Category Archives: Finance

Know Your Net Worth | Financial Literacy

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“What gets measured gets managed.” Peter Drucker

This principle of ‘what gets measured gets managed’ means that examining or quantifying an activity, such as personal finance and net worth, will change the activity and its result by forcing you to pay attention to it.

This principle said another way…’you manage what you measure‘ is pertinent to personal finance. The principle can be applied to help us manage our personal finances and to permit us to get our hands around our personal net worth. Creating a net worth statement, and updating it each year, will help you monitor your financial progress and meet financial goals.

As you prepare to invest, you’ll need to know your net worth. And, it’s simple to calculate. You simply add up what assets you own and subtract what liabilities you owe.

Creating a net worth statement, and updating it each year, will help you monitor your financial progress and meet financial goals. It will also enable you to calculate how much you have (or don’t have) to invest.

www.finra.org/investors/personal-finance/know-your-net-worth

Many Americans are feeling these 3 big financial stresses – MarketWatch

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If you look only at the nation’s low, 3.7% unemployment rate, it would be easy to assume that the economy’s humming and that Americans are feeling great about their finances. But after reviewing five recent notable surveys, I believe many people are actually feeling three big financial pain points now.

Overall, according to the Bank of America Workplace Benefits Report of 996 retirement-plan participants, just 55% of employees rate their financial wellness as good or excellent, down from 61% a year ago. “That’s something to keep a close eye on,” says Lisa Margeson, head of Retirement Client Experience and Communications at Bank of America.

— Read on www.marketwatch.com/story/many-americans-are-feeling-these-3-big-financial-stresses-2019-10-02

The 5 Step Guide to Avoid Making Investment Mistakes

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“The only man who never makes a mistake is the man who never does anything.”

If you apply this famous quote by Theodore Roosevelt to investing, the easiest way to avoid mistakes while investing is by not investing at all. But, that is the biggest investment mistake one can make.

Investing is important to build wealth in the long term. However, just investing is not enough as investing right is equally important.
— Read on www.entrepreneur.com/article/343454

Retirees: Don’t Make Mistakes Before a Correction | Kiplinger

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Take some lessons from the mistakes many retirees made during the downturn that socked stocks in 2008. By adjusting accordingly, you don’t have to fear outliving your retirement portfolio, even if you’re about to retire.

How can someone who’s approaching retirement, or is already retired, better handle the next financial crisis?

Although many might say the economy is going through a healthy pullback, there is no doubt that another financial crisis will come at some point. Be sure to avoid making the same mistakes so many retirees did in 2008.

— Read on www.kiplinger.com/article/investing/T047-C032-S014-retirees-don-t-make-mistakes-before-a-correction.html

Paying Yourself First

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“Why would you wake up in the morning, leave your family, not do what you want with your day, go to work all day long for 8, 9, 10 hours a day, commute back home, get up and do it all over again? Why would you do this 5 days a week, 4 weeks out of the month, 12 months out of the year? Why would you do all that to earn money and not pay yourself first? Most people pay everyone else before themselves: the government, their creditors, and their bill collectors. Everybody else gets paid first and then if anything’s left over, then they pay themselves. That system stinks and is designed for you to fail financially. If that’s the system you’re using right now, and you don’t have money, that’s why. The odds are set up against you. It’s too tough for you to get rich if you’re paying everybody else first. You need to change this. You need to completely redirect your income so the first person who gets paid is you.” David Bach, The Automatic Millionaire

Paying yourself first is often referred to as “the golden rule of personal finance.” Paying yourself first means saving before you do anything else with your paycheck, like paying bills, buying groceries, or shopping. You allocate a percentage of your pay or income to a savings or investment account. Paying yourself first prioritizes savings and investing, but not at the expense of necessary expenses like housing, utilities and insurance.

Prioritize savings

If you deposit money directly into savings or brokerage account every time you get paid, you may be less likely to spend it on your everyday expenses. Following this system can help you foster a habit of saving that will add up over time and help you be prepared for retirement or unexpected expenses.

A good target is to save 10 – 15% of your take-home pay and put it toward your savings and investment goals. Saving even $125 or $150 a month is one small step you can take to help you get into the habit.

The first bill you pay each month should be to yourself.

By paying yourself first, you make saving a top priority. You make it a priority to pay your savings and investment accounts first, before making the first monthly payment or paying the first bill.

Most people say they don’t save enough money for retirement, or invest enough, or save a big enough emergency fund, because they don’t have the money to save more. That’s why personal finance advice says that you should pay into those savings and brokerage accounts first. Treat it like a bill. Approach it the same way that you treat your phone bill or your electric bill.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Automate Your Savings

A quick way to begin paying yourself first is by setting up an automatic transfer to a savings or retirement account every time you receive a direct deposit, like a paycheck.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.
Paying yourself first makes saving money and investing in assets a priority without sacrificing other financial needs and obligations. No matter what your level of earning or responsibilities are, you can afford to pay yourself first with a few small changes.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.
Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Paying yourself first should really be called investing in yourself first.

How To Stop Living Paycheck To Paycheck – Fidelity

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Nearly 8 out of 10 workers (78%) live paycheck to paycheck, according to a new survey from CareerBuilder.com.1 That’s up from 75% last year, and it applies even to those making 6 figures: 1 in 10 workers making $100,000 or more say they live paycheck to paycheck.

“In working with many clients over the years, I have found that most people tend to spend their entire paycheck if it is available in their bank account, regardless of whether they are at a low/middle level or are highly compensated,” says Marc Kodomatsu, a financial planner in Lake Oswego, OR.

If you’re putting away adequate savings for your goals and you have a healthy emergency fund, living paycheck to paycheck isn’t necessarily a disaster. But a quarter of Americans have no money saved for an emergency, according to Bankrate, and 20% have less than 3 months of living expenses in the bank.

“The events in Houston are a stark reminder of the perils of living paycheck to paycheck,” says Thomas Balcom, a financial planner in Lauderdale-by-the-Sea, FL. “For those folks who have flood insurance, they may not have the funds available to cover their deductible or tie them over until they return to work.”

Breaking the paycheck-to-paycheck cycle takes discipline and a plan. Here’s what top financial experts recommend as the best steps toward more financial independence:
— Read on www.fidelity.com/mymoney/how-to-stop-living-paycheck-to-paycheck

7 Rules for Wealth: #4 Retirement Cost-Cutting

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Are you paying 1% for portfolio management? Why?

You want to be invested in a collection of index funds with an average expense ratio no worse than 0.1%. That’s easy to do. Fidelity has index mutual funds with 0% fees. Or you could easily put together a small, well-balanced assortment of exchange-traded funds costing 0.03% to 0.06%. (Check out the Forbes Best ETFs for Investors ranking.)

Or you could put all your money in the Vanguard Balanced Index Fund at 0.07%.
— Read on www.forbes.com/sites/baldwin/2020/01/04/7-rules-for-wealth-4-retirement-cost-cutting/

Cash Flow Analysis in Retirement

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Adding up all the money coming in and going out is called cash flow analysis, and it looks at all income from investments, properties, work, or anywhere else. And it looks at spending.

When it comes to cash flow, there are no hard and fast rules about what is good—it depends on personal goals and values. But there are some general guidelines to be consider.

  • Try to start early and save at least 15% of income for retirement—and any employer matching counts toward this goal.
  • Retirees should try to limit withdrawals from their savings to about 4% of their account balance in the year they entered retirement, though they can increase that for inflation each year.
  • Limit your monthly essential bills and housing costs to 50% of your monthly income.
  • Save about 5% of your income for short-term expenses.
  • Look to keep your total monthly debt bills below 36% of your monthly income.
  • Consider a growth portfolio consisting of (70% stocks, 25% bonds, and 5% cash) that would have allowed a retiree to withdraw more than 7% each year over 25 years of retirement—over 25% more than a conservative portfolio (20% stocks, 50% bonds, and 30% cash) with a sustainable withdrawal rate of 5.7%.3

Cash flow analysis may also show some opportunities for tax savings and other ways to make the most of one’s money.

Source: Financial health: Know your vital signs, FIDELITY VIEWPOINTS, 09/30/2019
3. The chart, “More stocks may mean higher anticipated withdrawal rates, but with less certainty,” was created based on simulations that relied on historical market data. The historical range analyzed was January 1926 to July 2018. These simulations take into account the volatility that a variety of asset allocations might experience under different market conditions. The illustration compares 3 different hypothetical portfolios—conservative, with 20% stocks, 50% bonds, and 30% cash; balanced, with 50% stocks, 40% bonds, and 10% cash; and growth, with 70% stocks, 25% bonds, and 5% cash. For each of the hypothetical portfolios, the maximum withdrawal rate was calculated such that the portfolios do not run out of money in 99%, 90%, and 50%, respectively, of the hypothetical scenarios. See footnote 4 for more information on asset classes and historical returns.

Inflation and Purchasing Power of the Dollar

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There is an extremely important concept that concerns the value of a dollar today versus tomorrow. Over time, inflation erodes the worth of money, so that a given amount buys less in the future than it can today.  When inflation is high, it erodes purchasing power, meaning your income must be greater to keep pace with rising prices and maintain a desirable lifestyle. The opposite is also true: A low-inflation environment, like the current one, puts less pressure on income.

pexels-photo-164656Photo by Pixabay on Pexels.com

Consequently, you want your sources of income to regularly exceed, or at least keep pace with, the rate of inflation—something the S&P 500 has been doing for the better part of five years.

Investors who hold cash or cash equivalents should not feel comfortable. They may have opted for a less riskier short-term investment, but have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value over the long-term.

When you are planning for the future, you are examining dollars over numerous time periods. To compare them, you need to put them on an equal purchasing-power footing, so they are all in equivalent dollar terms.

One approach, the equal footing will be the purchasing power of today’s dollars—that is, dollar amounts will always be stated in terms of today’s dollar equivalent.

Individual Retirement Accounts

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The Traditional IRA and the Roth IRA offer ways to save for retirement, although each offers different benefits and advantages.

The Traditional IRA allows an individual with earned income to take a tax deduction for dollars contributed (if income falls below a certain threshold), and the growth in the account is tax deferred. When distributions are taken from a Traditional IRA, they are taxed as ordinary income. If one chooses not to take distributions from an IRA after reaching 59½, the IRS will force distributions to be taken at age 70½. These are known as required minimum distributions (RMDs) and are based on the presumable retiree’s life expectancy.

The Roth IRA was established as an account into which after-tax dollars are invested. While the Roth gives no tax deduction on the front end, the growth—and eventual distribution—is federal tax-free. The Roth IRA allows one to take out 100% of contributions at any time for any reason with no taxes or penalties. It is only the growth on which one must wait until the age of 59½ to draw penalty-free. There is also a 5-year aging period, which means that a payment made from a Roth IRA account is considered a qualified distribution if it is made after a 5-year period, beginning with the first taxable year after which a contribution to the Roth IRA occurs.

  • Traditional and Roth IRAs: The annual contribution limit for traditional and Roth IRAs is $6,000 total across both account types for those under the age of 50 and $7,000 for people 50 and over. Tax deductions for traditional IRA contributions begin to phase out at certain income levels if you or your spouse has a workplace retirement plan. You’ll lose your deduction entirely once your income is too high, but you can still make nondeductible contributions. The amount you can contribute to a Roth IRA declines once your income hits a certain threshold, and you can’t contribute at all once your income hits $137,000 if filing singly, $203,000 if married filing jointly, or $10,000 if married filing separately.
  • SEP IRAs: The annual contribution limit for a SEP IRA is 25% of up to $280,000 in compensation or 25% of net self-employment earnings (self-employment income minus SEP contributions and 1/2 of self-employment tax). Only employers can make contributions (you’re counted as an employer if you run your own business). The total maximum annual contribution is $56,000.
  • SIMPLE IRAs: The annual contribution limit is $13,000 for a SIMPLE IRA or $16,000 if you’re over 50. Employers can contribute 2% of compensation or can match contributions you make up to a maximum of 3% of compensation. You can open a SIMPLE IRA if you are self-employed or run your own business and can contribute as both employee and employer.