Financial Literacy: Six Principles of Personal Finance | TD Ameritrade

Posted on March 6, 2021 by admin

Imagine operating a boat without the basic understanding of nautical rules of the road or even how to operate a boat. Scary thought.

Here’s another scary circumstance – one that is all too real. Many Americans are making financial decisions with minimal financial knowledge of investing, budgeting, and credit. The TIAA Institute conducted a survey on U.S. financial literacy, asking 28 basic questions about retirement saving, debt management, budgeting, and other financial matters. The average respondent answered only about half of the questions correctly.

Another study, conducted by Pew Research, found that one in four Americans say that they won’t be able to pay their bills on time this month.

It has been said that knowledge is power, and if that’s true, then too many Americans lack the power to control their financial futures. Financial success rarely happens by accident; it is typically the outcome of a journey that starts with education.

Talking about money is one of the most important skills to being a fiscally responsible and a financially literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one, according to CNBC.

Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, it is considered rude to discuss money and wealth.

The missing component is financial literacy education and training.

Mastering personal finance requires you to look at your financial situation holistically and come up with a plan for how to manage your money. In this TD Ameritrade video, we’ll look at helpful principles for six personal finance topics:

Budgeting – focus on the big ticket items by cutting cost on the expensive costs such as cars and homes
Saving and investing – be specific about your destination and your plan on achieving your goal and reaching your destination
Debt and Credit – avoid high interest debt and loans on items that will quickly lose value
Reduce taxes – find ways to legally pay less taxes on the income you earn,
Avoid insurance for expenses you can pay out of pocket – purpose of insurance is to protect you in unfortunate scenarios. 60% of all bankruptcy is related to medical expenses
Investing for retirement. – don’t just save for retirement, invest for retirement.

Make high impact adjustments to your finances to improve your financial future.

References:

Financial Wellness

Aside

Financial Wellness: Time to tune up your financial goals, plan and strategy.

Tax season is upon us meaning that the 2020 filing season officially opens on February 12, 2021, and the final deadline is April 15, unless the IRS announces changes. For that reason, it is the time to assess your financial health, gather your tax documents and get your personal finance in order.

Knowing where you stand financially before the tax filing deadline gives you time to adjust your current tax withholding and also figure out what you can contribute to accounts like traditional IRAs, Roth IRAs, and health savings accounts, based on your modified adjusted income and your overall financial picture.

“People focus on the negative. They don’t like locating all the files, math is scary, and there’s this need to be very precise,” says Andy Reed, PhD, Fidelity’s vice president for behavioral economics. “The beginning of the year is a good trigger for taking stock of your financial situation, which is good to do once a year.”

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Financial wellness

Knowing where you stand is a critical to financial wellness. “Financial Wellness” relates to thinking about and paying attention to your financial well-being. And, there is no better time than now to hit the refresh button and create a path towards financial wellness. Thus, having your financial plan and strategy in place can not only mean a great deal to you in the long term, but it may provide you some comfort in the short term.

The first thing to do is to do a financial year in review by calculating your personal net worth (assets – liabilities) and assessing your cash flow (income – expenses). Once you know where you stand financially, you can plot out how you achieve your financial goals, according to Charles Schwab financial advisors. Consequently, thinking about what you really want financially, your goals, is the first step toward getting it.

“Saving and investing wisely helps you work toward a more secure future, it also gives you freedom to focus on you.”

Your primary financial focus should be earning and saving money, managing spending and debt, and setting up an emergency fund. Cash flow is financial oxygen of financial wellness, explained Berna Anat, a financial literacy educator and creator of financial education website Hey Berna. “Once you can breathe better, you can plan better.”

To achieve a sense of financial wellness means having your financial plan, strategy and goals in place. Financial wellness can not only mean a great deal to you in the long term, but it may provide you some comfort in the short term.

References:

Why so many Americans in the middle class have no savings

Posted on October 11, 2020 by admin

“Millions of Americans, and not just the working class and poorest among us, struggle to make ends meet.” Neal Gabler

Middle class families in America are in rough shape. The typical middle class family, according to the Federal Reserve, have enough financial cash reserve to keep themselves afloat for about 3 weeks if they lose their primary source of income. The biggest reason cited for this predicament is several decades of wage stagnation in the U.S. as worker productivity has increased, wages remained constant and corporate C-suite executives’ compensation have increase a thousand-fold in that same timeframe.

The Federal Reserve conducted a survey to “monitor the financial and economic status of American consumers.” The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all.

(As part of a collaboration between The Atlantic and the PBS NewsHour, Judy Woodruff looks at why Gabler and so many other Americans are struggling with savings.)

Additionally, the Federal Reserve asked Americans if they could come up with $2,000 in 30 days if they had to in case of an emergency. As many as 40 percent of American families can’t, despite the once pre-COVID improving economy.

Owning Stocks, Bonds and Mutual Funds essential to accumulating wealth

In 2020, a Gallup poll finds 55% of Americans reporting that they own stocks, based on polls conducted in March and April. However, a closer look into the numbers reveal that the top 1% of wealthiest Americans own 50% of household equities (stocks, bonds, and mutual funds). And, the top 10% own a staggering 80% of household equities.

Stock ownership is strongly correlated with household income, formal education, age and race. In 2020, the percentages owning stock range from highs of 85% of adults with postgraduate education and 84% of those in households earning $100,000 or more to lows of 22% of those in households earning less than $40,000 and 28% of Hispanics.

When you own stock, you own a piece of the company. This means you own a share of the company’s profits and assets. When you own stock, you can grow your money and wealth! There are two ways you can make money with a stock. First, the value of your ownership stake can go up or appreciate in value. Second, some stocks pay dividends too. Dividends are company profits that some companies distribute to their shareholders.

Why Own stocks

Stocks are one possible way to invest and grow your hard-earned money. And, according to Morning Star, savvy investors invest in stocks because they provide the highest potential returns. And over the long term, no other type of investment tends to perform better.

On the downside, stocks tend to be the most volatile investments. This means that the value of stocks can drop in the short term. But you can minimize this by taking a long-term investing approach. Yet, there’s also no guarantee you will actually realize any sort of positive return.

By educating yourself and increasing your investing knowledge, you can make the risk acceptable relative to your expected reward. And, investing in stocks is well worth it, because over the long haul, your money can work harder for you in equities than in just about any other investment.

Financially Unstable

“Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants and debt is the money of slaves.” Unknown

Financial illiterate pay a hefty price for not having basic financial knowledge.

Your Credit Score and How it Works

Posted on October 3, 2020 by admin

It is important for consumers to understand how your credit score works. Since, not understanding how credit scores work can actually hurt your credit score. Your credit score can affect your financial future and you need a good credit score to get the lowest interest rates on future loans.

Stack of credit cards and dollars.

Most consumers understand that bankruptcy or foreclosure is going to negatively impact their credit score for seven years, but there are plenty of other small mistakes a consumer can make that can turn a good score of 750 or higher into a mediocre 680.

One mistake people make is thinking that carrying a monthly balance on your credit card statements helps improve your credit score. The truth is that you can build a great credit score without carrying a balance and paying interest on your purchases, according to consumer advocate Clark Howard.

The smart and responsible way to use credit cards is to have a budgeted amount that will go on your credit card each month and pay your bill in full each month. Clark Howard also recommends that consumers do not charge more than 30% of your available credit card balance. Preferably, keep it below 10% if you want to boost your credit score quickly.

According to Clark Howard, your payment history makes up 35% of your FICO score and it is important to understand this fact when bills are due. Consequently, you can attain a good credit score by paying your bills on time and keeping a low credit card balance.

References:

Howard, Clark, Big mistake can hurt credit score, The Atlanta Journal-Constitution, October, 1, 2020, pg. D1
https://finance.yahoo.com/news/7-small-mistakes-that-will-hurt-your-credit-score.html

Federal Debt has Surpassed the Size of the U.S. Economy | New York Times

Posted on August 23, 2020 by admin

By Matt Phillips. Aug. 21, 2020 Updated 7:48 a.m. ET

The national debt of the United States now exceeds the size of the nation’s gross domestic product. That was once considered by economists a doomsday scenario that would wreck the U.S. economy. So far, that hasn’t happened.

“Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.”

“The death spiral could be triggered once the debt surpassed the size of the U.S. economy — a turning point that was probably still years in the future.”

“It actually happened much sooner: sometime before the end of June 2020.”

“”This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.”

“At the end of last year, the United States was about $17 trillion in debt — roughly 80 percent of the gross domestic product. In January, government analysts predicted that debt would approach 100 percent of the G.D.P. around 2030. But by the end of June, the debt stood at $20.63 trillion, or roughly 106 percent of G.D.P., which shrank amid widespread stay-at-home orders. (These numbers don’t count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)”

“Economists have long told a story in which debt levels this large inevitably ignited an economic doom loop. Towering levels of debt would freak out Treasury bond investors, who would demand higher interest rates to hand their cash to such a heavily indebted borrower. With its debt payments more expensive, the government would have to borrow even more to stay current on its obligations.”

“Neither tax increases nor spending cuts would be attractive, because both could slow the economy — and any slowdown would hurt tax revenues, meaning the government would have to keep borrowing more. These scenarios frequently included dire predictions of soaring interest rates for business and consumer borrowing and crushing inflation as the government printed more and more money to pay what it owed.”

“But instead of panicking, the financial markets are viewing this seemingly bottomless need for borrowing benignly. The interest rate on the 10-year Treasury note — also known as its yield — is roughly 0.7 percent, far below where it was a little over a year ago, when it was about 2 percent.”

“There’s a debate about whether a large amount of government debt hamstrings economic growth over the long term. Some influential studies have shown that high levels of debt — in particular debt-to-G.D.P. ratios approaching 100 percent — are associated with lower levels of economic growth. But other researchers have found that the relationship isn’t causal: Slowing economic growth might lead to higher levels of debt, rather than vice versa.”

“Others have found that they don’t see much of a relationship between high levels of debt and slow economic growth for rich developed countries.”

“The experience over the last decade has drastically shifted the way economists and investors think about how the United States funds itself.”

Purpose of Saving

Posted on August 1, 2020 by admin

Save for the long term. Saving and investing are a marathon. To power through saving and investing, you need purpose, patience and stamina.

As a general rule, it’s recommended that individuals save and invest 15% of their gross income into a retirement fund or funds like a 401(k), 403(b), IRA, etc. The exact amount depends on the individual, but the sooner individuals begin saving, the better.

Delaying saving until you have more money to contribute could mean less funds in the future, as your investment won’t have as much time to earn compounding interest.

The impact of compounding is greater the earlier you start saving. You’ll earn not only from the money you invest but also from previous earnings. Not to mention, the sooner you work savings into your budget, the easier it will be to live within your means and prioritize savings in the future.

No matter how little, contribute what you can to your selected plan. Any time you see an increase in salary, receive a bonus or pay off a debt, consider increasing your contribution.

“Savings is the money set aside for emergencies and major purchases like a vehicle or a house. Savings is about setting aside money for future use.”

Most Americans don’t feel prepared for retirement. Fully 58% of workers with pay of more than $100,000 indicated they are not saving enough for retirement; that percentage increases to 69% across income levels. Additionally, 18% of people who earn more than $100,000 say they live paycheck to paycheck which makes it difficult to save for retirement, according to a survey of 8,000 workers by global advisory firm Willis Towers Watson. Frankly, the problem is simply that Americans aren’t saving enough.

Experts say there are ways to up your retirement savings, even if you’re feeling financially stretched. First, look for ways to slash your current spending to free up extra cash or consider a side gig to earn more.

Saving money takes effort and discipline

“Do not save what is left after spending but spend what is left after saving.” Warren Buffet

Saving does requires self discipline and desire to save and to not spend more than you earn. That lack of frugality could explain why 58% of Americans have less than $1,000 in savings. But, saving money can be simple when you develop the correct mindset and create positive savings habits. Add, savings can get easier to accomplish when you actually know where your earnings go month after month.

Automate your savings

Automate your savings is about setting aside a portion of your earnings that would go directly into either a bank account or a retirement plan, depending on your financial goals and plan. You can also set automatic transfers from your checking to savings accounts to fund important goals and create automatic bill pay so you never forget to handle a fixed expense. With an automatic transfer of a portion of your earnings, you’re effectively paying yourself first as a means to save money, and at the same time, you will not really miss the cash you’re socking away.

Reasons to Save and Invest

If you require motivation to save money, make a competition or game out of saving money. By making it interesting and competitive, saving should become more deliberate. Thus, a good way to boost your cash reserves is to find someone who’s willing to engage in a savings contest.This will encourage you to save money that will put you on the path of buying yourself more financial security.

Another trick to staying motivated and on track, set small saving goals and milestones that will give you a sense of progress. For example, make a point to celebrate saving and investing accounts reach $10K, $25K and $100K in assets.

You cannot save your way to financial independence and wealth. The only reasons to save are to create an emergency fund, to set aside money for a short term major purchase like a house or vehicle, and to invest it. Saving money will put you on the path of buying yourself more financial security.

The difference between saving and investing comes down to accumulating money vs. making money grow. Both are important and it essential to understand how to make saving and investing work together. It’s important to put your money to work for you. Put your saved money into investment accounts and never use these accounts for anything, not even an emergency. This will force you to create an emergency fund.

Avoid debt that doesn’t produce cash flow

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

Make it a personal financial rule that you will never use debt that doesn’t make you money. You should only borrow money to purchase assets that increase your income or create positive cash flow. Financially savvy people use debt to leverage investments and grow cash flows. Financially non-savvy spenders use debt to buy good and services that make others richer.

Debt is one of the big three destroyers wealth and can wreck havoc on one’s ability to achieve financial security and independence. It can quickly get out of hand especially when people habitually spend more than they earn to live a lifestyle they cannot afford. Debt can compound to the detriment of a spender if consumers fail to pay off credit card balances each month.

References:

The Vestiges of Spending and Debt

Posted on May 9, 2020 by admin

“Debt means enslavement to the past, no matter how much you want to plan well for the future and live according to your own standards today. Unless you’re free from the bondage of paying for your past, you can’t responsibly live in the present and plan for the future.” Tsh Oxenreider, Organized Simplicity: The Clutter-Free Approach to Intentional Living

Debt is often described as a four-letter word, burying borrowers with substantial balances and double-digit interest fees. And for many Americans, that’s the case.

Living with and accumulating debt has always been an almost certain path to financial ruin and can be a recipe for disaster. Debt can be sneaky. It is difficult to get ahead financially when you don’t have enough money to pay for something and reaching for a credit card to fund. It is no way to live in the short or long term.

Debt eats away at disposable income and limits the borrower’s ability to meet other financial goals, such as saving and investing for retirement. It also forces those who carry a monthly credit card balance to overpay for consumer goods — including furniture, clothes, and flat-screen TVs — due to the interest charges that accrue.

But debt isn’t just credit cards. It comes packaged as student loans, car payments, store credit cards, home mortgages, personal loans, business loans, payday loans, and even “buy now, pay later” deals. Essentially, anytime you owe somebody else money for anything—it’s debt.

It’s important to give debt the boot for good. First, stop taking on any kind of new debt. That means stop paying for goods and services with a credit card to make ends meet, stop leveraging your future to pay present. Stop living beyond your means.

You can’t get out of debt if you keep adding additional purchases and expenses to it. Instead, start focusing on paying off your debts with the smallest to largest balances.

Stop living with debt.

Anytime you owe somebody else money for anything—it’s debt.

Paying off debt continues to be one of the most pressing financial goal for Americans. A 2018 Transamerica Center for Retirement Studies found that nearly a third (31%) of survey participants stated that eliminating bad debt was their number one financial goal.

Paying off bad debt, and debt in general, is extremely important for consumers. It can be difficult to save for retirement and other long-term goals when a big chunk of your money is going toward debt repayment. That’s why it’s important to have a financial plan that details how to get out of debt—it can save you money in interest and ultimately help you save more money and reach your goals faster.

Student loans, credit card balances, car loans, and mortgages all represent types of debt that typical consumers must pay off. It’s important to make sure to pay at least the minimum required—and on time—to keep all loans in good status. After all, defaulting on credit cards, car loans, student debt, or home mortgages can destroy your credit rating, and risk bankruptcy.

Debts are negative bonds

A fixed rate mortgage acts like a bond with fixed payments. But, the exception is that you are the one issuing the bond instead of buying it, which makes it a negative holding. Debts are like negative bonds, you’re making interest payments in addition to principal.

A bond is an investment in which you expect to get back your initial investment (principal) plus some interest. Conversely, a mortgage is a promise to pay back the borrowed amount (principal) plus some interest. Thus, it appears to be that a mortgage and all consumer loans are basically just a negative bond.

Viewing mortgages, automobile loans or student loans as a negative bond, where you are paying interest to the loan holder instead of collecting it, might change a person’s mindset regarding debt. Indeed, paying off debt almost always garners a higher after-tax return than you can earn by investing in high-quality bonds.

Before you tackle debt, pay yourself first.

Use tax-advantaged accounts like a flexible spending account or a health savings account if you have a high deductible health plan. That lets you pay for medical bills using pre-tax money.

Save enough in a workplace retirement savings plan to get the match from your employer—that’s “free money.” Set aside some cash for emergencies.

Assuming you are meeting those primary obligations, here’s a guide to help you pay off debt while saving for emergencies and long-term goals like retirement. It may seem counterintuitive, but before you tackle debt, make sure you have some “just in case” money and save for retirement.

It can be easy to run up a large credit card balance. And once you do, it’s not easy to pay it off. The minimum payments are typically low, which means you are paying mostly interest, so it will take much longer to pay off the balance. And it will cost you more. So if you can, consider paying more than the minimum each month.

Debt and Credit Reporting

Once a delinquency has been reported to a collection agency, paying it off won’t help your FICO score. The damage has already been done, and the blemish will remain on your credit report for seven years.

At this point, it is recommended that you negotiate with the debt collector so you can repay a smaller amount and keep more of your savings. Creditors will often accept far less than what is actually due. One important caveat: When you negotiate a lower payment, the IRS usually counts the forgiven amount (what you’re not required to pay) as income, which means that you’ll owe taxes on that money.

Take pleasure in saving.

Personal Financial guru Suze Orman states that the most important piece of advice she can provide regarding debt is that, “Until you can feel more pleasure from saving than you get from spending, you are going to be tempted to spend money you don’t have.” Essentially, until an individual makes saving a priority and core objective, they will be fighting a uphill battle to curb spending and to ensure the spending remains below the earnings.

It worth repeating the fact that Americans have a spending problem. Every research and survey conducted on the subject of debt reveals that conspicuous spending, or in the vernacular of a former Federal Reserve Chairman, conspicuous consumption has long been a concern of economists in American. Many of the bursting economic bubbles over the past dozen decades can be directly contributed to Americans getting over their proverbial skies with respect to debt and spending more than they earn.

Debt for appreciating and income producing assets

If used properly, debt can potentially provide the leverage to accumulate income and producing assets wealth. Very few people could afford to purchase a primary residence without a mortgage loan.

Not all property appreciates in value, of course, but for most Americans, their primary residence is their single largest asset. As of 2018, U.S. homeowners are sitting on a record $15.2 trillion of “tappable equity,” defined as the total amount of equity a homeowner with a mortgage can borrow against their home, according to Magnify Money by Lending Tree.

Ditch Debt and Start Saving | Fidelity Investments

Posted on February 28, 2020 by admin

Balancing paying off debt and saving can be tricky. Here’s a step-by-step guide.

BY STAFF WRITER, FIDELITY – 06/28/2019

Key takeaways

Save for an emergency—consider saving enough to cover 3 to 6 months of expenses.
Consider a health savings account if you’re eligible, and contribute to your workplace retirement plan.
Pay down debts with the highest interest rate first.

Student loans, credit card balances, car loans, and mortgages—oh, my. You probably have a variety of debt—most people do. So which should you focus on paying off first? And how can you save at the same time?

Of course, make sure to pay at least the minimum required—and on time—to keep all loans in good status. After all, defaulting on credit cards, car loans, student debt, or home mortgages can destroy your credit rating, and risk bankruptcy.

Before you tackle debt, pay yourself first. Make sure you:

Use tax-advantaged accounts like a flexible spending account or a health savings account if you have a high deductible health plan. That lets you pay for medical bills using pre-tax money.
Save enough in a workplace retirement savings plan to get the match from your employer—that’s “free money.”
Set aside some cash for emergencies.

Assuming you are meeting those primary obligations, here’s a link to a guide to help you pay off debt while saving for emergencies and long-term goals like retirement. It may seem counterintuitive, but before you tackle debt, make sure you have some “just in case” money and save for retirement.

— Read on www.fidelity.com/mymoney/ditch-debt-and-start-saving

Conspicuous Spending and Skyrocketing Debt

Posted on February 21, 2020 by admin

“The hard truth is: the amount of money we earn is not always directly proportional to the amount of money we save because, more often than not, the more money we make, the more we spend.” David Bach, author “The Automatic Millionaire”

Let’s face financial reality and an inconvenient truth. Whether on Main Street, Wall Street or Pennsylvania Avenue, Americans continue to have and have long had a spending problem. Government statistics and other studies show that Americans’ spending has generally risen in the years since the 2008 – 2009 Great Recession. This trend is reflected in Americans’ general pattern of consumer spending and reflected in the rising levels of consumer, corporate and public debt which has topped a whopping $75.3 trillion in 2019 according to the stats coming out of the Federal Reserve.

Moreover, Gallup found in an April 2018 poll that people “…want see themselves as fiscally responsible, to some degree.” Even Americans who admit that they are spending more than they earn over the past several months are more likely to claim this is only temporary, rather than their normal. Those who say they are spending less believe it is permanent, despite what the numbers reveal.

And Americans’ have a predilection to say that they enjoy saving more than spending, which rose dramatically between the period before and the period just after the recession, has remained in place, even as the economy has improved.

Positive Cash Flow

Asked about their spending habits, Gallup results show that Americans are as likely to say they are spending the same amount as they used to (35%) as to say they are spending less (35%). Slightly fewer, 30%, report spending more. The takeaway is that Americans’ conspicuous spending habits will not change unless they first acknowledge it as a problem.

On the other hand, most wealthy people understand and stress the importance of spending much less than their means. Spending less gives them financial freedom which then translates into various opportunities such as career mobility, flexibility to venture into activities outside of work, and of course the ability to increase their wealth.

On the other hand, if Americans are spending more than what they earn, then even with a big six-figure income, they will be excessively reliant on each of their paycheck. It is very important that they are financially independent before the time comes when they decide to become self-employed or to retire. So it’s important to start saving, investing and accumulating wealth.

Simply spending less than we earn, eliminating bad debt, managing taxes and fees, paying ourselves first, starting to save early, automatically saving and investing for the long-term, and developing smart financial habits and positive financial mindset will result in huge results over a long period of time.

References:

From Gratitude to Greatness: Brownlee Global's Path to a Purposeful Life

Guide and Educate Individuals How to Build Long-Term Wealth, Better Manage Their Money, and Achieve Financial Freedom

Category Archives: Debt

Financial Literacy: Six Principles of Personal Finance | TD Ameritrade

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Financial Wellness

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Why so many Americans in the middle class have no savings

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Your Credit Score and How it Works

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Federal Debt has Surpassed the Size of the U.S. Economy | New York Times

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Purpose of Saving

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The Vestiges of Spending and Debt

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Ditch Debt and Start Saving | Fidelity Investments

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Conspicuous Spending and Skyrocketing Debt

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