Tag Archives: Financial Literacy

Investing Truths by Peter Lynch

Posted on by

“Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you are not going to do very well.”  Charlie Munger

Peter Lynch stressed the importance of looking at the underlying business enterprise strength, which he believed eventually shows up in the company’s long-term stock price performance. Also, pay a reasonable price relative to the company’s market value.

Here are important investing truths from Peter Lynch:

  1. Know what you own and be able to explain why you own it.  Only buy what you understand. ” Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.”
  2. Compounding of capital and principal takes time. Be patient, because most great wealth from the stock market is built over decades. “Often, there is no correlation between success of a company’s operations and the success of its stock over a few months or even years. In the long term, there is 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient and to own successful companies.”
  3. Simple is usually better than complex and smart. “If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”
  4. Volatility of the stock market is guaranteed. “You’ve got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that’s your answer, you should consider reducing your stock holdings today.”
  5. Finding undervalued companies selling below their intrinsic value is a lot harder today. “A stock-market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”
  6. Start early and at a very eary age. Invest for the long term…stocks are relatively predictable over 10-20 years. “Time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Walmart (WMT, Financial) in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.”
  7. Focus on the company behind the stock. Do not become overly attached to a stock. “Although it’s easy to forget sometimes, a share is not a lottery ticket…it’s part-ownership of a business.”
  8. Don’t try to predict the market. “Nobody can predict the interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.”
  9. Study history. Market crashes are great opportunities. “During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents, and blue-jeans (Levi Strauss) made a nice profit. Today, you can look for non-internet companies that indirectly benefit from internet traffic (package delivery is an obvious example); or you can invest in manufacturers of switches and related gizmos that keep the traffic moving.”
  10. It’s very tough for a company to go bankrupt if a company has more cash than debt or if they do not have debt. “The real key to making money in stocks is not to get scared out of them.”
  11. When you own stocks, it will alwalys be scary due to volatility and there is always something to worry about.  Everyone is a long term investor until stocks go down. “There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.”
  12. When yields on long-term government bonds exceed the dividend yields of the S&P 500 by 6% or more, sell stocks and buy bonds. ““In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.”

Emotions can be a real performance killer according to Lynch, if market drops get you selling out in a panic, or market surges have you greedily snapping up overvalued shares. The best investors will do the opposite.

“The single greatest edge an investor can have is a long-term orientation.” Seth Klarman

References:

  1. https://www.investopedia.com/articles/stocks/06/peterlynch.asp
  2. https://www.fool.com/retirement/2020/04/07/9-investing-tips-from-peter-lynch-that-you-shouldn.aspx
  3. https://www.gurufocus.com/news/341584/peter-lynch-golden-rules-for-investing-
  4. https://www.valuewalk.com/2015/07/peter-lynchs-investing-principles-and-25-golden-rules/
  5. https://www.suredividend.com/peter-lynch-investing-lessons/

Health, Financial and Emotional Well-Being

Posted on by

“We don’t see the world as it is, we see it as we are.” Anaïs Nin

Recent survey shows Americans are the unhappiest they have been in 50 years. Pandemic and health concerns, social unrest and economic distress have left Americans feeling tired, and living with a constant state of “brain fog” which are just a few symptoms of stress, anxiety, lack of sleep, and poor overall mental health.

People will exercise to help their bodies become fit, but when it comes to mental health, most people do nothing. Let’s be frank, the coronavirus has changed many Americans emotional, financial, and physical health circumstances dramatically and quickly. It’s important to take a holistic approach to your health, financial and emotional well-being. We know that planning for your future is about so much more than your finances – you and your family’s physical and emotional wellness are also a priority.

Time and time again, research has shown that “money cannot buy happiness” and that not only do you need a finite amount of money to be happy, but that prioritizing things like expressing gratitude, friendships, hobbies and family may actually lead to long-term well-being.

Keep physical, emotional and financial health a priority and in the center of your thoughts and daily life.

Overall emotional, physical and financial well-being are what your attempting to holistically achieve. It helps you feel more secure and less stressed in all areas. Sometimes the best thing you can do for your health – and your long-term financial security – is to tune it out the constant negative news. Here are some ways to tune out negativity during uncertain times.

  1. Put down the smart phone and turn off the news. Allow yourself just one hour of news time each day, preferably in the middle of the day. This ensures you don’t start or end your day anxious. It’s important to stay informed, but once a day should suffice.
  2. Stay positive and focus on an attitude of gratitude. List the top five (or more) things you’re grateful for each day. Your list may be the same from day to day or it could change based on the past day’s experience. It could be as simple as being thankful for the roof over your head or a smile from a stranger as you walk your neighborhood.
  3. Get physical and eat healthy. You’ve probably heard it before, and that’s because it’s true – physical activity is just as healthy for your mind as it is for your body. This doesn’t mean you have to participate in high intensity interval training. Start small. Simply going for a walk or doing basic stretches can help keep your mind and body at their best. Additionally, eliminate process foods, refined sugars and saturated fats from your diet. Eat more plant based foods and whole grains.
  4. Connect with family and friends. Having a strong support system is important during good times, but even more so during challenging ones. Reach out to someone you haven’t talked to in a while to see how they’re doing. Send a text or card or give them a call. If your family is spread out across the country, use digital apps to connect and play games.
  5. Stick to a schedule. When you’re stressed, it often takes a toll on your sleep schedule. Keeping a consistent routine can help. Get up and go to bed at the same times each day, even on weekends. Know your stress triggers and pay attention when you notice them flaring up.

While it’s important to be aware of what’s going on in the world, focusing on the bad news won’t help your financial strategy, your emotional well-being or your physical health. Remember, you’re in it for the long term.

During the current coronavirus pandemic, instead of ‘social distancing,’ our focus should be on ‘physical distancing’ and ‘social connection.'”

Maintain mental health and emotional well-being

Focus on the now. Worrying about the past or the future isn’t productive. When you start chastising yourself for past mistakes, or seeing disaster around every corner, you’re only creating more stress and anxiety in your life.

It’s important to stop and to take a breath and ask yourself what you can do right now to succeed. Find something to distract you from destructive thoughts and reset your attitude.

Achieving a healthy frame of mind can seem more challenging than in years past.

Having a daily moment of intentional quiet can go a long way toward a better outlook.

Try this five-minute meditation routine that combines both yoga and balance to steady the mind, utilize the breath to become more mindful, and reduce stress.

Mindfulness meditation does, in fact, decreases anxiety and improves self-esteem, studies have shown.

As you move through Mindfulness meditation, focus on deep breathing. Inhale and exhale through the nose, and start by filling up your lungs with air. Then feel the air rise up into the chest. As you exhale, empty the chest first and then feel the stomach deflate like a balloon. This slow, conscious and specific breath pattern aids in focusing the mind to the present moment.

Finally, if your mind wanders easily during this sequence, you can focus on a one-word mantra to recite silently to yourself. Choosing a word like “serenity” or “peace” or “confidence” and syncing your movement with your breath can help transport you to a different world that quiets distractions from the past and future.

References:

  1. https://www.synchronybank.com/blog/millie/money-and-happiness/https://www.synchronybank.com/blog/millie/money-and-happiness/
  2. https://apple.news/Am_LnLhs1Q22oltXhOLcRLg
  1. https://www.edwardjones.com/market-news-guidance/client-perspective/your-health-your-finances.html
  2. https://www.edwardjones.com/market-news-guidance/guidance/tune-out-stressful-times.html

Saving for the Future

Posted on by

“Saving is about putting aside money for future use. Investing is about putting your money to work for you with the goal of growing it over time.”

Saving money isn’t the easiest thing to do, especially if you’re one of the many of Americans living paycheck to paycheck. But saving for the future remains vitally important — not just to enable you to make large discretionary purchases such as a big screen television or a luxury vacation, but for emergencies, retirement, or buying a home.

  • Saving involves putting aside money for future use.
  • Investing involves putting your money to work for you with the goal of growing it over the long term.
  • To build your financial future, you need to do both, save for the future and invest for the long term.

Unfortunately, many of Americans aren’t where they should be financially. A 2019 Charles Schwab Modern Wealth survey found that about 59 percent of American adults are living paycheck to paycheck.

If you’re having a hard enough time paying the bills and putting food on the table without racking up debt, saving for the future is probably the last thing on your mind. Only 38% of people have an emergency fund, according to Charles Schwab, and one in five Americans don’t have a dime saved for retirement, according to a survey from Northwestern Mutual.

But, being a good saver certainly puts you ahead of the game. And having solid savings’ habits are an important step toward financial security. But saving by itself is not enough. While saving is about accumulating money for the future, investing is about growing your money over the long term. And that can make a huge difference in your financial future.

Begin your savings journey today for a better tomorrow

The hardest part about saving is getting started.

Basically, saving is putting aside money for future use. Think of saving as paying yourself first or an essential expense. From your earnings, you should take out what you intend to save for taxes first, if you’re a freelancer, and then take out 10% to 15% for savings. In other words, before you spend your first dollar on monthly expenses, first you should set aside 10% to 15% of income for your savings.

You can think of it as money you have left over once you’ve covered your essential expenses. Essentially, you should make saving a line item on your monthly budget, so that saving becomes one of your essentials. And, having money tucked away will help you pay for the things you want above and beyond your daily expenses, and also cover you in case of emergency.

Having more month left then money

A savings account is an interest-bearing account that helps you save money and earn monthly interest. Separate from your checking account and long-term investments, savings accounts can grow with regular deposits and compounding interest that you can use for your future, large purchases or emergency funds.

Having a sizeable savings account can help you stay out of debt and give you the cushion you need should you face an unexpected illness, job loss or expense. Plus, when you want something special like a week’s vacation, you’ve got the money.

Building a “cash cushion” is an important step towards financial freedom. In a cash cushion, or emergency fund, you want enough cash on hand to cover three to six months’ essential expenses.

Additionally, a well-rounded savings strategy should focus on both short-term and long-term goals, says personal financial expert, Carrie Schwab-Pomerantz CFP® major moves in order to save money — Those extra dollars are being used in two ways: to pay off debt (credit cards and student loans) and to save for a new home.

Most people keep their savings in a bank account. The upside is that it’s easily accessible and safe; the downside is that it won’t earn very much. Money in savings accounts is not likely to keep pace with inflation. Which means the money you have saved today can actually lose buying power over time. That’s why just saving isn’t enough.

Investing creates the action

Investing, on the other hand, is about putting your money to work for you with the goal of growing it over time. Here’s an example. If you put $3,000 each year in a savings account and earn 1 percent, at the end of 20 years you’d have about $67,000. If you invested that same amount of money and got an average 6 percent return over the same time period, you’d have nearly $117,000. The sooner you start saving the less you may need to save because your money gets to work that much sooner. The more you save, the more you have to invest—and the more those returns can add up.

Nobody knows, especially the talking heads in the financial entertainment media, if the stock market is going up or down tomorrow, much less six months or 12 months from now. Moreover, it should not matter if the market meltdowns one day and melt-up the next. When it goes down, you should invest. And, when it goes up, you should invest. In other words, you must consistently invest in the market. Do not let volatility and market moving news faze you, or cause a bout of investing paralysis.

Investing involves risk

Of course, investing involves risk. And the stock market particularly will have its ups and downs. But there are ‘tried and true’ ways to mitigate that risk. The key to mitigating risk is to diversify by choosing a broad range of investments in stocks, bonds, and cash based assets that aligns with your financial plan asset allocation, risk tolerance and time horizon and never put all your money in one particular stock or asset.

One other important factor is time. To protect yourself against market downturns, a long-term approach is essential. At your age, you have time to keep your money in the market and ride out the inevitable market lows. The trick is to stick with it through those lows, keeping your focus on the potential for long-term gains.

Beginning with your next paycheck, commit to paying yourself first. Develop a budget, evaluate your spending needs, and understand your long-term goals.

References:

  1. www.schwab.com/resource-center/insights/content/youre-saving-should-you-be-investing-too
  1. https://www.bustle.com/life/3-women-share-how-theyre-saving-for-their-big-life-goals
  2. https://content.schwab.com/web/retail/public/about-schwab/Charles-Schwab-2019-Modern-Wealth-Survey-findings-0519-9JBP.pdf
  3. https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings

Time in the Market

Posted on by

Time in the market, not timing the market

Investors have a bad tendency to do the wrong thing at the wrong time with regards to investing decisions. They want to panic sell when the market is getting hit really bad (sell low) or they fear that they’re missing out on the market rally and buy when markets start to go up (buy high). Successful investors know that it is impossible to predict a stock’s outcome. Any stock can result in a potential profit or loss, but the hope of “hitting it big” in the markets has led plenty of investors to try and time the market. Instead, it’s importance of investors to have a clear idea of their goals, as well as the time frame for their financial plan.

 Focus on time in the market – not trying to time the market

Timing the market involves trying to predict the future price trend of a stock and the market. As a result, there is a high probability of failure with this strategy, because no consistently predict the future of the markets. Although it sounds ideal to buy stock at a low price and sell it shortly after at a higher price for a profit, it’s often too good to be true. There are always people who get lucky, but that’s exactly what it is: luck. Essentially, someone may have luck with one stock, but lose it all on the next trade.

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” John Bogle

It can be tempting to try to sell out of stocks to avoid downturns, but it’s nearly impossible to time it right.  If you sell and are still on the sidelines during a recovery, it can be difficult to catch up. Missing even a few of the best days in the market can significantly undermine your performance.

The most important course of action for investors is patience and maintaining a long-term mindset. History has repeatedly demonstrated the value for investor to stay invested in the market, even during a market sell off. Going back to 1930, if you had stayed exposed to the equity market, your returns would have been around 15,000%.

If you missed the top 10 performing days of each decade since 1930 because of mistiming the market over that period, your returns would be a mere 91%. And missing even a few days as the market rebounds can significantly diminish your returns, research from JP Morgan shows.

Keep perspective: Downturns are normal and typically short

Market downturns may be unsettling, but history shows stocks have recovered and delivered long-term gains. Over the past 35 years, the stock market has fallen 14% on average from high to low each year, but still managed gains in 80% of calendar years, according to Fidelity.

Investors must ignore the urge to panic and sell off their investments. Perspective is what is important during days like these and long term perspective is key. No one can consistently time the market and one of the most important factors in building wealth is time in the market.

Essentially, you don’t want to sell off your stock positions when the market has a bad day. Instead, ride it out. Research indicates that over the long-term, you reap the rewards of the power of compounding by staying invested in the market.

Rather than give in to emotion, stay the course. The wealthy are in the market for the long term. The headlines are scary, but there’s always going to be a new threat to investors, whether it’s election fears or whatever the Fed will do next.

References:

  1. https://www.cnbc.com/2020/03/31/bofa-keith-banks-warns-investors-against-trying-to-time-the-market.html
  2. https://www.prnewswire.com/news-releases/the-importance-of-time-in-the-market-vs-timing-the-market-301113822.html
  3.  The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation.
  4. https://www.fidelity.com/viewpoints/investing-ideas/six-tips

Financial Security Begins Within

Posted on by

Mindset matters.

With the right mindset and hard work, achieving your financial goals are possible. However, you have to start by understanding and eliminating your negative thoughts. If you believe there’s no point trying to achieve your financial goals and to go for the life you want, then you’ll never achieve them. Therefore, you might be tempted to make choices that make your financial position worse.

Achieving a positive mindset can be difficult, but there are some proven techniques that’ll help you:

  • Take care of yourself physically and emotionally
  • Know where you stand financially
  • Set achievable financial goals
  • Make small changes
  • Try to see the positive and maintain a positive attitude

Your financial security and well-being are determined by your mindset. Financial security gives you the time and opportunity to do the things that might make you happy. Taking control of your financial life and changing the way you think can make a huge difference.

With a positive and determined mindset, you can set goals and make plans to achieve them. You’ll remain focused on your goals and create the extra money to save and invest toward achieving those goals.

For example, if you want to retire early, the way to do so is to make more money, spend less, and invest more. You’ll need to resist temptation to spend what you have or to not spend what you haven’t got.

Even with a positive mindset, you won’t achieve your goals overnight. But it’ll put you on the right track to take more control over your finances. 

There are three ways to take control and have more money to invest and accumulate wealth.

  • First is to make more money.
  • Second is to spend less.
  • Third is to invest for the long term and grow your money.

You’ll need to combine financial literacy with a plan and self-control. And when life throws you a financial curve ball, you’ll need to stay positive – remaining focused on your goals and not make excuses.

Financial security

Safety and security are incredibly important human needs. And, people must feel secure before they’re able to address their “higher-level” needs of belonging, esteem, and self-actualization according to Maslow’s Hierarchy of Needs.

Security expert Bruce Schneier states, “Security is both a feeling and a reality.” But feeling and reality can be quite different. “The reality of security is mathematical,” says Schneier. It’s all about the probability of risks and the effectiveness of corresponding countermeasures.

Most of people try to achieve financial security mathematically. We consider all the potential financial risks we face – unemployment, illness, unexpected costs, etc. – and try to determine reasonable countermeasures for each of those risks. You might not consider yourself financially secure until you have adequate emergency savings to last being unemployed for 6 months.

Security is a feeling on your psychological reactions to both risks and efforts to reduce risks. You can create a reality of security and still not feel secure. Similarly, you can feel secure and yet not really be secure in your current position.

When it comes to finances, you can stable employment, be in great health, and have money saved up – and still not feel secure with your money.

Financial goals are great, but if your fears and worries about money are holding you back, there’s a lot to be said for simply trusting in yourself and your abilities.

Build your savings. Find the ideal job. But also give yourself the proper credit for being able to make due when the unexpected happens.

Having a positive financial mindset is the foundation for taking control of your money and becoming more financially stable. Setting yourself goals, addressing and eliminating bad habits, and learning how to get a handle on your thought processes will help you to manage your finances and put you in a better position with all aspects of your life. 

References:

  1. https://www.moneymanagement.org/blog/what-does-it-mean-to-be-financially-secure
  2. https://www.dollarbreak.com/wealth-creation-mindset/
  3. https://www.credit.com/blog/why-financial-productivity-begins-with-w-positive-mindset/

6 Habits to Build Wealth

Posted on by

“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/

Financial Mindset

Posted on by

“It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

Financial Mindset

“Change your mindset and attitude, and you can change your life.”

You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

Other examples of beliefs about money and personal finance include:

  • Taking personal responsibility regarding your finances is everything.
  • You shouldn’t buy things you can’t afford.
  • You don’t have to make a ton of money to be financially successful.
  • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
  • Borrowing money from or lending money to your family isn’t recommended.
  • Education can get you a better job, if you get the right education.
  • You should buy life insurance.
  • You have much more to do with being a financial success than you think.

Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

1. Using debt to reach your dreams.

This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

2. Thinking you do not need an emergency fund.

The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

3. Settling for a stressful job to pay off debt.

“The most important thing when paying off your debts is to pay off your debts.”

Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

4. Delaying your retirement savings.

Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

5. Failing to have a backup plan.

The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

Takeaway

Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

References:

  1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
  2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
  3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
  4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
  5. https://www.getrichslowly.org
  6. https://obliviousinvestor.com
  7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

Top 10 Investing Terms Google Search

Posted on by

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/

Financial Planning 12 Step Process

Posted on by

A financial plan creates a roadmap for your money and helps you achieve your financial goals.

The purpose of financial planning is to help you achieve short- and long-term financial goals like creating an emergency fund and achieving financial freedom, respectively. A financial plan is a customized roadmap to maximize your existing financial resources and ensures that adequate insurance and legal documents are in place to protect you and your family in case of a crisis. For example, you collect financial information and create short- and long-term priorities and goals in order to choose the most suitable investment solutions for those goals.

Although financial planning generally targets higher-net-worth clients, options also are available for economically vulnerable families. For example, the Foundation for Financial Planning connects over 15,000 volunteer planners with underserved clients to help struggling families take control of their financial lives free of charge.

Research has shown that a strong correlation exist between financial planning and wealth aggregation. People who plan their financial futures are more likely to accumulate wealth and invest in stocks or other high-return financial assets.

When you start financial planning, you usually begin with your life or financial priorities, goals or the problems you are trying to solve. Financial planning allows you to take a deep look at your financial wellbeing. It’s a bit like getting a comprehensive physical for your finances.

You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don’t trip you up.

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you get a snapshot of your current financial position, helps you get a sense of where you are heading, and helps you track your monetary goals to measure your progress towards financial freedom. A good financial plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

A financial plan is a comprehensive roadmap of your current finances, your financial goals and the strategies you’ve established to achieve those goals. It is an ongoing process to help you make sensible decisions about money, and it starts with helping you articulate the things that are important to you. These can sometimes be aspirations or material things, but often they are about you achieving financial freedom and peace of mind.

Good financial planning should include details about your cash flow, net worth, debt, investments, insurance and any other elements of your financial life.

Financial planning is about three key things:

  • Determining where you stand financially,
  • Articulating your personal financial goals, and
  • Creating a comprehensive plan to reach those goals.
  • It’s that easy!

Creating a roadmap for your financial future is for everyone. Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.

The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional.

There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.

12 Steps to a DIY Financial Plan

It’s not the just the race car that wins the race; it also the driver. An individual must get one’s financial mindset correct before they can succeed and win the race. You are the root of your success. It requires:

  • Right vehicle at the right time
  • Right (general and specific) knowledge, skills and experience
  • Right you…the mindset, character and habit

Never give up…correct and continue.

Effectively, the first step to financial planning and the most important aspect of your financial life, beyond your level of income, budget and investment strategy, begins with your financial mindset and behavior. Without the right mindset around your financial well-being, no amount of planning or execution can improve your current financial situation. Whether you’re having financial difficulty, just setting goals or only mapping out a plan, getting yourself mindset right is your first crucial step.

Knowing your impulsive vices and creating a plan to reduce them in a healthy way while still rewarding yourself occasionally is a crucial part of a positive financial mindset. While you can’t control certain things like when the market takes a downward turn, you can control your mindset, behavior and the strategies you trust to make the best decisions for your future. It’s especially important to stay the course and maintain your focus on the positive outcomes of your goals in the beginning of your financial journey.

Remember that financial freedom is achieved through your own mindset and your commitment to accountability with your progress and goals.

“The first step is to know exactly what your problem, goal or desire is. If you’re not clear about this, then write it down, and then rewrite it until the words express precisely what you are after.” W. Clement Stone

1. Write down your goals—In order to find success, you first have to define what that looks like for you. Many great achievements begin as far-off goals, that seem impossible until it’s done. Though you may not absolutely need a goal to succeed, research still shows that those who set goals are 10 times more successful than those without goals. By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50? So that’s the first thing you should ask yourself. 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 values and goals will act as a motivator as you dig into your financial details. Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions about spending and help to invest in your long-term goals. When you understand how your goal relates to what you truly value, you can use these values to strengthen your motivation. Standford Psychologist Kelly McGonigal recommends these questions to get connected with your ideal self:

  • What do you want to experience more of in your life, and what could you do to invite that/create that?
  • How do you want to be in the most important relationships or roles in your life? What would that look like, in practice?
  • What do you want to offer the world? Where can you begin?
  • How do you want to grow in the next year?
  • Where would you like to be in ten years?

Writing your goals out means you’ll be anywhere from 1.2 to 1.4 times more likely to fulfill them. Experts theorize this is because writing your goals down helps you to choose more specific goals, imagine and anticipate hurdles, and helps cement them in your mind.

2. Create a net worth statement—To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. 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. Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that 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. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your 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? Examining your expenses and spending helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on aligns with your values and what is most important to you.  An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

  • Essentials (50 percent)
  • Wants (30 percent)
  • Savings (20 percent)

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success.

5. Create an Emergency Fund–Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense, according to U.S. Federal Reserve? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Keep 12 months of essential expenses as Emergency Fund or a rainy day fund.  If you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover) to the amount calculated using the above formula. An Emergency Fund is a must for any household. Park the amount set aside for contingencies in a separate saving bank account, term deposit, and/or a Liquid Fund.

6. 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. Don’t go overboard when taking out a home loan. It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. But, as a rule of thumb, the value of the house should not exceed 2 or 3 times your family’s annual income when buying on a home loan and the price of your car should not exceed 50% of annual income. 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. This is called the debt-to-income ratio. If you stick to this ratio, it will be easier to service your loans/debt. Borrow only as much as you can comfortably repay. If you have multiple loans, it is advisable to consolidate all loans into a single loan, that has the lowest interest rate and repay it regularly.

“Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you.” David Bach

7. Get your retirement savings on track—Whatever your age, retirement planning is an essential financial goal and retirement saving needs to be part of your financial plan. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. 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. To build a retirement nest egg, aim to create at least 20 times your Gross Total Income at the time of your retirement. This is necessary to keep up with inflation. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference thanks to the power of compounding interest. Do not ignore ‘Rule of 72’ – As per this rule, the number 72 is divided by the annual rate of return on investment to determine the time it may take to double the money invested. There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

  • IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
  • Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
  • 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. 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.

Ideally, you should save 15% to 30% from your net take-home pay each month, before you pay for your expenses. This money should be invested in assets such as stocks, bonds and real estate to fulfil your envisioned financial goals. If you cannot save 15% to 30%, save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.

After retiring, follow the ‘80% of the income rule’. As per this rule, from your investments and/or any other income-generating activity, you need to generate at least 80% of the income you had while working. This will ensure that you can take care of your post-retirement expenses and maintain a comfortable standard of living. So make sure to invest in productive assets.

8. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? If you’re not an investor, To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. 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. As a rule of thumb, your equity allocation should be 100 minus your current age – Many factors determine asset allocation, such as age, income, risk profile, nature and time horizon for your goals, etc. But you could broadly follow the formula: 100 minus your current age as the ratio to invest in equity, with the rest going to debt. And, never invest in assets you do not understand well.

  • Good health is your greatest need. Without good health, you can’t enjoy anything else in life.

9. Make sure you have the right insurance—As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. Insuring your assets is more of a defensive financial move than an offensive one. 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. Have 10 to 15 times of annual income as life insurance – If you are the bread earner of your family, you should have a tem life insurance coverage of around 10 to 15 times your annual income and outstanding liabilities. No compromise should be made in this regard. Review your policies to make sure you have the right type and amount of coverage. Here are some of the most important ones to get when planning for your financial future.

  • Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
  • Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
  • Health insurance: Health insurance is protection for your most important asset: Your health and life. Health insurance covers your medical expenses for you to get the care you need.
  • Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
  • Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working.

10. Know your income tax situation—Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. Tax legislation tend to change a number of deductions, credits and tax rates. Don’t be caught by surprise when you file your last year’s taxes. To make sure you’re prepared for the 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 tax accountant for specific tax advice.

11. Create or update your estate plan—Thinking about estate planning is important to outline what happens to your assets when you’re gone. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. 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.

12. Review Your Plans Regularly–Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. After you figure out how to create a monetary plan, it’s good practice to review it around once a year.

Additionally, take into account factors such as the following:

  • The number of years left before you retire
  • Your life expectancy (an estimate, based on your family’s medical history)
  • Your current basic monthly expenditure
  • Your existing assets and liabilities
  • Contingency reserve, if any
  • Your risk appetite
  • Whether you have adequate health insurance
  • Whether you have provided for other life goals
  • Inflation growth rate

A financial plan isn’t a static document to sit on — it’s a tool to manage your money, track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting m arried, starting a new job or retiring, having a child or losing a loved one.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run, especially if you want to make a roadmap to a successful future.

For additional financial planning resources to create your own financial plan, go to the MoneySense complete financial plan kit.

References:

  1. https://www.pewtrusts.org/en/research-and-analysis/articles/2017/04/06/can-economically-vulnerable-americans-benefit-from-financial-capability-services
  2. https://www.forbes.com/sites/forbesfinancecouncil/2020/05/26/your-mindset-is-everything-when-it-comes-to-your-finances/?sh=22f5cb394818
  3. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  4. https://www.principal.com/individuals/build-your-knowledge/build-your-own-financial-plan-step-step-Guide
  5. https://mint.intuit.com/blog/planning/how-to-make-a-financial-plan/
  6. https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf
  7. https://news.stanford.edu/news/2015/january/resolutions-succeed-mcgonigal-010615.html
  8. https://www.investec.com/content/dam/united-kingdom/downloads-and-documents/wealth-investment/for-myself/brochures/financial-planning-explained-investec-wealth-investment.pdf
  9. https://www.sec.gov/investor/pubs/tenthingstoconsider.html
  10. https://www.nerdwallet.com/article/investing/what-is-a-financial-plan
  11. https://www.axisbank.com/progress-with-us/money-matters/save-invest/10-rules-of-thumb-for-financial-planning-and-wellbeing
  12. https://twocents.lifehacker.com/10-good-financial-rules-of-thumb-1668183707

 

Savings Goal: Emergency Fund | America Saves

Posted on by

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