Category Archives: Financial Planning

Social Security Cost-of-Living Increase

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Social Security Announces 5.9 Percent Benefit Increase for 2022

Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2020 through the third quarter of 2021, 68 million people — including retirees, disabled people and others – who receive Social Security and Supplemental Security Income (SSI) benefits will receive a 5.9% cost-of-living adjustment in 2022, the Social Security Administration announced.

For the average retiree who received a monthly check of $1,559 this year, a 5.9% rise would increase that payment by $91.98, to $1,650.98, in 2022.

The 5.9 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to approximately 8 million SSI beneficiaries will begin on December 30, 2021. (Note: some people receive both Social Security and SSI benefits).

The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

The highest COLA increase was 14.3% in 1980. Inflation hit a peak 13.5% in 1980, dropped to 20.3% the following year and 6.1% in 1982, according to the data from the Federal Reserve Bank of St. Louis.

Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account.

References:

  1. https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf
  2. https://www.usatoday.com/story/money/2021/09/14/social-security-cola-2022-benefit-rise-could-6-most-since-1982/8334935002/
  3. https://www.ssa.gov/news/press/releases/2021/#10-2021-2

COVID Breakthrough: New Pfizer Antiviral Pill

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Pfizer develops COVID therapeutic antiviral pill that cuts hospitalizations and deaths by 89%

Pfizer Inc. said its COVID-19 therapeutic antiviral pill, officially known as PF-07321332, reduced hospitalizations and deaths in high-risk patients exposed to the virus by 89%, a result that has the potential to upend how the disease caused by the coronavirus is treated and possibly end the course of the pandemic.

The drugmaker said that it was no longer taking new patients in a clinical trial of the treatment “due to the overwhelming efficacy” and planned to submit the findings to U.S. regulatory authorities for emergency authorization as soon as possible.

The Pfizer results mean there are now two promising candidates for treating COVID-19 patients early in the course of the disease. Last month, Merck & Co. and partner Ridgeback Biotherapeutics LP submitted their experimental pill to regulators after a study showed it slashed the risk of getting seriously ill or dying by half in patients with mild-to-moderate COVID-19.

A pill that could be taken at home at the first sign of symptoms is a crucial tool for reducing and possibly ending the COVID-19 crisis globally, so long as it’s widely available.

In Pfizer’s trial of 1,219 unvaccinated adults, five days of treatment with its drug dramatically reduced the rate of hospitalisation when it was started within either three days or five days of symptom onset, the company said. The drug, Paxlovid, binds to an enzyme called a protease to stop the virus from replicating itself.

Overall, just 0.8% of people who started treatment within three days of getting sick ended up in the hospital and no one died, while 7% of people who got a placebo in that window were later hospitalised or died. Similar results were found when the drug was started within five days of symptom onset. The result, which hasn’t been published in a medical journal, was highly statistically significant, Pfizer said.

References:

  1. https://www.business-standard.com/article/current-affairs/pfizer-develops-covid-pill-that-cuts-hospitalisations-and-deaths-by-89-121110500783_1.html
  2. https://newsnationusa.com/news/world/uk/covid-breakthrough-as-pfizers-new-pill-slashes-hospitalisations-by-89/

Save and Invest for Retirement

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“No matter how much money you earn, you’ll never build wealth and achieve financial freedom if you spend more than you make.”

Saving and investing for retirement depends on your current age, cash flow, desired lifestyle in retirement and the types of retirement accounts that are available to you. No one is born knowing how to save or to invest. A few people may stumble into financial freedom—a wealthy relative may die, or a entrepreneurial business may take off. But for most people, the only way to build wealth and attain financial freedom is to save and invest over a long term.

The amount of money you’ll need to live on in retirement depends on many personal factors, some you can control (such as when you start saving and how you budget) and some you can’t (including the length of your retirement, inflation and your health during it). As you save for retirement you want to amass the biggest pile of assets possible. More savings and investments equals more confidence and room to breathe. Less savings equals less confidence and more restrictions.

“Investing makes it possible for your money to work for you.”

There are basically two ways to make money.

  1. You work for money. – Someone pays you to work for them or you have your own business.
  2. Your money works for you. – You take your money and you save or invest it. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. Your money can make an “income,” just like you.

In general, experts recommend socking away 10%–20% of your income toward your future. Even if you’re not able to contribute that much early in your career, time and compound interest are on your side. And thanks to the power of compounding, the earlier you start investing, the less capital you may have to save to get you to your financial goal.

With the power of compounding, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved and invested can add up to big money.

Start early and pay yourself first

The earlier you start investing and growing your money for retirement the better, but it’s never too late. Regular contributions can keep your portfolio on track. Some strategies include:

  • If you have a workplace 401(k) or 403(b) plan, decide how much of your salary to have deducted from your paycheck and deposited in your retirement account. Ensure you pay yourself first to avoid spending the money you set aside for saving.
  • Budget using the 50/30/20 rule: 50% of your income should go toward essentials, 30% to discretionary spending, and 20% toward long-term goals (like retirement).
  • Start catch-up contributions. This rule allows those over 50 to add more to an IRA or 401(k) (or similar plan), giving you a chance to make up lost time if you’re late to the retirement savings game.

There are many methods to meet your retirement savings goals, including tax-friendly workplace plans and IRAs. Diversifying how and where you save your money can be a smart strategy, especially when considering tax implications and rates of return. Here are some options for where to park your retirement savings.

  • 401(k)s and other workplace plans – A 401(k) is a tax-deferred, employer-sponsored retirement account, typically for corporate workers. Unless you have and opt for a Roth or after-tax option, you don’t pay taxes on the money you contribute or your account as it grows; instead, you’ll owe income tax on withdrawals. 401(k)s, 403(b)s and 457s are “defined contribution” (DC) plans. With DC plans, you contribute your own money, and your employer or organization can choose to contribute as well, typically by matching some of what you save. If yours does, make sure to contribute at least the amount of the match. It’s “free money” and can provide a powerful boost to your savings.
  • Individual retirement accounts (IRAs) – The most common types of IRAs are traditional and Roth IRAs. Which to choose can come down to taxes—that is, whether you want a tax break now or in the future. With a traditional IRA, some or all of your contributions may be tax deductible, but you‘ll owe income tax on withdrawals. With a Roth IRA, you contribute after-tax dollars, but withdrawals (and any investment gains) are tax free as long as you meet certain criteria.
  • Annuities – Another tool to consider is an annuity. Annuities can provide guaranteed income, no matter what your other investments do. You can choose between a fixed or variable annuity. Fixed annuities offer consistent installment income, while income from a variable annuity fluctuates depending on how the stock market performs.
  • Taxable accounts – Taxable accounts are offered through brokerage firms and enable you to invest in stocks, bonds, mutual and exchange-traded funds (ETFs) and a range of other investments. As the name suggests, you’ll owe tax on any interest or dividends earned though the accounts, as well as capital gains on investments you sell at a profit.

Other sources of retirement income

As you consider your budget, it’s helpful to understand other potential income sources during retirement. Though rare, a few companies still offer pension-style benefits. And most workers contribute to Social Security throughout their careers and will be able to receive regular payments when they retire.

  • Defined-benefit plans – With defined-benefit plans, your employer fully manages and contributes to the account. When you retire, you receive a guaranteed income, typically in one “lump sum” payment or at defined intervals. The amount you receive will depend on many factors, including your salary and years of employment.
  • Cash-balance plans – Some companies offer cash-balance pension plans. Like traditional pensions, employers fund the accounts. But, like 401(k)s, employees manage the distributions. Also, the amount an employer can contribute to your account rises with age.
  • Social Security – Don’t forget about Social Security, which you contribute to through FICA taxes. The amount you’ll receive Opens in new window each month from Social Security depends on many factors including your lifetime earnings and how old you are when you start taking payments.

How to save and invest more

It’s one thing to have money to invest. But how to invest is a whole other subject. It can be particular challenge for busy and non financially savvy individuals. Investing your retirement funds in stocks could help give your money a chance to grow over time often faster than the rate of inflation.

There’s always time to save more for retirement while you’re still working. Here are some tips.

  • Make retirement savings a priority: Put your future first by planning for it. Set up automatic investments so the money you put toward investing comes directly out of your paycheck. After all, if you don’t see it, you’re less likely to miss it.
  • Maximize retirement accounts. Saving as much as you’re allowed Opens in new window in tax-favored retirement accounts is a great goal to have. But before you can max out, start small. For example, if your employer matches contributions to your workplace plan, it’s like free money—so make sure to save at least enough to earn every matching dollar.
  • Save in a brokerage account. If you’re able to stash some extra funds in a taxable brokerage account, do so. This money won’t provide tax savings, like a 401(k) or individual retirement account (IRA) can. But it’s a powerful way to build additional funds for the future.
  • Tax planning is an important part of retirement planning. Having a diversified tax approach, with savings in a traditional pretax 401(k) or tax-deductible IRA, plus an after-tax Roth account (which can mean tax-free withdrawals) and/or a brokerage account, can save you now and in the future. A financial planner or tax professional can help with your strategy.

When saving and investing for retirement, four factors are key in determining how much you’re going to have when you reach your leisure years. They are:

  1. Time horizon – The number of years during which you save.
  2. Amount or your retirement number – How much you save per year.
  3. Rate of appreciation – How much your assets can grow through interest and investments.
  4. Rate of depreciation (or loss of purchasing power) – How much you may lose from inflation, taxes, and bad investments.

The best investments depend on when you will need the money, your financial goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

Being wealthy is not about how much money you earn each month but is about how much you’re able to save and invest for the long term. Everyone wants to build wealth and retire well. But investing to grow your money and to build wealth will lower your dependence on your job, giving you more options in life and results in financial freedom. Investing for building wealth may enable you to retire early in life.

References:

  1. https://www.prudential.com/financial-education/how-to-save-for-retirement
  2. https://www.sec.gov/investor/pubs/savings-investing-for-students.pdf
  3. https://www.prudential.com/financial-education/retirement-for-women-and-common-challenges
  4. https://www.thestreet.com/retirement-daily/tools-resources/retirement-remix-chapter-10-investing-for-retirement
  5. https://www.entrepreneur.com/article/332372

Financial Planning and Investing

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“Take control of your finances, savings and wealth building with a financial plan.”

Whether you have short-term financial needs — such as planning for an upcoming vacation or holiday spending — or long-term plans like retirement, financial planning can help you organize your finances by evaluating your expenses and income. Yet, a 2020 Northwestern Mutual study found that 71% of U.S. adults admit their financial planning needs improvement.

Futhermore, the Northwestern Mutual research finds a third (32%) of Americans say their financial discipline has improved during the pandemic, and 95% say they expect their newfound habits will stick after the health crisis subsides.

Among the financial behaviors that people say they’ve adopted as a result of the pandemic and expect to maintain going forward are:

  • Reducing living costs/spending (e.g., cancel subscriptions, eat out less, etc.) – 45%
  • Paying down debt – 34%
  • Increasing investing – 33%
  • Regularly revisiting financial plans – 29%
  • Increasing use of tech/digital solutions to manage finances – 28%
  • Increasing retirement contribution/savings – 25%

A financial plan can show if you’re on track to meet your money and savings goals. Financial planning can include strategies for paying off debt, starting an emergency fund, saving up for a large purchase like a house, or building wealth.

Investors who stick to a financial plan have an average total net worth that’s 2.5 times greater than those who don’t follow one, according to Charles Schwab. Financial planning helps you understand where you are today. It also creates a roadmap to get you where you want to be in the future.

Investing is key to building wealth.

Time is on your side and key when it comes to building your wealth. That’s the magic of compound interest. Compound interest is interest earned on interest. Basically, it’s the reason why investments earn more money over time.

But before you start investing, it’s crucial that you’re financially prepared. Consider these four signs you’re ready to invest:

  • Have a long-term financial plan and strategy.
  • Have an emergency fund.
  • Research and prepare to invest.

Investing all depends on tim ane in the market and your unique financial situation. These signs are a good step to getting your finances in order. But consult a financial professional for comprehensive investment advice.

As a result of the personal finance challenges experienced by Americans during the pandemic, the 2020 Northwestern Mutual study found that  there was mounting interest in personal  financial planning that may be here to stay. “Personal finance is a lifelong journey; it’s not something you look into once and say, ‘OK, I checked that box,’ and move on,” explains Matthew Pelkey, OppUs’ director of financial education. “Just the simple act of looking into things you can do to be more deliberate in your financial life will give you that agency over your finances — and create the habits that are really what produce good financial health.”

Financial planning can equip you to handle life’s many unexpected financial twists and turns. Although, it will vary, depending on your stage in life. You don’t need to know everything — but knowing and planning for the essentials will provide a solid foundation. Always remember the adage:  “Failing to plan is planning to fail.”

  • References:
    1. https://news.northwesternmutual.com/planning-and-progress-2020
    2. Strategic Business Insights, MacroMonitor 2018-2019 Report, February 2019.
    3. https://www.opploans.com/oppu/articles/financial-planning/

    Black Wealth Summit

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    Receiving a College Degree Accumulates Wealth for Whites and Not For Blacks

    Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change, according to the Black Wealth Summit. For example, the typical White family has eight times the wealth of the typical Black family, according to the 2019 Survey of Consumer Finances (SCF). The research showed that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016.

    Wealth is defined as the difference between families’ gross assets and their liabilities.

    During the Black Wealth Summit, John Rogers of Ariel Investments cited studies by the St. Louis Fed showing that white households with college degrees tend to build wealth while net worth often declines among Black college graduates. The median and mean wealth of Black families is less than 15% of White households’ wealth, according to the Fed’s latest figures from last year.

    John Rogers launched the nation’s first Black-owned money management and mutual fund firm when he was only 24 years old. His firm has reached nearly $17 billion in assets under management.

    Signs of change amid widening disparities

    The data confirms prior research on the role of parental wealth in the transmission of lasting economic advantage: Less-wealthy parents, mostly Blacks, are less able to financially help their adult children, making it more difficult for the next generation to accumulate wealth.

    In addition, Black college-educated households are far more likely than their White counterparts to give financial support to their parents. These parents may have entered the workforce at a time when their only employment provided no pension or retirement savings benefits, or even Social Security.

    In contrast, parents of White college-educated households have mostly benefited from employment-related retirement benefits. Thus, the pattern among White and Black college-educated households is the opposite: Young college-educated White households are more likely to receive financial support from parents and at considerably higher levels

    The findings confirms prior research, which shows that the typical Black college-educated household does not have the same opportunities to add to their family wealth building as their White counterparts, who report large wealth gains at least up to the Great Recession.

    Understanding factors such as inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions contribute to wealth accumulation and families’ financial security.

    References:

    1. https://files.stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-achievements-how-a-college-degree-accumulates-wealth-for-whites-and-not-for-blacks.pdf
    2. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

    Difficult Financial Conversations

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    The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

    Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
    Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

    “Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

    “Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

    References:

    1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing

    Global Inflation Worries

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    “Inflation will be higher and more persistent than people expect.” Mohamed El-Erian, Allianz & Gramercy Advisor

    Higher and more persistent inflation may now be an unavoidable economic fact of life for Americans, and it’s starting to make a lot of economists, investors and public leaders worry. They, specifically economists, collectively believe inflation is primed for rapid growth domestically as trillions in federal stimulus spending is layered on top of the Federal Reserve’s loose monetary policy.

    This level of unadulterated fiscal spending could mean that investors will have to get used to inflation, higher interest rates, more market volatility and lowered returns on invested capital.

    In conjunction to domestic and global inflation concerns, there exist two significant global economic worries for individuals and investors:

    • Global supply chain constraints which are significant and will get worst whether it is disrupted supply chains or labor worries, and
    • Global tightening of monetary conditions and less liquidity.

    But, major shocks to the economy tend to be caused by either a major policy mistake or market accidents. Yet, we’re unlikely to witness double digit inflation in the United States.

    The Federal Reserve and the Biden Administration contend that the elevated inflation readings will prove transitory. The Fed and Administration view that the current inflation stems chiefly from temporary factors such as supply bottlenecks and a spike in post-pandemic consumer demand.

    The August inflation report showed that prices increased by 5.4% year over year in July. Wages increased, too—but not by enough to offset inflation.

    And, Americans know inflation when they see it: retail shops and restaurants are raising their prices on consumers, and prices of used cars and trucks were 32% higher in August than they were a year earlier, and workers are discovering bargaining power over wages for certain positions for the first time in years, according to Barron’s. “Inflationary pressures are likely to rise because everyone is spending—including the government—and it becomes a self-sustaining cycle,“ says Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates.

    “When you live in a world of abundant liquidity, investors tend to take on too much risk.” Mohamed El-Erian

    Congress has assigned a dual mandate for the Federal Reserve: Foster maximum employment and maintain price stability. The FOMC has interpreted maintaining price stability as keeping inflation growing at about 2% a year over the long-term.

    Over the past two decades, the Federal Reserve has been unable live up to its two percent inflation mandate. Using the Fed’s preferred gauge of inflation, core Personal Consumption Expenditures (PCE), which tracks price changes over time without volatile energy and food costs, inflation has remained stubbornly below the Fed’s 2% annual target since the 2007 – 09 Great Recession, except for a brief stretch in early 2012 and much of 2018.

    Going from a disinflationary world to an inflationary world

    Evidence that some of the issues that might spur inflation could abate ahead, particularly some of the supply chain issues. Additionally, unit labor costs remain low, meaning that companies still aren’t spending substantially more for productivity, which also could tamp down inflation.

    Federal Reserve Chair Jerome Powell has been resolute in his commitment to seeing the whites of inflation’s eyes before raising rates or paring back quantitative easing. But some market observers believe the Fed is being too lax.

    “Financial conditions should remain quite accommodative for a while and in our view risks an overshoot,” said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income.

    The drivers of global inflation are many and complex. They include global economic and policy forces as well as domestic. Yet, it’s important to keep in mind that the rise in inflation isn’t necessarily life altering. Although, policy makers can’t hold on to the “mystical attraction of transitory inflation” when the facts on the grow indicate the contrary, according to Mohamed El-Erian. Given the extraordinary level of fiscal and monetary economic stimulus, inflation may be less transitory than previously thought.

    References:

    1. https://www.forbes.com/advisor/investing/inflation-worries/
    2. https://www.cnbc.com/video/2021/10/25/mohamed-el-erian-were-not-anywhere-near-risk-of-hyperinflation.html
    3. https://www.pimco.com/en-us/insights/viewpoints/want-to-mitigate-inflation-take-a-portfolio-approach
    4. https://www.barrons.com/articles/government-economy-stock-market-51633705211

    Financial Health

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    “Despite positive financial health trends at the national level, the majority of people in America are still not financially healthy.”

    U.S. Financial Health Pulse, we find that more people in America were Financially Healthy as of August 2020 than they were in 2019.

    Building upon the foundation of a strong pre-pandemic economy, it appears that an array of stimulus policies, debt relief measures, economic shutdowns, and consumer behavior changes have temporarily blunted the worst effects of the economic crisis for many people.

    But a majority of people in America (67%) are not financially healthy; these individuals have little financial cushion should relief measures subside and economic conditions worsen. Among those who are struggling financially, millions of people are experiencing extreme financial hardship. We also find that profound disparities in financial health have persisted, and in some cases widened, across race, income, and gender.

    From the U.S. Financial Health Pulse, we find that more people are Financially Healthy in 2020 than they were last year. But many people are still struggling financially and there is evidence that financial health disparities have widened over the past three years.

    In the long-term, solutions that address systemic barriers to financial health – such as policies that ensure pay equity, living wages, workplace protections, affordable healthcare, and access to high-quality financial products and services – are necessary to ensure equitable financial health outcomes for all.

    • Indicator 1 – Spend Less than Income – As of August 2020, 57% of people in America said their spending was less than their income over the last 12 months, a significant increase from the 54% of people who reported this in 2019 and the 53% of people who reported this in 2018 (Figure 6). This increase is likely the result of strong economic
      growth over the past two years, combined with a confluence of recent interventions and events that have increased people’s income, while reducing their overall expenses over the last few months. On the income side, the stimulus payments, the additional $600 in federal unemployment insurance, and the Paycheck Protection Program loans temporarily increased many people’s disposable income over the spring and summer.11
    • Indicator 2 – Pay Bills On Time:  As of August 2020, 69% of people in America said they paid all of their bills on time over the past 12 months, an increase from 2019 and 2018, when 66% and 64% of people reported this (Figure 9).17  This upward trend is likely the result of the confluence of factors discussed in the previous section: economic growth prior to the onset of the pandemic, government stimulus measures, forbearance and relief measures, state lockdowns, and changing consumption patterns have left people with more money to put toward bill payments. In fact, as of May 2020, nearly half of people (45%) who had received a stimulus payment by May said they used the funds from that payment to pay their rent, mortgage, or utility bills (Table D5)
    • Indicator 3 – Liquid Savings:  As of August 2020, 59% of people in America said they had enough savings to cover at least three months of living expenses, an increase from 53% in 2019 and 55% in 2018 (Figure 12). The upward trend over the past year is likely the result of strong economic growth since 2018, the recent stimulus and relief measures, and a reduction in consumption during state lockdowns.24 These self-reported trends align with reports from the U.S. Bureau of Economic Analysis showing that the U.S. personal savings rate hit an all-time high in April 2020.25
    • Indicator 4 – Long-Term Savings:  As of August 2020, nearly half of people in America (47%) said they were confident they were on track to meet their long-term financial goals, a significant increase from 2019 when 39% of people reported this, and 2018 when 40% of people reported this (Figure 15). These sentiments are supported by national data from Fidelity showing that average balances in IRAs, 401(k)s, and 403(b)s grew significantly during the second quarter of 2020 as the stock market soared.29
    • Indicator 5 – Manageable Debt:  As of August 2020, more than half of people in America (55%) said their debt was manageable, an increase from 2019 and 2018 when 52% and 53% of people reported this (Figure 16). A decrease in overallhousehold debt is likely driving people’s improved perceptions about the manageability of their debt.  According to the Federal Reserve, total household debt decreased by $34 billion from April to June 2020, as people cut back on their expenses, reduced new borrowing, and focused on paying off outstanding debt.30 Mortgage payment deferrals and the federal moratorium on student loan obligations may have also contributed to improved sentiments about debt manageability.31
    • Indicator 6 – Credit Scores:  In August 2020, nearly seven in 10 people in America (69%) said they had a prime credit score, an increase of 3 percentage points from previous years, when 66% of people reported this (Figure 22). These figures align with nationally representative data from Experian showing that VantageScores generally improved in the early months of 2020.36 While credit score calculations are based on a variety of inputs, an overall reduction in household debt (pg. 27), changes in credit reporting requirements per the CARES act, and a reduction in credit utilization may be driving improvements in credit scores nationally.37
    • Indicator 7 – Adequate Insurance:  In August 2020, 52% of people in America said they were confident they would have sufficient insurance to manage an emergency, a significant decline from the 58% of people who reported this in 2019 and the 61% of people who reported this in 2018 (Figure 23). This indicator was the only one of the eight financial health indicators that declined between 2019 and 2020. Some of this decline may be due to a change in survey logic preceding the question used to measure this indicator.38 However, some of the decline may beexplained by a longer-term trend in declining rates of health insurance ownership
    • Indicator 8 – Planning Ahead:  As of August 2020, 64% of people in America said their household plans ahead financially, a significant increase from the 59% of people who reported this in 2019 (Figure 24). While it may seem counterintuitive that more people are planning ahead during such a volatile time, it may be precisely the uncertainty of the current moment that makes planning so compelling.41 Without knowing when the next round of stimulus and relief measures will arrive, many people continued to keep their expenses low, even as states began to reopen their economies. Much of the decrease in spending has been driven by people with higher incomes (as we discuss on pg. 25), but people with lower incomes have attempted to reduce their expenses as well.42

    Return on Equity (ROE)

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    Return on Equity provides insight into how efficiently a company’s management is using financing from equity to operate and grow the business.

    Return on Equity (ROE) is the measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity. It is a simple metric for evaluating investment returns and it brings together the income statement and the balance sheet, where net income or profit is compared to the shareholders’ equity.

    “ROE is a way to think about how much money you are getting back from an investment,” says Mike Bailey, director of research at FBB Capital Partners in Bethesda, Maryland

    The number (ROE) represents the total return on equity capital and shows the firm’s ability to efficiently turn equity investments into profits. To put it another way, it measures the profits made for each dollar from shareholders’ equity.

    It is a ratio that investors can use to compare firms operating within the same industry to assess which one presents better investment opportunities.

    Comparing ROE for different companies in the same industry helps investors to see which ones have generated the highest rate of return. ROE is a useful metric for service-based businesses.

    A sustainable and increasing ROE over time can mean a company is good at generating shareholder value because it knows how to reinvest its earnings wisely, so as to increase productivity and profits. 

    “ROE tells you how good or bad management is doing with your investment,” Bailey says. “Higher ROEs generally stem from profitable businesses that enjoy competitive advantages within a given industry.”

    In contrast, a declining ROE can mean that management is making poor decisions on reinvesting capital in unproductive assets.

    In short, Return on equity measure, of how efficiently a company is using shareholders’ money. Efficient companies tend to be more profitable companies, and more profitable companies tend to make better investments, investors like companies with higher ROEs.

    For capital-intensive businesses that require a larger investment in assets, like those in manufacturing and telecommunications, return on invested capital (ROIC) is a more useful measure, as it takes into account their capital expenditure.

    Return on Invested Capital is calculated by taking into account the cost of the investment and the returns generated. Returns are all the earnings acquired after taxes but before interest is paid. The value of an investment is calculated by subtracting all current long-term liabilities, those due within the year, from the company’s assets.

    The cost of investment can either be the total amount of assets a company requires to run its business or the amount of financing from creditors or shareholders. The return is then divided by the cost of investment.

    References:

    1. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-return-on-equity-roe/
    2. https://money.usnews.com/investing/articles/what-is-return-on-equity-the-ultimate-guide-to-roe
    3. https://capital.com/return-on-equity-roe-definition

    Things to Consider When Saving, Investing and Building Wealth

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    Saving for the future, investing to grow your money and building wealth has little to do with the economic cycle, the stock market valuation or even how much money you earn.

    It’s your mindset that can hinder your financial outcome and keep you trapped at an unsatisfying level of financial success. And, unless you can embrace a positive financial mindset, your ability to save, invest and build wealth will be hindered for the rest of your financial life.

    The process of investing and wealth-building can be improved by a adhering to the following tips to set yourself up for potential financial success and freedom:

    1. Start Early

    It’s important to invest a percentage of your salary each month. And, starting early could be a way to dramatically increase your savings over time. The good thing about starting early is you can get the benefits of compound interest!

    2. Set Investment Goals

    Are you saving up to buy a house? Or putting money away for retirement? Investing with a purpose will help you determine the right strategy and keep you on track to pursue your financial goals. Determine your financial freedom number.

    3. Know Your Time Horizon

    If you think you’ll need the money within the next five years, you might consider less volatile investments, like fixed income securities. Investing for the long-term (think: 15 or more years)?  You might think about adopting a less conservative strategy.

    4. Assess Your Risk Level

    Knowing how much risk you’re willing to take on will help you narrow down your investment choices and keep you from letting your emotions guide your investing during periods of high market volatility.

    5. Analyze Your Budget

    Take your monthly income and take a list of your monthly expenses and create a budget (for instance, the popular 50/30/20 budget). By looking at your spending, you may discover extra money to invest each month.

    6. Know Your Investment Choices

    Familiarize yourself with different investment types to see what makes sense for you. Are you interested in international stocks and ETFs (exchange-traded funds)? Maybe bonds and mutual funds?

    7. Go It Alone or Use an Advisor

    If you’re the independent type, you may be drawn to Self-Directed Trading. Or if you prefer an advisor or to automate your investments with a Robo Portfolio.

    8. Consider Avoiding Individual Stocks and Bonds; Invest in Market Index Funds

    If you’re still learning the ropes, you might be more comfortable sticking to broader based investments like index funds and ETFs. These types of investments require less of your time and are less risky since they invest in numerous companies. As an alternative, an market index fund is an investment that tracks a market index, typically made up of stocks, like the S&P 500, or bonds. Index funds typically invest in all the components that are included in the index they track,

    9. Diversify Your Portfolio

    If all your investments are your company’s stock, and they go out of business, you’ll wish you had a diversified portfolio. You may reduce your risk by holding a variety of securities that react differently to market changes.

    10. Think Long-term

    History shows whenever the market takes a dip due to volatility, it eventually bounces back. Be patient and disciplined: Give your money time, make consistent contributions and wait out inevitable market downturns.

    11. Don’t Forget High Interest Debt

    School loans or credit card debt can make allocating money to investments a tough choice. It’s possible to reduce your debt and invest, and we can help you accomplish both.

    12. Get Your Match

    Many employers offer a 401(k) match, which can be a great incentive to invest for retirement, helping you to potentially build tax deferred savings.

    13. Save and Invest for Retirement

    When you’re young, retirement seems like eons away — but for many, regardless of age, now is the best time to start saving for your golden years. You may consider looking into Traditional and Roth IRAs to get started. The typical retirement strategy is built on the pillars of your pension, 401(k) plan, your Traditional IRA, and taxable savings.

    14. Automate Your Contributions and Pay Yourself First

    Pay yourself first instead of saving what remains after monthly expenses. Set up recurring investments to take advantage of dollar cost averaging. With this strategy, instead of trying to time the market, you invest the same amount each month — sometimes you might buy high, but other times, you’ll purchase low.

    15. Beware of Fads

    Just because everyone is jumping on the latest meme stock or investing app doesn’t mean you should. Fad stocks are often unpredictable, so if this doesn’t align with your investment strategy, feel confident to sit them out.

    16. Be Informed

    A prospectus sheet details the performance of a company to help you understand its stock performance. And digital tools can help you track your investments, too. If you cannot dedicate time to read and research, invest in a market index fund which is one of the easiest and most effective ways for investors to build wealth.

    17. Don’t Neglect Your Emergency (or Peace of Mind) Fund

    Investing grows your money and helps build long-term financial freedom, but you need to be prepared for short-term unexpected expenses. So when setting out on your own, don’t forget to start setting aside funds in an emergency (or peace of mind) fund. This money should be liquid (not invested in securities), so you can access it for unexpected expenses.

    18. Watch Out for Fees

    Some brokers will charge a commission fee whenever you buy or sell stocks, which add up and make a dent in your overall returns. Trade U.S. stocks and ETFs commission-free with our Self-Directed Trading.

    19. Ask for Help

    Investing can get complicated. Don’t be afraid to reach out to a financial advisor for advice and support.

    20. Adjust as You Go

    As life circumstances change, it might make sense to move your money into different types of investment accounts or change up how much you contribute. Any time your financial circumstances change, remember to reassess your financial goals, plan and investments.

    21. Create and Follow a Financial Plan

    Every living adult needs to financially plan. A financial plan is a comprehensive overview of your financial goals, net worth, cash flow, debt, taxes, risk tolerance, time horizon and it provides the steps you need to take to achieve and manage them.

    22. Investing has risks.

    No one knows exactly what will happen in the future and investments could lose money, so be aware of how much you are able to invest and be comfortable leaving it there for a period of time since it may have ups and downs.

    23. A Wealthy (or Positive Financial) Mindset

    It’s imperative that you refocus your mindset and change how you think about yourself, your finances, and the world around you. If you keep thinking about things the same way, you’re going to get the same results. Change in the world around you doesn’t happen until you change yourself. Embrace and grow your positive financial mindset about money, wealth and financial freedom.

    Getting Started

    Getting started is often the hardest step for most new investor to take, but starting to invest today is advice worth implementing! “The best time to plant a tree is twenty years ago; the second best time is today.” And, what’s true for a tree is also true for growing your money.

    References:

    1. https://www.ally.com/do-it-right/investing/things-to-know-when-investing-in-your-20s/
    2. https://www.harveker.com/blog/11-principles-infographic-financial-freedom/