Category Archives: Value Investing

The Greater Fool Theory

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“The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. As long as there is a greater fool around the corner willing to pay a higher price, the value will continue to rise,” — Ashwin Sanghi

The “greater fool theory” refers to the principle that one can make money by investing into overvalued assets and selling them for a profit later, because there will always be someone else, “the greater fool”, who will come along and pay a higher price for the assets.

Billionaire Microsoft co-founder and investor Bill Gates has dismissed investments in cryptocurrencies, such as Bitcoin, and non-fungible tokens (NTFS). He opined that the digital assets market is largely driven by rampant speculation, greed and the greater fool theory.

Gates stated that the phenomenon of cryptocurrencies and non-fungible tokens as something that’s “100% based on greater fool theory,” since there will always be other speculators willing to pay more for assets.

Gates said he doesn’t own any crypto because he prefers investing in assets with determinable intrinsic value (value that is justified by facts) or “things that have valuable output.”

Thus without having a determinable intrinsic value, — a value that is justified by “facts”; such as assets, liabilities, earnings, dividends and other definite values — investing in cryptocurrency and NTFs is purely speculative by investors.

In the past, intrinsic value was equated to a company’s “book value”. Subsequently, a new concept was developed; the intrinsic value was determined by the earning power or the present value of the discounted future cash flow of a company.

Regarding intrinsic value: “To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowing her age or that a man is heavier than he should be without knowing his exact weight..” — Security Analysis by Benjamin Graham, David Dodd, Warren Buffet.

According to Corporate Finance Institute, the best way to avoid being a “Greater Fool” is to:

  • Do not blindly follow the herd, paying higher and higher prices for something without any good reason.
  • Do your research and follow a plan.
  • Adopt a long-term strategy for investments to avoid bubbles.
  • Diversify your portfolio.
  • Control your emotion of greed and resist the temptation to try to make big money within a short period of time.
  • Understand that there is no sure thing in the market, not even continual price inflation.

References:

  1. https://decrypt.co/102973/bill-gates-crypto-and-nfts-100-based-on-greater-fool-theory
  2. https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/greater-fool-theory/
  3. https://medium.com/the-peanut/the-concept-of-intrinsic-value-in-security-analysis-baa26ed1d42a

Purchase Price Matters

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“If you think about the environment we’ve been in for the past 10 years, purchase price has not mattered.” Marc Rowan, CEO & Director, Apollo Global Management, Q4 2021 Earnings Call

The profit of an investment is often determined by the purchase price since “Price is what you pay; value is what you get”, quips billionaire investors Warren Buffett.

The price of a stock is determined by human characteristics and emotions, such as fear and greed, market tendencies and other factors. All of these things affect the price of a stock, sometimes to a large degree but rarely do they significantly affect its value.

“If you think about the [stock market] environment we’ve been in for the past 10 years, purchase price has not mattered”, said Marc Rowan, CEO & Director, Apollo Global Management. “The more risk you took, the more outrageous, generally the higher the pay off.”

Rowan and Apollo Global Management has consistently followed the investment philosophy that “purchase price matters”. Although, over the past decade in the equity stock markets, their strategy of “patient, value-oriented, disciplined approach to capital deployment” had not been consistently rewarded.

Share Price and Intrinsic Value

“Losing money can happen when you pay a price that doesn’t match the value you get. Look for opportunities to get more value at a lower price.”

Before purchasing a stock, it’s essential to compare the market price of a stock to its fair intrinsic value. When you find a company whose stock’s price is trading lower than the company’s intrinsic value would mark the opportune moment to purchase the company. Since value investors believe that an undervalued market priced stock will eventually climb to reach its fair, or intrinsic, value.

This is a process known as value investing, a type of investing that puts the utmost importance on the valuation of a company and uses various metrics to determine whether the valuation is low, high, or where it should be.

Some of the most important metrics include:

  • Price-to-Earnings Ratio (P/E Ratio). The P/E ratio compares the price of a stock to the company’s earnings per share (EPS).
  • Price-to-Sales Ratio (P/S Ratio). The P/S ratio compares the price of the stock to the annual sales, or revenue, generated by the company.
  • Price-to-Book-Value Ratio (P/B Ratio). Finally, the P/B ratio compares the price of the stock to the net value of assets owned by the company, divided by the number of outstanding shares.
  • Price-to-Free-Cash-Flow Ratio (P/FCF Ratio)

Before buying a stock, you must attempt to compute the intrinsic value of the company. If you’re following the value investing strategy, you’ll want to make sure the stocks you buy are undervalued compared to their peers.

Even when following other investing strategies, it’s important to avoid purchasing overvalued stocks because the market has a history of correcting overvaluations with price declines. Because in the long term investing, purchase price does matter.

Growth at a Reasonable Price (GARP)

Overvaluation will ultimately matter. In the short run, stock prices are based on hype and current news. Over the long term, valuations will ultimately matter when the hype declined and the market will correct the price.

When a stock is falling in price, it’s difficult to purchase a stock when it’s out of favor and widely being panned by the crowd.

References:

  1. https://www.apollo.com/~/media/Files/A/Apollo-V3/documents/apo-q421-earnings-call-transcript.pdf
  2. https://www.moneycrashers.com/factors-buying-stock-price-value/
  3. https://www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/

Mindset, Discipline, Patience, Opportunity

  • It’s about process and being contrarian to current market sentiment and the crowd’s emotion
  • Why the hype: Optimistic vs. Pessimistic

When you purchase a stock, you are buying a Piece of a Company, not just a Ticker Symbol.

Every Investment is the Present Value of all Future Cash Flow.

Do you understand how the company makes its money (e.g., revenue, profit and free cash flow)

If the share price is surging; but the company’s corresponding fundamentals correlating and are skyrocketing.

Free Cash Flow – the true life blood for a company :

  1. Pay down debt
  2. Buy back stocks
  3. Pay shareholders’ dividends
  4. Acquisitions
  5. Organic growth

Buying Stocks On the Dip

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“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” ~Warren Buffett

Billionaire investor Warren Buffett added shares of companies during the market downturn. He has been acquiring stocks on the dip during the recent quarter’s market downturn and bulking up his stakes in oil companies such as Occidental Petroleum (OXY)

Buying a ‘Wonderful Company at a Fair Price’

The most important concept to appreciate when buying stocks is that price is what you pay for a stock, and value is what you get. Paying too high a price can decimate returns and increase your investing risk. 

To delve deeper, the value of a stock is relative to the number of earnings or cash flow the company will generate over its lifetime. In particular, this value is determined by discounting all future cash flows back to a present value, or intrinsic value.

Buffett has said that “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.

Buffett’s investing style has been buying stocks on sale priced below its intrinsic value. He has never been one that favors acquiring commodities, but higher inflation rates could have played a role, Thomas Hayes, chairman of Great Hill Capital in New York, commented.

“As for Buffett buying shares in OXY, I wouldn’t make too much on it,” Hayes said. “Historically, he has avoided investing in commodity stocks. Today he sees it as a hedge against inflation and a potential supply/demand imbalance.”

Inflation is the biggest strain on the economy. While the pace of inflation eased slightly during the month of April, investor sentiment towards the Fed’s pace of tightening remains mixed.

The fact that he is deploying his war chest of cash is a strong indication that he and his lieutenants believe that there are undervalued stocks out there,” he said. “This doesn’t mean he believes that the market is undervalued or will rebound in the near future, but that some companies are compelling buys. This is a good signal for value investors.”

Buffett’s energy investments demonstrate the 91-year old’s investing strategy of acquiring shares in companies that have low valuations and shareholder returns in the form of dividends and buybacks, Art Hogan, chief market strategist B Riley Financial, told TheStreet.

References:

  1. https://www.thestreet.com/investing/buffett-buying-stocks-on-the-dip

10 Powerful Quotes ~ “The Psychology of Money”

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“Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control.” Morgan Housel

10 Powerful Quotes from “The Psychology of Money” by “Morgan Housel”

  1. “Spending money to show people how much money you have is the fastest way to have less money.”
  2. “Getting money is one thing. Keeping it is another.”
  3. “Be nicer and less flashy. No one is impressed with your possessions as much as you are.”
  4. “You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration.”
  5. “Use money to gain control over your time.”
  6. “Saving is the gap between your ego and your income.”
  7. “Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you. Money relies more on psychology than finance.”
  8. “Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control.”
  9. “Happiness is just results minus expectations.”
  10. “In fact, the most important part of every plan is planning on your plan not going according to plan.”

https://twitter.com/books_dq/status/1517815934056075264

A few bonus quotes:

“”Be more patient” in investing is the “sleep 8 hours” of health. It sounds too simple to take seriously but will probably make a bigger difference than anything else you do.”

“The formula for how to do well with money is simple. The behaviors you battle while implementing that formula are hard.”

“”Save more money and be more patient” is too simple for most people to take seriously, but it’s the best solution to most financial problems.”

References:

  1. https://www.collaborativefund.com/blog/rules-truths-beliefs/
  2. https://www.collaborativefund.com/blog/$/

12 Timeless Rules of Investing

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Guidelines Every Investor Should Embrace, But Few Actually Do

An Investment U White Paper Report written by Dr. Steve Sjuggerud, Advisory Panelist, Investment U

In the the white paper report, Dr. Sjuggerud identified 12 classic investing rules that every investor can use throughout their lifetimes.

These guidelines are provided to help investors achieve their goals, sometimes in capitalizing on gains and sometimes in mitigating losses.

1. An attempt at making a quick buck often leads to losing much of that buck.

  • The people who suffer the worst losses are those who overreach.
  • If the investment sounds too good to be true, it is.
  • The best hot tip is “there is no such thing as a hot tip.”

2. Don’t let a small loss become large.

  • Don’t keep losing money just to “prove you are right.”
  • Never throw good money after bad (don’t buy more of a loser).
  • When all you’re left with is hope, get out.

3. Cut your losers; let your winners ride.

  • Avoid limited-upside, unlimited-downside investments.
  • Don’t fall in love with your investment; it won’t fall in love with you.

4. A rising tide raises all ships, and vice versa. So assess the tide, not the ships.

  • Fighting the prevailing “trend” is generally a recipe for disaster.
  • Stocks will fall more than you think and rise higher than you can imagine.
  • In the short run, values don’t matter. In the long run, valuations do matter.

5. When a stock hits a new high, it’s not time to sell something that is going right.

  • When a stock hits a new low, it’s not time to buy something that is going wrong.

6. Buy and hold doesn’t ALWAYS work.

  • If stocks don’t seem cheap, stand aside.

7. Bear markets begin in good times. Bull markets begin in bad times.

8. If you don’t understand the investment, don’t buy it.

  • Don’t be wooed. Either make an effort to understand it or say “no thanks.”
  • You can’t know everything, so don’t stray far from what you know.

9. Buy value, and sell hysteria.

  • Paying less than the underlying asset’s value is a proven successful investing strategy.
  • Buying overvalued stocks has proven to under perform the market.
  • Neglected sectors often offer good values.
  • The “popular” sectors are often overvalued.

10. Investing in what’s popular never ends up making you any money.

  • Avoid popular stocks, fad industries and new ventures.
  • Buy an investment when it has few friends.

11. When it’s time to act, don’t hesitate.

  • Once you’re in, be patient and don’t be rattled by fluctuations.
  • Stick with your plan… but when you make a mistake, don’t hesitate.
  • Learn more from your bad moves than your good ones.

12. Expert investors care about risk; novice investors shop for returns.

  • If you focus on the risks, the returns will eventually come for you.
  • If you focus on the returns, the risks will eventually come for you.

Good investing.

References:

  1. https://investmentu.com/timelessrules/

Magic Formula

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“Believe it can be done. When you believe something can be done, really believe, your mind will find the ways to do it. Believing a solution paves the way to solution.” – David J. Schwartz

In “The Little Book That Beats the Market”, Joel Greenblatt, Founder and Managing Partner at Gotham Capital (average annualized returns of 40% for over 20 years), sets out the basic principles for successful stock market investing.

In his book, Greenblatt provides a “magic formula” that makes buying good companies at bargain prices process driven. It takes a bunch of stocks (Russell 3000) and ranks them on quality; takes the same bunch and ranks them on value. Add the two ranks and buy the stocks with the highest summed ranks. Hold them for a year or preferably longer.

The formula is based on two very solid pillars of value investing: Invest in companies with high returns, and make sure they’re selling at a large discount (margin of safety).

For his quality factor, Greenblatt chose return on capital, defined as EBIT (earnings before interest and taxes) divided by the sum of working capital and fixed assets. For his value factor, Greenblatt chose EBIT divided by enterprise value.

“If you just stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr. Market has decided to literally give away.”

“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

“In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”

“Stock prices move around wildly over very short periods of time. This does not mean that the values of the underlying companies have changed very much during that same period. In effect, the stock market acts very much like a crazy guy named Mr. Market.”

“Although over the short term, Mr. Market may set stock prices based on emotion, over the long term, it is the value of the company that becomes most important to Mr. Market.”

“After more than 25 years of investing professionally and after 9 years of teaching at an Ivy League business school, I am convinced of at least two things: 1. If you really want to “beat the market,” most professionals and academics can’t help you, and 2. That leaves only one real alternative: You must do it yourself.”
― Joel Greenblatt, The Little Book That Beats the Market

“Over the short term, Mr. Market acts like a wildly emotional guy who can buy or sell stocks at depressed or inflated prices. Over the long run, it’s a completely different story: Mr. Market gets it right.”

“Although over the short term Mr. Market may price stocks based on emotion, over the long term Mr. Market prices stocks based on their value.”

Greenblatt’s three basic principles:

  1. Buy good companies;
  2. Buy them at bargain prices;
  3. Use ranking to pick stocks.

Financial commentator Gary Shilling likes to say, “The stock market can remain irrational a lot longer than you can remain solvent.”

T,hus, when looking for bargain prices, you need to look at a lot more things than earnings yield, and when looking for good businesses, you need to look at a lot more things than high return on capital.

You can’t judge a business as good or bad without looking at its stability, its growth prospects, and the quality of its earnings; and you can’t judge a business as a bargain without looking at a variety of valuation metrics.

References:

  1. https://www.goodreads.com/work/quotes/73414-the-little-book-that-beats-the-market
  2. https://www.fool.com/investing/general/2007/03/23/foolish-book-review-the-little-book-that-beats-the.aspx
  3. https://seekingalpha.com/article/4374333-how-market-beat-little-book-beats-market-stock-pickers-guide-to-joel-greenblatts-magic

Differences Between Price and Value

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“Price is what you pay; value is what you get.” Warren Buffett

“Don’t judge a company’s stock by its share price.” Many people incorrectly assume that a stock with a low dollar price is cheap, while another one with a four-digit dollar price is expensive. In fact, a stock’s price says little about that stock’s value. Moreover, it says nothing at all about whether that the market price of a company is headed higher or lower.

The most important distinction between the ‘market price you pay’ and the ‘intrinsic value you get’ is the fact that price is arbitrary and value is fundamental.

  • Price is the amount paid for the product or service.
  • Cost is the aggregate monetary value of the inputs used in the production of the goods or services.
  • Value of a product or service is the utility or worth of the product or service for an individual.

To effectively deploy this strategy, it’s essential to find a company that you understand, that has solid fundamentals — then be patient and wait until the company’s stock price falls below its intrinsic value before you purchase the company.

Regarding ‘understanding’ a company, it’s important for investors to know how a company makes its money–revenue, profits and free cash flow.

At some point, a stock’s market price over the long term adjusts to its intrinsic value. This fact is how successful investors such as Warren Buffet have used to make billions over the long term.

“Finding differences between price and value is by far the most effective investment strategy”, writes Phil Townes, founder of Rule One Investing . “Not recognizing differences between price and value is also what causes many investors to lose their shirts, as companies are just as often overpriced as they are underpriced.”

How do you find companies that are on sale for less than their true value is to evaluate companies using a set of standards that look beyond the company’s current price tag. Phil Town call these standards the four Ms:

  • Meaning,
  • Moat,
  • Management and
  • Margin of Safety

The first step is to make sure you understand the company and the company you invest in has meaning to you as an investor. If it does, you’ll understand it better, be more likely to research it and be more passionate about investing in it.

The second step is to choose a company that has a moat. This means that there is something inherent about the company that makes it difficult for competitors to step in and carve away part of their market share.

The third step is to look at the company’s management. Companies live and die by the people managing them, and if you are going to invest in a company, you need to make sure their management is talented and trustworthy.

Finally, calculate the company’s intrinsic value and determine a margin of safety. Margin of safety is the price at which you can buy shares of a company, being more likely that you won’t lose money and have increased confident that you will make a good return on your invested capital.

When the market price of a company is lower than the company’s intrinsic value number, the company is deemed underpriced and represents a great investment opportunity.

“Leveraging differences between price and value is as simple as that”, said Town. “Find a company that you believe in, that has solid fundamentals — then wait until their price falls below their value. If you do this, you can buy companies on sale, sell them for their true value and make a lot of money in the process.”

The goal is to identify stocks that are undervalued—that is, their market prices do not reflect their true intrinsic value.

References:

  1. https://www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/
  2. https://keydifferences.com/difference-between-price-cost-and-value.html
  3. https://www.investopedia.com/articles/stocks/08/stock-prices-fool.asp

The overriding goal is to help individuals learn how to successfully invest in assets, to build long term wealth and achieve lifetime financial freedom. 

What is Return on Invested Capital (ROIC)

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Return on Invested Capital (ROIC) is a performance ratio that aims to measure the percentage return that a company earns on invested capital.

The Return on Invested Capital (ROIC) ratio shows how efficiently a company is using the investors’ funds to generate net income. Investors use the ROIC ratio to compute and to understand the value of a company. It represents for investors how well a company has put its capital to work in order to generate profitable returns on behalf of its shareholders and debt lenders.

Fundamentally, ROIC answers the question:

  • “How much in returns is the company earning for each dollar invested?”

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.

Net operating profit after tax (NOPAT) is typically used in the numerator because it captures the recurring core operating profits and is an unlevered measure (i.e. unaffected by the capital structure).

Unlike net income, NOPAT is the operating profits post-taxes and thus represents what is available for all equity and debt providers.

  • Return on Invested Capital (ROIC): The numerator is net operating profit after tax (NOPAT), which measures the earnings of a company prior to financing costs.
  • Invested Capital: As for the denominator, the invested capital represents the sources of funding raised to grow the company and run the day-to-day operations.

Capital refers to debt and equity financing, which are the two common sources of funds for companies that are used to invest in cash flow generative assets and derive economic benefits.

A company can evaluate its growth by looking at its return on invested capital ratio. Any firm earning excess returns on investments totaling more than the cost of acquiring the capital is a value creator. Excess returns may be reinvested, thus securing future growth for the company. An investment whose returns are equal to or less than the cost of capital is a value destroyer. Generally speaking,

  • A company is considered to be a value creator if its ROIC is at least two percent more than the cost of capital;
  • A company is considered to be a value destroyer is if its ROIC is two percent less than its cost of capital.

There are some companies that run at zero returns, whose return percentage on the value of capital lies within the set estimation error, which in this case is 2%.

A higher return on invested capital can be considered an indication that a company is required to spend less to generate more profit.

  • Profitable Returns on Invested Capital (ROIC) → Positive Value Creation and Shareholder Returns

The higher the profit margins of the company, the higher the return on invested capital, as the company can convert more revenue (or NOPAT) into profits.

Companies that generate an ROIC above their cost of capital implies the management team can allocate capital efficiently and invest in profitable projects, which is a competitive advantage in itself.

When investors screen for potential investments, the minimum ROIC tends to be set between 10% and 15%, but this will be firm-specific and depend on the type of strategy employed.

ROIC is one method to determine whether or not a company has a defensible “economic moat”, which is the ability of a company to protect its profit margins and market share from new market entrants over the long run.

Warren Buffett

The overall objective of calculating ROIC is to better understand how efficiently a company has been utilizing its operating capital (i.e. deployment of capital).

Generally, the higher the return on invested capital (ROIC), the more likely the company is to achieve sustainable long-term value creation.

References:

  1. https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-roic/
  2. https://www.wallstreetprep.com/knowledge/roic-return-on-invested-capital/

Benjamin Graham

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Every investment is the present value of all future cash flow.

Benjamin Graham, colleague and mentor to billionaire investor Warren Buffett,  is widely acknowledged as the father of value investing. His timeless book, The Intelligent Investor, is considered the value investor’s bible for both individual investors and Wall Street professionals.

Many of Benjamin Graham’s concepts are deemed fundamental for value investors, and his concepts should be studied and followed for anyone who plans to invest long term in the stock market.

For example, “Margin of Safety” is the famous term coined by Ben Graham. In simple terms, an asset worth $100 and bought at $80 has a better Margin of Safety than the same asset purchased at $95. In other words, “A great company is not a great investment if you pay too much for the stock”,  according to Benjamin Graham.

The 10 Benjamin Graham quotes, all of which are valuable in today’s market, tell us that::

  1. “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
  2. “People who invest make money for themselves; people who speculate make money for their brokers.”
  3. “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street, it almost invariably leads to disaster.”
  4. “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
  5. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
  6. “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
  7. “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
  8. “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
  9. “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”
  10. “Weighing the evidence objectively, the intelligent investor should conclude that IPO does not stand only for ‘initial public offering.’ More accurately, it is also shorthand for: It’s Probably Overpriced, Imaginary Profits Only, Insiders’ Private Opportunity, or Idiotic, Preposterous, and Outrageous.”

See the source image“I never ask if the market is going to go up or down because I don’t know, and besides, it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it is worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.”—Sir John Templeton

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Benjamin Graham

“Successful investing is about managing risk, not avoiding it.” – Benjamin Graham

References:

  1. https://cabotwealth.com/daily/value-investing/benjamin-graham-quotes-to-improve-your-investing-results/

9 Good Financial and Wealth Building Habits

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Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.

When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.

Below are nine good financial habits.

1. Create a budget.

The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.

When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.

2. Avoid or consolidate higher-interest credit card and personal debt.

Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.

The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.

If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?

3. Understand your financial circumstances.

You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.

With an understanding of your finances, you’ll always know what makes the most sense for you and your money.

4. Learn from past mistakes and failures.

Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.

It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.

5. Set goals and create a plan .

Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?

Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.

According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”

6. Ask questions.

Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.

For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.

7. Save for retirement.

Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.

You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.

8. Automate your savings.

There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.

Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.

9. Pay down debt.

Taking on debt can be a successful strategy as long as you’re comfortable with two things:

  • The monthly payment
  • Your ability (and willingness) to pay down the debt.

The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.

If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.

Creating a wealth plan

A well thought out wealth plan rests on three essential pillars:

  • Save
  • Invest
  • Repeat

These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.

A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.

Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:

  • Clear vision over goals
  • Easily control expenses and estimate savings
  • Automate investments
  • Define a strategy to achieve wealth
  • Adapt your strategy over time

In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.

In essence, a wealth plan acts as a roadmap to financial freedom.

References:

  1. https://www.discover.com/personal-loans/resources/consolidate-debt/good-financial-habits/
  2. https://goodmenproject.com/featured-content/how-to-create-a-wealth-plan-get-started-now/