2020 and is expected to reach 102% by the end of 2021.

And the debt is projected to increase significantly in the future. The Congressional Budget Office (CBO) projects a federal budget deficit of $2.3 trillion in 2021—the second largest deficit since 1945.

Source: Congressional Budget Office, as of February 11, 2021.

Failure to address the current challenge could shake global markets even before the Treasury has exhausted its available measures to pay bills. A U.S. debt default, whether through delayed payments on interest owed on U.S. Treasuries or on other obligations, would be unprecedented.

The effect would be one of perception. And, perception can be tied to the reality that someone isn’t going to be paid on time, whether it be government contractors, individuals who receive entitlement payments, or someone else. The damage to U.S. credibility would be irreversible.

Even if a default were only technical—if payments other than interest on debt were delayed—the United States could no longer fully reap the benefits bestowed on the most reliable debtors.

Interest rates would likely rise, as would financing costs for businesses and individuals. Debt ratings would be at risk. The government’s own financing costs, borne by taxpayers, would increase. Stock markets would likely be pressured as higher rates made companies’ future cash flows less predictable. Such developments occurring while economic recovery from the COVID-19 pandemic remains incomplete makes the potential scenario all the more important to avoid.

Let it be said that no one doubts the ability of the United States to pay for its obligations, according to Vanguard. There is a minimal credit risk posed by the United States is supported by its strong economic fundamentals, excellent market access and financing flexibility, favorable long-term prospects, and the dollar’s status as a global reserve currency.

The House has passed a measure that would suspend the debt ceiling through mid-December of 2022, and the bill now goes to the Senate. Republicans in the Senate oppose any effort to raise the borrowing limit and appears intent on making Democrats address it as part of their sprawling investment in social programs and climate policy under reconciliation.

Senate Democrats could lift the debt ceiling without the GOP votes through reconciliation, although that would come with downsides. Under reconciliation, a simple majority of senators can pass a very small number of budget bills each year. The process is sufficiently complex that it would probably take a couple of weeks and distract Democrats from their negotiations over Biden’s “Build Back Bette” agenda.

Thus, the Democrats resist raising the debt ceiling through reconciliation if it means potentially sacrificing other policy goals. And, the rules for reconciliation would require Democrats to specify a new limit for the national debt which would expose them to potentially uncomfortable GOP political attack ads.

Republicans insist that since Democrats control both the executive and the legislative branches and are in a socialistic tax-and-spend binge, they should bear sole responsibility for dealing with the debt limit, which is rearing its ugly head again because the suspension included in a two-year 2019 budget deal expired on July 31.

Democrats argue that Republicans should share the burden of this unpopular chore, since (a) much of the debt involved was run up under Republican presidents and (b) Democrats accommodated Republicans on debt-limit relief during the Trump presidency.

For long term investors, it’s clearly in the best interest of the country to resolve any debt-ceiling issues, according to Fidelity. And, it’s important to understand that there will always be times of uncertainty. It’s important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation.

References:

  1. https://investornews.vanguard/potential-u-s-debt-default-why-to-stay-the-course/
  2. https://www.cnbc.com/2021/10/05/debt-ceiling-us-faces-recession-if-congress-doesnt-act.html
  3. https://nymag.com/intelligencer/2021/10/democrats-can-raise-debt-ceiling-via-reconciliation-bill.html
  4. https://www.fidelity.com/learning-center/trading-investing/2021-debt-ceiling

Own Your Net Worth and Cash Flow

Posted on by

8 out of 10 women will be solely responsible for their financial well-being. Some women will be ready. Many won’t. UBS Wealth Management Report

As women’s life expectancies increase and the rate of divorce for individuals over age 50 continues to climb, more women will find themselves solely responsible for their own current and long term financial well-being.

UBS Wealth Management embarked on research–Own Your Worth–to explore women’s thoughts and feelings, the challenges they faced, lessons they learned and advice they would impart to other women.

With the wisdom of hindsight, nearly 60% of widows and divorcees regrettably wish they had been more involved in long-term financial decisions while they were married, according to UBS’ findings. A full 98% of them urge other women to become more involved early on.

Unfortunately, too many women ignore the advice of widows and divorcees. In direct contrast to the advice, many married women are taking a lesser role in managing the household finances. In a counterintuitive twist, Millennials are the most willing to leave investing and financial planning decisions to their husbands.

Fifty-six percent of married women still leave investment decisions to their husbands, according to UBS. Surprisingly, 61% of Millennial women do so, more than any other generation. What’s more, most women are quite content with their backseat role when it comes to investing and financial planning.

UBS’ research reveals many reasons for women’s abdication, from historical and social precedents to family, gender roles and confidence levels.

So. why do women minimize their role in major financial decisions? According to USB’ research, the reasons vary:

  • Gender roles run deep – Gender roles are ingrained from early in life and often prove hard to shake. In many cases, married couples are simply imitating the gender roles they witnessed growing up.
  • Men are still the breadwinners – Within families, 70% of men are the main breadwinners, in part because of the gender pay gap and the career breaks women take to raise children.
  • Time constraints are challenging – Whether married or not, women have many demands on their time. They take on the majority of household duties, including childcare and chores, as well as paying bills and tracking spending.
  • Competence vs. confidence – Together, history and society have conspired to affect women’s financial confidence. Both women and men think men know more about investing, and women are less confident than men in making major financial decisions. Women consistently underestimate their own abilities while overestimating what is required to be financially involved.

Yet, most study respondents participated in some financial decisions while married, from handling cash flow and bills to saving and investing. Regardless of their level of engagement, however, most agree it wasn’t enough. The research shows:

  • 59% of widows and divorcees wish they had been more involved in long-term financial decisions
  • 74% don’t consider themselves very knowledgeable about investing
  • 64% of widows blame themselves for not being more financially involved (53% of divorcees)
  • 56% of widows and divorcees discover financial surprises
  • 53% would have done fewer household chores to find more time for finances
  • 79% of women who remarry take a more active role

USB recommends three actions to take today

The advice from women who have been there is clear: The time to become involved in your family’s present and future financial well-being is today, not when some unforeseen events happen in the future.

Women are encouraged to get involved in their financial well-being as a form of self care, much in the same way you would take care of your health by:

  1. Owning your worth – Know where you stand and what you want for the future. Take the time to add up your assets and liabilities, like loans, credit and other debts, and ask for full transparency from your partner.
  2. Finding your voice – Start the conversation with your partner. Talking about money is considered taboo to some couples, particularly before they are married. But if you found yourself alone tomorrow, do you know what you’d do to make sure you’re financially secure? There is a tremendous benefit to having open communication about money with a trusted confidante.
  3. Setting an example – Model financial partnership for your family and loved ones. According to our survey, women are repeating the gender roles they saw growing up. As you begin taking a more active role in your finances, you can set an example of financial partnership for the younger generation.

Though women are aware of their increasing longevity and the financial needs associated with it, most tend to focus their efforts on short-term financial responsibilities such as managing the household’s day-to-day expenses and paying the bills.

In contrast, taking charge of long-term financial decisions, such as investing, financial planning and insurance, can have far more impact on their future than balancing a checkbook.

By sharing decisions jointly, both women and men can face the future with optimism—and set an example of financial partnership for generations to come.

Almost 60% of women do not engage in the most important aspects of their financial well-being: investing, insurance, retirement and other long-term planning. USB Wealth Management Report

References:

  1. https://www.ubs.com/content/dam/WealthManagementAmericas/documents/2018-37666-UBS-Own-Your-Worth-report-R32.pdf
  2. https://www.ubs.com/us/en/investor-watch/own-your-worth/_jcr_content/mainpar/toplevelgrid_1797264592/col2/teaser/linklist/link_2127544961.2019551086.file/PS9jb250ZW50L2RhbS9XZWFsdGhNYW5hZ2VtZW50QW1lcmljYXMvZG9jdW1lbnRzL293bi15b3VyLXdvcnRoLXJlcG9ydC5wZGY=/own-your-worth-report.pdf

Take Control of Your Finances

Posted on by

There are ways to feel more in control of your financial situation–and make the money you have go farther. The key is to take a close look at your current budget and to better manage your cash flow. You can best do this by finding expenses you may be able to pare back or eliminate, and by potentially finding new sources of income.

Smart spending and saving strategies, according to FinTech company SoFi, to follow are:

Create a Budget and Manage Your Cash Flow – Take a close look at your monthly spending to get a full picture of your spending, and start tracking your spending (every cash/debit/credit card transaction and every bill you pay) for a month or so.

Once you understand your average monthly spending, compare it to what’s coming in. You can look at your bank statements for the past few months to get an idea of much after-tax income you are taking in on average per month.

Comparing what is coming in vs. going out will help you know exactly where you stand financially.

Uncovering Places to Save – Once you understand your monthly spending and group your expenses into categories, the next step is to list your expenses in order of priority, starting with the essentials and going down to the “nice to haves.”

Once you’ve established which expenses are the most important, you can start looking for places to cut some of your unnecessary spending. For example, if you are spending a lot on restaurants and take-out, you might consider cooking at home a few more nights a week.

Negotiating with Service Providers – You may be able to negotiate for a lower rate from many of your providers, especially if you’re dealing with a company that’s in a competitive market.

Before you call or email a business or provider, it is important to know exactly how much you’re paying for a service, what you’re getting for your money, and how much the competition is charging for the same or similar service.

It’s also a good idea to make sure you are communicating with someone who actually has the power to lower your rate and, if not, ask to speak with someone who does.

You may also want to let providers know that if they can’t do better, you may decide to switch to another company.

Cutting Back on Bigger Expenses – Look at the big items in your overall budget. For example, if your car payment too high, you could buy a less expensive to cut monthly payments.

If rent is eating up too much of your income, you might want to look into finding a cheaper place to live that’s still nice, taking in a roommate, or moving in with friends.

The lower you keep these costs, the easier it will be to live well within a tight budget.

Knocking Down Debt – Having too much debt can hamper your chances of achieving financial security down the line.

That’s because when you’re spending a lot of money on interest each month, it can be harder to pay all of your other expenses on time, not to mention grow your savings.

Reducing debt may seem like a tall mountain to climb, but choosing the right debt reduction strategy may be able to help you chip away and slowly improve your financial situation.

Since credit card debt typically costs the most in interest, you might consider tackling these debts first, and then move on to the debt with the next-highest interest rate, and so on.

Starting an Emergency Fund – Start putting a little bit away into an emergency fund each month a priority: An unexpected expense—like your car breaking down or a visit to an urgent care clinic—could put you over the financial edge.

If you start putting just a small amount aside each month into an emergency fund, it won’t be long before you have a decent financial cushion that could prevent you from having to run up high interest credit debt the next time something unexpected rolls around.

Spending Only Cash for Everyday Expenses – Using plastic that can make it feel like you are not really spending money. Thus, switching to cash (and leaving the credit cards at home) for other expenses can be a great idea when money is tight.

The reason is that using cash places a harder limit on your spending and helps you become more aware of your choices. When you can literally see your money going somewhere, you may find yourself becoming much more intentional in the way you spend it.

Another benefit of cash is that it’s more difficult to get into debt since you can’t spend cash you don’t have.

Starting a Side Gig – Once you’ve done some basic budgeting, it may be clear that additional income could help ease things while money is tight.

Sometimes all it takes is some extra time and energy, but taking on a side hustle, or using your talents to pick up some freelance work can bring in additional income.

Some ideas for generating extra income include:

  • Selling things on eBay or Craigslist
  • Hold a garage sale
  • Creating an Etsy store and selling homemade goods
  • Driving for a rideshare or food delivery service
  • Giving music lessons
  • Renting out a room on Airbnb
  • Walking dogs
  • Cleaning houses
  • Babysitting
  • Handling social media for small businesses
  • Selling writing, photography, or videography services to clients

Start saving and investing, immediately – Your first financial goal should be to create an emergency fund and to establish the discipline for saving by “Paying yourself first”. To take advantage of compound interest, start investing early and regularly.

Takeaways

You can gain control of your finances by calmly sitting down, creating a budget, and determining your cash flow. This entails looking at your monthly income, as well as your average monthly spending, and seeing how it all lines up.

To create a monthly budget, you must allot funds for expenses such as rent and other bills, then sets aside a small amount directly for savings and uses the rest to live off for the month

Once you have a sense of your cash flow, you can take steps to reduce unnecessary spending, negotiate to lower monthly bills, chip away at expensive debt, and even start building a financial cushion.

References:

  1. https://www.sofi.com/learn/content/what-to-do-when-money-is-tight/
  2. https://www.usatoday.com/story/college/2012/04/25/7-steps-to-take-control-of-your-financial-future/37391767/

Financial Literacy – 7 Principles of Money Management

Posted on by

“If you don’t know where you are going, any road will get you there.” Lewis Carroll

Mastering personal finance requires more than a strategy of hope and ‘wishing for the best’—you have to look at your current financial situation holistically and come up with a financial plan for how to manage your money and how to achieve your goals. There are seven personal finance principles that are important for achieving financial success: mindset, budgeting, saving, debt, taxes, insurance, and investing for retirement.

1. Mindset – According to Stanford psychologist Carol Dweck, your mindset plays a pivotal role in what you want and whether you achieve it. Your mindset is a set of beliefs that shape how you make sense of the world and yourself; and, people are capable of changing their mindsets. Mindset influences how you think, feel, and behave in any given situation. And, the first step on the path to financial success is believing you can change your financial circumstances, being accountable, and accepting responsibility for your current reality and financial future. You must embrace that you are in control of your financial future, and every choice you make and action you take can have an impact.

2. Budgeting, Financial Planning and Goal Setting – Budgeting helps you better understand how you spend your money and shows you ways to manage your money, pay off debts and save for future financial goals. Budgeting helps you better understand how you spend your money and shows you ways to manage your money, pay off debts and save for future financial goals. Whether you’re new to budgeting or you’ve tried it before and failed, understanding which steps to follow makes budgeting for beginners simpler.

Begin planning your monthly budget by figuring out how much you have coming in versus how much is going out every month. Ultimately, you want to end up with a blueprint that specifically breaks down your income and expenses, so you know how much you can spend and how much you can save each month.

Figuring out how to budget can be challenging. Avoiding these three common budgeting pitfalls:

  • Getting overwhelmed,
  • Having unrealistic expectations, and
  • Being too strict

Financial planning involves implementing strategies that help you reach your financial goals, be they short-term or long-term. The path to financial success involves planning. It is impossible to effectively manage your finances if you don’t know how much money you have available to spend or have a plan on how you want to spend, invest, and save. You need to create a road map by defining your financial goals.

“The great majority of people are “wandering generalities” rather than “meaningful specifics”. The fact is that you can’t hit a target that you can’t see. If you don’t know where you are going, you will probably end up somewhere else. You have to have goals.”  Zig Ziglar

Three essential keys to setting financial goals:

  • Be specific – define what you want to achieve and when. Goals can be short term (a few days, months, or a year) and long term (five, 10, or 15 years).
  • Be realistic – make certain your goals are attainable. Setting unattainable goals will only lead to disappointment when they are not achieved.
  • Write them down – keep records of your goals and mark off key milestones as you achieve them. Refer to this information from time to time. Writing down goals, reviewing them, and recording your progress can motivate you.

3. Credit and Debt – Understanding the way compound interest works is key to building wealth or avoiding crushing debt. Compound interest can work to your advantage as your investments grow over time, but against you if you’re paying off debt, like credit cards. Thus, make that compound interest work for you instead of against you.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

Compounding interest can be a powerful tool to have in your financial arsenal. It can be very beneficial in building wealth and in creating large sums of money over time if invested correctly. But unfortunately, there is a darker side to compounding interest – compounding debt.

Debt is rampant across the United States. According to the New York Federal Reserve, consumer debt was approaching $14-trillion in the third quarter of 2018. This includes mortgages ($9.14-trillion), auto loans ($1.65-trillion), student loans ($1.44-trillion), and credit card loans ($829-billion).  The thing about debt is that it eventually has to be paid. There is no such thing, economists like us tend to remind too often, as a free lunch.

Compound interest means reinvesting earned interest back into the principal of an investment Although investment returns aren’t guaranteed, compound interest can potentially help your investments grow exponentially over time.

If you don’t have credit already, start building it now! Many lenders consider not having credit just as bad as having bad credit. Many people in their 30s who have no credit think they have perfect credit because they’ve never had delinquent payments. They can’t have great credit, since they have no credit at all. Many people who are afraid of credit don’t actually understand credit. They may have a credit card, but never use it. Because they never use it, there is no history to report to the credit bureaus. In this case, they might as well not have the card at all, since creditors have no way of determining their credit trustworthiness.

4. Taxes – Being tax efficient with investments allows more money to be reinvested into a portfolio to grow over time. There are ways investments can be taxed and strategies for potentially minimizing tax burdens. Tax planning and financial planning are closely linked, because taxes are such a large expense item as you go through life. If you become financially successful, taxes will become your single biggest expense over the long haul. So planning to reduce taxes is a critically important piece of the overall financial planning process.

5. Saving and Emergency Funds – An emergency fund is 3-6 months of expenses set aside in the event of a job loss, car problems, a medical emergency, or other unexpected financial situations. An emergency fund should be kept in a liquid bank account like a savings account that is easy to access in the event of a financial emergency. An emergency fund is just one type of savings account that is “earmarked” or reserved for financial emergencies. Ensure your emergency fund is only used during financial emergencies so it can help you survive if you lose you source of income or your paycheck stops coming in.

6. Insurance and Risk Management – No one really wants to think about life insurance. But if someone depends on you financially, it’s a topic you can’t avoid. Getting life insurance doesn’t have to be hard (or boring). We have some answers to common questions about life insurance so that you can make informed decisions about protecting your loved ones financially. Have you ever wondered on your family would manage if something happens to you? Life insurance is important for protecting your loved ones if something happens to you.

7. Investing for Retirement – It should not be intimidating to start investing. There are five simple rules for building a long-term portfolio:

  • Contribute early and often
  • Minimize fees and taxes
  • Diversify your portfolio
  • Consider how much time you have
  • Focus on long-term goals

https://youtu.be/vl2sasYSY4E

Financial Independence, Retire Early (F.I.R.E.) —is a growing movement of people who want to break free from relying on a job for income. Research has found several money management habits of financially independent people that can help you make the most of your money regardless of your financial goals.

https://youtu.be/7zf7zob1Xdc

References:

  1. https://www.verywellmind.com/what-is-a-mindset-2795025
  2. https://diversyfund.com/blog/compounding-debt-the-dark-side-of-compounding-interest/
  3. https://www.businessinsider.in/finance/news/understanding-the-way-compound-interest-works-is-key-to-building-wealth-or-avoiding-crushing-debt-heres-how-to-make-it-work-for-you/articleshow/78711610.cms
  4. https://www.marketwatch.com/story/the-beginners-guide-to-building-a-budget-2019-08-09?mod=article_inline

Road to Wealth | American Association of Individual Investors (AAII)

Posted on by

You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Managing Credit

Posted on by

Credit is the cornerstone of financial life in the United States, and if you’re starting from scratch, your first step will be establishing your credit history. This means opening or getting added to an account, often a loan or credit card.

As you start building credit, your financial goals may go beyond simply building credit or getting a credit score. Good or excellent scores can help you qualify for the best offers and not get held back by a lack of credit.

  • Understanding what helps—and hurts—your credit score is important when deciding how to use credit and how much debt to take on.
  • The best way to maintain good credit is to borrow responsibly and always make payments on time.

Credit and debt are right at the top of the list of money management concerns and building wealth. Here are 10 common credit facts that can lead to financial well-being:

1)  A credit score is important when you need to borrow money and other areas.

Your credit score is a big part of your financial identity. It can be the most important factor in determining whether you can get a loan and how much it’ll cost you. Your credit score impacts your ability to borrow, and it can affect many other areas of your life, including:

  • Interest rates—Whether you’re looking to finance a home, a car or a washer and dryer, the better your credit score, the lower the interest rate you may be offered.
  • Renting a new home—A prospective landlord can run a credit check to see if you’re a good risk. Things like late payments and collections not only lower your score, they can be a deal breaker when it comes to renting.
  • Insurance premiums—In some states, insurance companies use credit-based insurance scores to determine your premiums. A poor credit score can increase your costs for home and auto insurance.
  • Job prospects—More and more companies use your credit history when screening for jobs. This can impact your ability to get—and keep—a job, as well as your eligibility for a promotion.
  • Security clearance or military deployment—For federal workers in national security positions including members of the military, late payments, collections, bounced checks, large debts or credit report errors can upend your career, jeopardizing deployment or a promotion.

2) Carrying a high balance does not helps build credit faster.

The only thing carrying a credit card balance builds is your interest payment—and the total cost of what you financed. To build credit, it’s much better to pay off what you charge each month and never carry a balance.

3) As long as you don’t go over your credit card limit you’re fine.

To improve your credit score it’s best to use less than 30 percent of your credit line to keep your “debt utilization” rate low. Debt utilization is the amount you borrow relative to the amount you’re able to borrow. A high utilization rate—or even an increase in the amount of credit you’re using—can flag you as a higher risk, lower your credit score and raise your interest rate.

4) Closing out credit cards will not improve your score.

Closing cards decreases your available credit and increases your debt utilization ratio, making it look like you’re borrowing at a higher percentage. Second, closing cards can reduce the average age of your accounts, making you seem like a newer borrower, which can lower your score.

However, closing a credit card can help you manage spending and protect you from identity theft if you’re not using the account. If you decide to close a card, you may want to adjust your spending or pay down existing balances at the same time to keep your debt utilization ratio steady.

5) Getting married does not merges your credit history.

Your credit histories always remain separate, unless there’s a joint account or authorized user. In that case, there’s a shared history, and you’re jointly liable for any charges. If you’re divorced or separated, a joint account still means joint liability, and any new or unpaid debts can affect your credit score. I suggest every couple openly discuss their attitudes toward credit and debt early in their relationship.

6) You can pay a company to quickly remove bad credit marks from your history. 

Accurate negative credit information can stay on your credit report for up to seven years. Bankruptcies can stay on your report for up to ten years. In fact, no one can remove negative information such as late payments from a credit report if it’s accurate, no matter what a credit “repair” company promises you. Use caution before signing up with any company that offers credit repair or counseling services.

7) Checking your credit report will negatively impact your score.

Absolutely not. You’re entitled to receive a free credit report annually from each of the three major credit rating bureaus (Equifax, Experian, Transunion), and I highly recommend getting them. Just go to annualcreditreport.com.

8) There are multiple credit scores.

There are quite a few credit scores, and different rating agencies often have more than one. You can even have different credit scores from the same agency because scores are calculated at different times and according to different criteria. For instance, FICO recently made changes to its criteria, which I discussed in a previous column. 

The important thing for consumers to understand is what basic factors go into a credit score: payment history, unpaid debts, age of accounts, debt utilization ratio, new credit applications and types of credit.

9) Shopping for credit will not hurt your credit score.

It depends on how you shop, the type of credit you’re shopping for and your timeline. For instance, applying for multiple credit cards within a short time can have a bigger negative impact on your credit score than shopping for a home or auto loan. In general, comparison-shopping within 14 to 45 days for an auto loan or mortgage is considered a single inquiry. But trying for a mortgage and a car loan at the same time could have a negative impact.

That said, it makes sense to shop around. To minimize any negative impact, pull your credit report in advance to check for errors, and concentrate your rate shopping into a short amount of time.

10) Having more credit cards does not improve your credit score.

Having multiple credit cards can improve your credit history. But it can also tempt you to spend more and be late on payments, which would lower your score.

Ultimately, the best way to improve your credit is to borrow responsibly. Understand these myths and you won’t be fooled into taking on too much debt—a financial prank to avoid any time of year.

Reference:

  1. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch
  2. https://www.schwab.com/resource-center/insights/content/money-myths-10-ways-we-fool-ourselves-about-managing-credit
  3. https://www.creditkarma.com/advice/i/how-to-build-credit-from-scratch#Next-steps-build-excellent-credit
  4. https://bettermoneyhabits.bankofamerica.com/en/taxes-income/understanding-tax-terms

Give Every Dollar a Job

Posted on by

“Controlling and managing your spending is a skill that takes practice, determination and discipline.”

One of the most important things you must learn and understand in financial planning is that every dollar must have a job, whether you intentionally give it one or not. It is best to assign a task to every dollar you earn. When every dollar has a predetermined destination and income minus spend equals zero, you have created a zero-balance budget; this is the goal.

If the idea of maintaining a budget seems unpalatable, start small. Begin by tracking your monthly expenses and spending habits.  You need to have a clear picture of where your money is going before you can change anything.

Become the boss of your paycheck and cash

Start assigning a job for every dollar you have with the intent of ensuring that money is your servant and working for you. You need to direct it to the things that move you forward, the things that allow you to live the kind of life you envision for yourself. You need to determine where your money goes, you need to take control.  Here are some examples, according to Joe Morgan, financial advisor, Best Financial Life:

  • Your home equity dollars provide a place to live and the safety that your home value won’t fall below your mortgage (assuming you have enough of them)
  • Your emergency fund sits like the fireman in the station, ready to help you through life’s next big challenge
  • Your living expenses, which are funded by your paychecks, ensure your current lifestyle is maintained throughout the year
  • Your savings cover any big purchases over the next five years that cannot be funded by your regular pay
  • Your investment portfolio takes care of expenses that are five or more years in the future, which won’t be covered by future income
  • Your “play money” investment account is for entertainment purposes, but only if you know you won’t get rich (or go broke) buying and selling individual stocks.

Give Every Dollar a Name

Intentional Mindset

Personal finance podcaster, Paula Pant, says, “You can afford anything, just not everything.” Intentional living is not about deprivation or sacrificing the things you enjoy, but investing and spending on the things that are valuable to you.

Adopting an intentional mindset around where and how you spend your money will help control cash flow and free up more money to save and invest. For example, if quality food and nice meals are where you find value, you could focus on spending in that category, but you may need to pull back in another.

It’s important to understand that building the life you deserve isn’t about owning luxury brands or having the biggest house. It’s about finding the things that aligns with your personal values and the vision for your life and that bring you purpose, fulfillment, and joy, while balancing the cost versus value in the choices you make.

Your time is ultimately one of your greatest assets. As Warren Buffett says, “If you don’t learn to make money while you sleep, you will work until you die.” A big part of your financial journey will be finding ways to make your money work for you, taking steps like investing in low-cost index funds.

When it comes to spending, being intentional by giving every dollar a job and intentionally search for the best value can make a big difference to your cash flow and personal financial bottom line.

References:

  1. https://financialaid.syr.edu/financialliteracy/financial-basics/every-dollar/
  2. https://bestfinlife.com/give-a-job-to-every-dollar-you-have/
  3. https://www.cnbc.com/2021/02/12/sisters-who-went-from-financially-insecure-to-6-figure-net-worths-top-money-tips.html
  4. http://www.orangecoastcollege.edu/student_services/financial_aid/wellness/Pages/dollarajob.aspx

Our mission is to educate and empower you with financial knowledge and skills, so you can ultimately apply to your life, create financial security, and build wealth for retirement.

Emergency Funds: How to Build and Use Them

Posted on by

An emergency fund can help you manage unexpected expenses without using a credit card or incurring personal debt.

“None of us, no matter our job, is immune to financial impacts,” Mikel Van Cleve, USAA advice director and CFP professional said. “Under the pandemic, we’ve seen major corporations close their doors, and small businesses that once were thriving fail.” Millions of Americans, who believed they were in secure recession proof positions, found themselves with jobs and regular paychecks.

Thus, Americans from every realm have witnessed firsthand the impact of unexpected black swan events can have on their livelihoods, hopes and dreams for the future.

“Emergencies—from a broken bone to a layoff—are a fact of life. When you’re faced with life’s unexpected events, you can be ready.”  Vanguard Investments

Even in the best of times, it might make sense to have a little extra money put aside for emergencies. A financial buffer can help if your car breaks down, you experience a loss of income, or you’re hit with a big medical bill. And having an emergency fund might also help you avoid tapping into savings and investments when an unexpected cost pops up.

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

Saving money isn’t always easy, but it’s likely to be less painful than the alternatives. A 2012 FINRA Investor Education Foundation National Financial Capability Study found that many of the people surveyed currently or recently:

  • Had unpaid medical bills: 26%.
  • Overdrew their checking account: 22%.
  • Took a loan from their retirement account: 14%.
  • Took a hardship withdrawal from their retirement account: 10%.
  • Had more than one late mortgage payment: 13%.
  • Filed for bankruptcy: 3.5%.

Furthermore, if you don’t have an emergency fund, you’re not alone. A 2019 Federal Reserve report found that 27% of Americans in 2018 would have a hard time covering an unexpected $400 expense. And 12% wouldn’t be able to pay for it at all.

How to Build an Emergency Fund

You might think that emergency funds are only for people who can set aside lots of extra cash each month. But even if money is tight, an emergency fund could help you feel more secure. Here are a few suggestions for building yours.

  • Keep it separate. The Consumer Financial Protection Bureau (CFPB) recommends setting up a separate savings account for your emergency fund. This makes it accessible, but not so accessible that you’ll be tempted to dip into it.
  • Start small if you need to. The Federal Trade Commission recommends saving even if you can only manage $10 each week or month. You might find it useful to set a regular schedule for your contributions and stick to it. It can be motivating and satisfying to watch the deposits add up, however small they start off.
  • Pay yourself first. If you can, you might want to consider setting aside some of your income for savings before you spend it on anything else. You could even automatically transfer your chosen amount into a savings account each payday.
  • Bank any extras. A tax refund, cash gift or raise at work could provide a good opportunity to kick-start an emergency fund or give it a big boost. Immediately setting that money aside can be a great way to grow your savings without dipping into your wallet.
  • Say “yes” to the 52-Week Savings Step-Up Challenge. The premise is simple: This week, save $1; next week, save $2; in week 3, save $3. Continue adding a dollar a week for 52 weeks. A year from now, you’ll have saved $1,378 — and surpassed your first goal of $1,000.
  • Schedule a monthly automatic draft that transfers money from your checking account to your savings account. This is the perfect solution if you look at your budget and know how much you can save. Just set it and forget it.

When to Use an Emergency Fund

After building an emergency fund, here are a few common situations when you might need to tap into your emergency savings.

  • To protect your income. A financial buffer could help if anything threatens your ability to do your job—for example, if your car breaks down and you can’t get to work any other way, or you need a new piece of equipment.
  • To replace your income. If your job is downsized or cut, your emergency fund could help you pay rent, buy food and cover other necessary expenses until you can find another source of income.
  • To cover medical expenses. Using your emergency fund is a no-brainer if your doctor recommends treatment or medication for a health issue.
  • To maintain a habitable living environment. Damage to your home, like a leaky roof, could cause more costly issues down the line if it’s not taken care of as soon as possible.

Remember, everyone’s situation is different, and you might have multiple ways to respond to a financial emergency. If you’ve been laid off and you’re struggling to pay bills, the CFPB recommends reaching out to your lenders directly. And it might be a good idea to seek the advice of a qualified financial adviser.

Bottomline

Whether you’re considering putting your money in a savings account, checking account, certificate of deposit, money market deposit account, money market mutual fund, bond or equity investment, real estate, or some other form of investment, weigh the following pros and cons:

  • How liquid are the funds? In other words, can you immediately withdraw your money if you need it?
  • Are there any fees or limitations to accessing the funds?
  • If you access your funds, is there a risk of loss of principal?

In many cases, FDIC-insured savings accounts or money market deposit accounts are preferable options because your money is more easily accessible. Plus, it’s not subject to market fluctuations.

References:

  1. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
  2. https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/
  3. https://www.consumer.ftc.gov/articles/0498-its-never-too-early-or-too-late-save
  4. https://www.usaa.com/inet/wc/advice-finances-emergencyfund

TWELVE SUCCESSFUL WAYS TO SAVE MONEY | America Saves

Posted on by

Start small, Think big. Make a commitment to yourself to save money, reduce your debt, establish an emergency fund, invest for the long-term and begin building wealth.

By Barbara O’Neill, Ph.D., CFP, CRPC, AFC, CHC, CFEd, CFCS, Rutgers Cooperative Extension

Savings is the foundation for investing. You cannot invest money if you have not saved it first. Like dieting, saving money is hard to start, even harder to maintain, and requires patience and discipline. When you achieve your financial goals, however, the results are so worth it. Below are 12 time-tested ways to save:

  1. Pay Yourself First – Treat savings like an important household bill (e.g., loan payment). Set aside a part of each paycheck, even if it is only a small amount, and leave it there. Save automatically where possible.
  2. Collect Coins – Put loose change into a can or jar. When the container is full, deposit the money into a savings account. Set aside $1 a day, plus loose change, and you should have about $50 a month, or $600 a year, saved. Save $2 a day, plus loose change, and you should have about $1,000.
  3. Complete a Savings Challenge – Pick a savings Challenge that matches your time frame and savings goal such as the 30 Day $100 Savings Challenge or the 50 Week $2,500 Savings Challenge. Savings challenges gradually ramp up savings deposits over time and provide motivation and structure.
  4. Continue to Pay a Loan or Bill – Make payments to savings or investment accounts with money that is freed up when loan payments end or an expense, such as childcare, ends. The rationale behind this savings method is that you are already accustomed to the payment so “redirecting” it will not pinch your cash flow.
  5. Break Costly Habits – Track your spending for a month or two and pick a few places where spending can be cut back or cut out to “find” money to save. For example, brown bagging lunch two or three days per week could save hundreds of dollars over the course of a year.
  6. Bank a Windfall – Save all or part of large, infrequent expected or unexpected sums of money. Examples of common financial windfalls include tax refunds, inheritances, settlements, awards and prizes, retroactive pay increases, and year-end bonuses at work.
  7. Crash Save – Decide that, for a month or two, you will buy only absolute necessities and save any money that remains after paying bills. At the end of the crash savings time period, treat yourself and buy the item(s) that you were saving for. Then resume your “normal” spending habits or set a new crash savings goal.
  8. Start a “Club” Savings Plan – Start a structured savings plan to save money over the course of a year for holiday or vacation expenses. Some banks and many credit unions still offer them. Unlike “coupon books” of years ago, weekly savings deposits are often transferred electronically from checking to savings.
  9. Save Your “Extra” Paychecks – Mark your paydays each year on a calendar. If you are paid bi-weekly, in two months of the year, you will receive three paychecks. If you are paid weekly, there will be four months with five paychecks. Anticipate these months in advance and plan to save part of the “extra” paycheck.
  10. Save Excess Expense Reimbursement Money – Review your employer’s reimbursement policy. If you get a fixed sum for business travel expenses, instead of having to collect receipts, and spend less than the per diem amount, save the difference. Ditto for mileage reimbursement for using a personal car for business.
  11. Reinvest Interest and Dividends Automatically – Arrange to have dividends and capital gains on mutual funds reinvested to purchase additional shares rather than receiving a check for a small amount and spending it. This is a painless way to increase investment account value over time.
  12. Participate in a Tax-Deferred Retirement Plan – Reduce your salary via payroll deduction to save for retirement and aim to take maximum advantage of employer matching. Money contributed to a 401(k), 403(b), or similar retirement savings plan and earnings on these funds grow tax-deferred until withdrawal.

For additional information about saving money, visit the America Saves program website.

——–

Spring is here! This is the perfect time to do some spring cleaning in your financial house. April has been declared as National Financial Capability Month. Throughout the month, the Financial Literacy and Education Commission (FLEC) and the Ready Campaign encourage people to take action to improve their financial futures and to be prepared when disaster strikes.

References:

  1. https://americasaves.org/resource-center/partner-resource-packets/financial-capability-month-ways-to-improve-your-financial-capability-now/
  2. https://americasaves.org

5 Simple Rules for Investing Success

Posted on by

“Definiteness of purpose or single-mindedness combined with PMA (positive mental attitude) is the starting point of all worthwhile achievement. It means that you should have one high, desirable, outstanding goal and keep it ever before you.” W. Clement Stone

Investing is a mental game.  And to be successful at the mental game, you must adjust your mindset and retrain your thinking that as a long-term investor, you need to be able to buy stocks and open new positions when the market is crashing or correcting.  You’re genetically programmed to be a lousy investor.  You must set up systems and rules to fight our normal urges and invest at what appears to be the absolute worst time and when everyone else is fearful and selling.

It is important to accept the fact that you will absolutely enter a position at the wrong time and make a bad buy in the short term.  It happens to every investor at sometime in their life.

Investing doesn’t have to be intimidating or challenging. To get started investing in stocks and bonds, you should follow with deliberate purpose and action five simple rules for building a long-term portfolio, according to TD Ameritrade:

  1. Contribute early and often – The single most important thing you can do in investing is to invest early and save often. Thanks to the magic of compounding, money invested early has more time to grow. Delaying investing can have a significant effect on your portfolio. In fact, for every 10 years you wait before starting to investing, you’ll need to save roughly three times as much every month in order to catch up.
  2. Minimize fees and taxes – Charges and taxes will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments.
  3. Diversify your portfolio – We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, some of your other investments might make up for these losses, although there are no guarantees.
  4. Consider how much time you have – Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least ten years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
  5. Have a financial plan and focus on long-term goals – A financial plan creates a roadmap for your money and helps you achieve your goals. It is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your plan and strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.

https://youtu.be/NxEcO7ITtMo

And, never forget the top two and oldest rules for investors, according to Warren Buffet:

  • Rule #1 of investing is “Don’t Lose Money.”
  • Rule #2 is “Don’t forget rule #1.”

What Buffett is referring to is a state of mind and philosophy for investing. Simply, it means that there’s no such thing as “play money.” You don’t go out and speculate on a stock. You remain patient and disciplined, whether your tax deferred or brokerage accounts are up or down for the month or year.

Investing is not gambling and the stock market is not a casino. There’s no such thing as the house’s money in investing. It’s all your money, and it has to be protected.

So, don’t become anchored to the price of stocks, instead focus on buying good businesses at fair prices.  Only thing that truly matters in investing is the long-term future prospects (innovation, moat, management acumen) and growth opportunities of businesses. Don’t let the loss in the price of a stock get in your head and don’t let a short-term paper loss sway your emotions, behaviors or actions.

Better to be a regular investor rather than be perfect or optimize to price of the stock.  And remember, celebrate good stock buys, and recognize and learn from bad buys.

References:

  1. https://www.barclays.co.uk/smart-investor/news-and-research/investing-for-beginners/10-golden-rules-for-investors
  2. https://www.fool.com/retirement/2007/08/06/invest-early-and-often.aspx
  3. https://www.investopedia.com/articles/financial-theory/11/6-lessons-top-6-investors.asp
  4. https://www.investopedia.com/articles/fundamental-analysis/09/market-investor-axioms.asp
  5. https://cabotwealth.com/daily/how-to-invest/10-basic-rules-of-investing-according-to-the-legends