Category Archives: Financial Literacy

Financial Literacy – 7 Principles of Money Management

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“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

Building Wealth By Focusing on the Long Term

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Americans can build wealth and achieve financial security by following proven long term financial strategies and wealth building principles.

These fundamental financial principles include to live on less than they make, avoid debt, stay invested for the long term, have an emergency fund, and remain financially disciplined and responsible. Theses are just a few of the habits and principles of Americans who have built wealth and achieved financial security.

INVESTING WITH PURPOSE

Investing is a great way to grow your money, especially for long term goals like building assets for retirement. It is important to understand and accept that building wealth has little to do with income or background.  According to financial guru David Ramsey, “it doesn’t matter where you come from…it matters where you’re going.”

What it does take to build wealth and achieve financial security is saving and investing over a long period of time measured in decades, patience and a systematic approach that creates good wealth building habits.

When you’re planning for short- or medium-term financial goals, it may make sense to put your money in a savings account or short-term cash equivalent, such as a certificate of deposit. For longer-term goals (more than 3 years away), you want to start investing a portion of your money to accelerate the growth of your savings and net worth.

It is imperative that investors avoid the pitfalls of short term financial strategies, such as reacting to equity market volatility, chasing returns, timing the market and excess trading. Instead, the strategy and focus must for financial long-term goals like retirement.

Overall, our belief is that it does not require vast investing knowledge, a large income, a streak of good luck, or a huge inheritance to build wealth or become financially secure. It takes embracing proven long term financial strategies and wealth building principles, such as to stay invested and focus on the long term.

Longevity and long term health care costs in retirement are significant challenges that must be considered by Americans.

Focus on long-term financial habits and goals

The best investor isn’t necessarily the person with the most short term successes, but rather the one with the best process and judgment. To make money safely and steadily, it is not the companies we invest in were flawless, but “the price” was too favorable to those who invest in them.  This experience produced two of my most important observations:

  • Success in investing doesn’t come from buying good things, but from buying things well, and it’s essential to know the difference.
  • It’s not a matter of what you buy, but what you pay for it.

Investors should not spend all of their time picking outstanding companies that the prices they paid were too high.  Mostly winning companies appear as poor investments in the beginning.

We’re living longer, and the world’s population is aging rapidly. In fact, the number of persons aged 50 or above is expected to double to almost 3.2 billion by 2050, according to UN projections. It will transform the way all of us will live, both economically and socially.

With unprecedented spending power, our ability to work longer and to have different retirement expectations, today’s older generation will propel innovation and economic prosperity unlike before. Their collective needs and spending, an estimated $7 trillion and climbing, will drive certain sectors, products and investments, that will have a substantial impact and ripple effect on economic activity.

References:

6 Habits to Build Wealth

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“If your goal is to become financially secure, you’ll likely attain it…. But if your motive is to make money to spend money on the good life,… you’re never gonna make it.” Thomas Stanley and William Danko

Your financial independence is far more important than showing off your wealth, according to authors of Millionaire Next Door, Thomas Stanley and William Danko. They assert that millionaires frequently remind themselves that those who spend all their income on high-priced luxury items often don’t have much accumulated wealth to their names and tend to live on the paycheck to paycheck treadmill.

Yet, many paths exist to building wealth which have little to do with wages and income. Wealthy people tend to practice daily habits that are designed to protect and grow their assets and help keep their body and mind in balance, according to financial experts who’ve studied subject.

They have found over and over again that you don’t have to be a high-income one-percenter to be wealthy. Many wealthy individuals never made more than $60,000 to $70,000 per year, but did a very good job of managing their expenses, cash flow and spending behavior. “Many people who live in expensive homes and drive luxury cars do not actually have much wealth”, according to Thomas and Danko. “Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods.”

Wealthy individuals generated several million dollars of net worth, simply because they started financial planning early in life, they saved as aggressively as they could afford to, and they invested that money in assets and stayed invested over the long. In short, “one of the reasons that millionaires are economically successful is that they think differently.”

Live Below Your Means and Practice Gratitude

“Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.” Thomas Stanley and William Danko

Related to not showing off your wealth, authors Stanley and Danko found that the vast majority of millionaires didn’t spend a lot of money and were grateful for things they did own and the lifestyle they lived. In fact, they spent well below their means given their fortunes. In addition, the majority of the wealthy reported that they created and followed a personal budget, and created and maintain a gratitude journal. In other words, they respected their wealth, kept their spending on a tight leash and practice gratitude daily.

There are a few key habits of building wealth:

  1. Remember to pay yourself first. Basically, paying yourself first is about having your financial and budgeting ducks in a row. One key to building wealth is creating a budget and sticking to it. Wealthy people know how to hold the line on discretionary spending items that can help them increase the “invest” portion of their monthly budget.
  2. Look ahead at your goals. Wealthy people typically set concrete goals, both personal and financial, and have a long-term focus that looks years, if not decades, down the road. The more specific the goals and the longer term the goals are, the better. The wealthy understand that it begins with setting personal goals—what you want to get out of life and how you might prioritize your list. And once you have an idea what you want to accomplish personally, you can plot a financial road map to help steer you there. In other words, the path to wealth involves starting early, and focusing on the long term.
  3. Do your homework; keep your cool. Markets go up, and markets go down—often suddenly and for no apparent reason. Define your comfort level with risk, keep your emotions in check, and recognize what you can and can’t control. According to Siuty, there’s no “secret sauce,” except that, to build wealth, it helps to “stay disciplined, be methodical, and not let emotions get the better of you.”
  4. Lead a non-lavish lifestyle. Despite the popular characterization of rich people throwing money wantonly around in movies and TV, in reality, wealthier folks actually tend to look for value in their purchases. They generally understand the difference between price and value. In other words, they’re not afraid to open the pocketbook, but they tend to expect value in return.
  5. Always expand your education. Education is one of the keys to success, and reading is one of the most efficient ways to learn. According to Thomas Corley, author of Rich Habits: 67% of the rich watch TV for one hour or less a day. Only 6% of the wealthy watch reality shows, he wrote, while 78% of the poor do. And, 86% of the wealthy “love to read,” with most of them reading for self-improvement.
  6. Get up early, eat healthy, exercise. The wisdom that “time is money” goes all the way back to Benjamin Franklin, so it’s no surprise that the wealthy tend to wake early and make the most of their time. The other aphorism the wealthy take to heart is “health is wealth.” According to Corley, 57% of wealthy people count calories every day, while 70% eat fewer than 300 calories of junk food per day. Some 76% do aerobic exercise at least four days per week.
  7. Practice Gratitude. Gratitude makes people more optimistic and positive. It improves relationships, which is strongly correlated with financial success, as well as health, happiness and longevity. And, grateful people are less likely to purchase things they don’t need and that can help them save more! The bottom line is this: It doesn’t matter how much you have if you don’t appreciate it! Without gratitude, you’ll never feel successful and wealthy, no matter your net worth. So regardless of your level of financial success, practicing gratitude is essential.

Seeking a life of balance in mind and body, creating measurable goals, and prioritizing saving and investing, can help put you on the right path, and help keep you from straying from that path. And the earlier you start, the better.

References ‘

  1. https://tickertape.tdameritrade.com/personal-finance/behavior-wealthy-habits-rich-16001
  2. https://brandongaille.com/the-millionaire-next-door-summary/
  3. https://www.fool.com/investing/best-warren-buffett-quotes.aspx
  4. https://partners4prosperity.com/thank-and-grow-rich-gratitude-and-wealth/

Goals

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“Most people don’t know what they want.” Jim Rohn

You can’t ask for what you want unless you know what it is you want, according to Mark Victor Hansen, co-author for the Chicken Soup for the Soul. And, the first step to creating a goal is to figure out what you want. If you don’t know what you want, you don’t know what you need to achieve to get there.

Creating a list of financial goals is necessary for managing money and financial success. When you have a clear picture of what you’re aiming for, working towards your target is easy. That means that your goals should be measurable, specific and time oriented.

There are several types and timeframes of financial goals:

  • Short term financial goals – These are smaller financial targets that can be reached within a year. This includes things like a new television, computer, or family vacation.
  • Mid-term financial goals – Typically take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.
  • Long-term financial goals – This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.

The  concept of setting “goals” can be intimidating to many individuals. It can feel so overbearing that it keeps people from even beginning the process settling goals.

Instead, a better way is to think of goals as a to-do list with deadlines and for the rest of your life. Goals can be added, subtracted and, most important, scratched off the list as you move through your life.

The major reason for setting a goal is for what it makes you do to accomplish the goal. This will always be a far greater value than what you get. That is why goals are so powerful—they are part of the fabric that makes up our lives.

“Research says that merely writing your goals down makes you 42% more likely to achieve them.”

Goal setting provides focus,  provides a deadline and measurement for your dreams, and gives you the ability to hone in on the exact actions you need to take in order to get everything in life you desire.

Goals are exciting because they provide focus and aim for your life. Goals cause you to stretch and grow in ways you never have before. In order to reach your goals, you must most do thing differently, you must become better; you must change and grow.

A powerful goal has components:

  • It must be inspiring.
  • It must be believable.
  • It must have written targets and you must measure progress against those targets.
  • It must be one you can act on.

When your goals inspire you, when you believe and act on them, you will accomplish them.

Achieving financial goals takes a little more than just luck.

It requires extreme discipline, dedication, and repeated sacrifice. It means setting short- and long-term financial goals and then following through on them. Unfortunately, these are things with which the majority of Americans seem to struggle.

Research, however, suggests that simply writing out a list of financial goals makes a person 42% more likely to achieve them, according to a study done by Gail Matthews at Dominican University.

It is widely known and accepted that if you want to achieve something, you had better set a goal.

However, very few Americans actually do or even know how to set financial goals. According to Schwab’s Modern Wealth Index, only 25% of people have some sort of written plan or goals. What’s worse, the Financial Health Network finds that only 29% of Americans are financially healthy.

Don’t wait for financial success to come knocking. Achieving your goal like affording a house, paying college tuition, or ultimately funding retirement, will most likely be on you.

References:

  1. https://www.success.com/10-tips-for-setting-your-greatest-goals
  2. https://www.forbes.com/sites/ellevate/2014/04/08/why-you-should-be-writing-down-your-goals/
  3. https://credit.org/blog/financial-goals-examples/
  4. https://www.success.com/rohn-5-simple-steps-to-plan-your-dream-life/
  5. https://www.aboutschwab.com/schwab-modern-wealth-index
  6. https://dollarsprout.com/list-of-financial-goals/
  7. https://finhealthnetwork.org

The Man in the Arena — Daring Greatly

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On April 23, 1910, Theodore Roosevelt gave what would become one of the most widely quoted speeches of his career. In Paris at the Sorbonne, Roosevelt delivered a speech called “Citizenship in a Republic,” which would come to be known as “The Man in the Arena.”


“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Theodore Roosevelt, Twenty-Sixth POTUS

 

 

References:

  1. https://www.mentalfloss.com/article/63389/roosevelts-man-arena

Financial Planning

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A financial plan includes everything from defining your goals to executing on them with a budget and an investment plan…and, it’s really never too early to get started!

Financial planning is the process of setting and creating a strategy to achieve your financial goals. Whether you’re planning for short-, medium- or long-term desires, having a financial plan in place makes money decisions easier every step of the way.

The keys to financial security and success are simple to achieve by every American.  The keys involve preparing a simple financial game plan, developing the correct financial mindset and implementing positive financial habits and behaviors…period.

“A ship without a rudder can certainly make its way across the water, but it has no control of where the water will take it–so grab your rudder and take initiative of your financial destiny.” Nancy LaPointe

Creating a game plan is a critical initial step in taking control of your financial future.  A simple financial plan allows you to get control of your financial future.

Financial Planning

Creating a financial plan is about developing a realistic guideline on how you can put all of your financial resources to their best use. The process starts by examining and articulating your short, intermediate and long-term goals and then sorting out your priorities.

A successful financial plan looks at all the interrelated parts of your financial life—income, expenses, discretionary spending, investments, debt, retirement planning, the role of insurance in risk management, income-tax liability, estate planning needs and desires—to make sure they’re all working in sync. This is essential, because if you don’t have a handle on how much money is coming in and going out every month, it’s next to impossible to know how much you can save.

If you don’t have a financial plan, you won’t be able to manage your most important goals like buying that bigger home, paying for your children’s education or funding a comfortable retirement. And if you don’t have adequate insurance, you may not be able to protect these savings in the face of an unexpected event, like an illness or a job loss.

A financial plan will include a series of concrete recommendations to help you achieve the goals that you have identified and prioritized. Without a plan, your financial future remains an undisciplined and low probability of success. The goal of a financial plan, after all, is to make your goals a reality. A financial plan is necessary for money management and financial security because:

  • 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan
  • 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost.

Benefits of Having a Financial Plan

Understanding where you stand financially and creating a plan for your financial goals is critical to your financial success. While it’s possible to achieve some financial goals without a financial plan, it’s a lot easier when you have a clear path forward. Having a plan in place serves as helpful guidance when questions of how much to spend and how much to save come up.

Some benefits of personal financial planning are:

  • You’ll better understand your current situation. If you don’t budget or keep track of where your money goes, it’s hard to know what kind of financial shape you’re in. With a financial plan, you’ll always have a pulse on your financial health and know what you’re capable of doing.
  • You’ll have a handle on risk management. Having an emergency fund is essential because you never know when you’ll need it. What’s more, knowing which types of insurance you need—such as health, life and disability—and how much can provide some protection when things go seriously wrong. With a good strategy, you’ll be able to plan for these risk management tools and fit them in your budget.
  • You can eliminate debt faster. If paying off debt is important to you, part of your financial plan can include specific actions you can take to accomplish that goal as fast as possible.
  • You can boost other savings goals. Depending on your goals, you may want to set aside cash for a home down payment, house renovations, a vacation and more. A financial plan can help you map out how you’ll meet each of your savings goals, and give you the motivation to do it.
  • You’ll be ahead on long-term goals. Whether you’re saving for retirement, a vacation or a child’s college education, financial planning can help you understand exactly how much you need to accomplish your goal and what you need to be doing now to get there. The sooner you start this process, the easier it will be to get ahead.

If you’d prefer to build your financial plan on your own, follow these tips:

10 Step Financial Plan

  1. Write down your goals—One of the first things to ask yourself is what you want your money to accomplish. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your goals will act as a motivator as you dig into your financial details.
    Write down your long-, medium- and short-term goals. Your long-term list might include things like retirement and a child’s education. Medium-term could be the down payment on a house or a new car. A vacation or new computer might fall into the short-term category. Whatever your goals, make them concrete. Then determine a dollar amount for each and the timeframe for reaching it.
  2. Create a net worth statement—Achieving your goals requires understanding where you stand financially today. So start with what you have. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. If you’re in the plus, great. If you’re in the minus, you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.
  3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?
  4. Create a budget and Build an emergency fund—Budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? This will help you determine if what you’re spending money on lines up with what is most important to you. Additionally, build an emergency fund to keep from dipping into long-term investments or borrowing at unattractive rates when you need cash in a hurry, create an emergency savings fund that can cover at least three to six months of essential living expenses such as rent or mortgage, utilities, food, and transportation.
  5. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. Look at each specific debt to decide when and how you’ll systematically pay it down.
  6. Get your retirement savings on track—Whatever your age, retirement saving needs to be part of your financial plan. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA. Save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.
  7. Check in with your portfolio—If you’re an investor, you should take a close look at your portfolio? (And if you’re not an investor, think carefully about becoming one!) Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis.
  8. Make sure you have the right insurance—Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Review your policies to make sure you have the right type and amount of coverage.
  9. Know your tax situation—The Tax Jobs and Cuts Act of 2017 changed a number of deductions, credits and tax rates beginning in 2018. For instance, standard deductions were increased significantly, eliminating the need to itemize for a lot of people. To make sure you’re prepared for the 2019 tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your accountant for specific tax advice.
  10. Create or update your estate plan—At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

Financial planning can improve your chances of achieving your financial goals and financial freedom. While financial freedom can mean different things to different people, it generally means having a feeling of security and empowerment with your money and life.

References:

  1. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  2. https://www.westernsouthern.com/learn/financial-education/financial-planning-checklist
  3. https://www.schwab.com/resource-center/insights/content/case-financial-planning
  4. https://www.experian.com/blogs/ask-experian/what-is-financial-planning/

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

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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

Top 10 Investing Terms Google Search

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Investing can feel intimidating when you’re just starting out, but it won’t feel that way forever. If you take things one step at a time, you’ll be a seasoned investor before you know it.

Every successful 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.

Additionally, before you start investing, it’s important that you’ve paid off your credit card and consumer debt, that you’re not investing money or capital that you will need within the next six months to three years, and that you have created emergency savings with six to twelve months of essential expenses in cash or cash equivalence.

Here are the top 10 investing terms people search on Google the most:

Search engine data is a great barometer for what’s really on people’s minds, according to Vanguard Investments —and if you’ve ever felt a little embarrassed about googling an investing term you think most people already know about, take comfort in the fact that there are millions of people out there who have exactly the same question.

References:

  1. https://investornews.vanguard/the-top-10-investing-terms-people-google-the-most/

Savings Goal: Emergency Fund | America Saves

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Make a pledge to yourself and create a simple savings plan that works.

EMERGENCY FUND

Nearly a quarter of savers who take the America Saves pledge chose “emergency savings” as their first wealth-building goal. And they have the right idea. Research shows that low-income families with at least $500 in an emergency fund were better off financially than moderate-income families with less than this amount. Yet most Americans don’t have enough savings to cover an unexpected emergency.

WHAT IS AN EMERGENCY SAVINGS FUND?

An emergency savings fund consists of at least $500, usually in a savings account that you do not have easy access to. Saving for this fund starts with small, regularly scheduled automatic contributions that build up over time.

WHY SHOULD YOU START SAVING FOR EMERGENCIES?

Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat and those who sink in debt. It also gives you peace of mind knowing that you can afford to pay unexpected expenses and ease anxieties over an uncertain future. That’s because keeping $500 to $1,000 of savings for emergencies can allow you to easily meet unexpected financial challenges such as repairing the brakes on your car or replacing a broken window in your house.

“Having cash or cash equivalents in your portfolio gives you peace of mind and the opportunity to capitalize when everyone else is losing their minds during a market correction,” said Henry Hoang, a certified financial planner with Bright Wealth Advisors in Irvine, California.

Not having emergency savings is one of the reasons many individuals borrow too much money, resort to high-cost loans, or increase their credit card balances to high levels.

HOW SHOULD YOU BUILD YOUR EMERGENCY SAVINGS?

The easiest and most effective way to save is automatically. This is how millions of Americans save. Your bank or credit union can help you set up automatic savings by transferring a fixed amount from your checking account to a savings account. Learn more about saving automatically. 

WHERE SHOULD YOU KEEP YOUR EMERGENCY SAVINGS?

It’s usually best to keep emergency savings in a bank or credit union savings account. These types of accounts offer easier access to your money than certificates of deposit, U.S. Savings Bonds, or mutual funds. Though these are useful tools for long-term saving, they are not ideal for an emergency fund that you may need access to more quickly. But not too quickly! Keeping your money in a savings account makes it much less likely that you will use these savings to pay for everyday, non-emergency expenses. Out of sight, out of mind. That’s why it is usually a mistake to keep your emergency fund in a checking account.

Your local America Saves campaign can help you find a participating financial institution that offers low- or no-minimum balance savings accounts.

HOW CAN YOU GET STARTED?

Those with a savings plan are twice as likely to save successfully. This includes setting a goal to build an emergency fund and deciding how much you want to save each month. This is where we come in. If you’re ready to make a commitment to yourself to save, take the America Saves pledge to save money, build wealth, and reduce debt. We’ll keep you motivated with information, advice, tips, and reminders to help you reach your goal to build an emergency fund.

References:

  1. https://americasaves.org/what-to-save-for/?goal=emergency-fund
  2. https://money.yahoo.com/warren-buffett-advice-is-more-relevant-than-ever-155730298.html

TWELVE SUCCESSFUL WAYS TO SAVE MONEY | America Saves

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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.

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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