Tag Archives: #FinancialLiteracy

Conspicuous Spending and Skyrocketing Debt

Posted on by

“The hard truth is: the amount of money we earn is not always directly proportional to the amount of money we save because, more often than not, the more money we make, the more we spend.” David Bach, author “The Automatic Millionaire”

Let’s face financial reality and an inconvenient truth. Whether on Main Street, Wall Street or Pennsylvania Avenue, Americans continue to have and have long had a spending problem. Government statistics and other studies show that Americans’ spending has generally risen in the years since the 2008 – 2009 Great Recession. This trend is reflected in Americans’ general pattern of consumer spending and reflected in the rising levels of consumer, corporate and public debt which has topped a whopping $75.3 trillion in 2019 according to the stats coming out of the Federal Reserve.

Moreover, Gallup found in an April 2018 poll that people “…want see themselves as fiscally responsible, to some degree.” Even Americans who admit that they are spending more than they earn over the past several months are more likely to claim this is only temporary, rather than their normal. Those who say they are spending less believe it is permanent, despite what the numbers reveal.

And Americans’ have a predilection to say that they enjoy saving more than spending, which rose dramatically between the period before and the period just after the recession, has remained in place, even as the economy has improved.

Positive Cash Flow

Asked about their spending habits, Gallup results show that Americans are as likely to say they are spending the same amount as they used to (35%) as to say they are spending less (35%). Slightly fewer, 30%, report spending more. The takeaway is that Americans’ conspicuous spending habits will not change unless they first acknowledge it as a problem.

On the other hand, most wealthy people understand and stress the importance of spending much less than their means. Spending less gives them financial freedom which then translates into various opportunities such as career mobility, flexibility to venture into activities outside of work, and of course the ability to increase their wealth.

On the other hand, if Americans are spending more than what they earn, then even with a big six-figure income, they will be excessively reliant on each of their paycheck. It is very important that they are financially independent before the time comes when they decide to become self-employed or to retire. So it’s important to start saving, investing and accumulating wealth.

Simply spending less than we earn, eliminating bad debt, managing taxes and fees, paying ourselves first, starting to save early, automatically saving and investing for the long-term, and developing smart financial habits and positive financial mindset will result in huge results over a long period of time.

References:

  1. https://www.federalreserve.gov/releases/z1/20190307/z1.pdf
  2. https://usdebtclock.org
  3. https://news.gallup.com/poll/209432/americans-say-saving-spending.aspx
  4. https://www.bea.gov/news/glance

Financial Planning

Posted on by

It’s not about how much money you earn. It’s what you do with the money that matters.

According to Schwab’s 2019 Modern Wealth Survey, more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a written financial plan feel that same level of comfort. Those with a plan also maintain healthier money habits when it comes to saving and demonstrate good investing behavior.

The goal of financial planning is to make your money goals a reality. Smart financial planning and long term investing involves in the utmost, spending less than you earn, saving and investing a modest amount each month, and accumulating wealth to end up with the financial assets to retire comfortably for 30 years or more.

Developing a financial plan will require an investor to identify their short-, intermediate- and long-term goals, and to create a long term investment strategy for achieving them. Think of a financial plan as a written planning guide to remind you of what you want, where financially you want to be in the future, and what it will take to get there. Despite the benefits of planning, Schwab’s survey shows that only 28 percent of Americans have a financial plan in writing.

Financial Self assessment

A sound financial plan begins by outlining the investor’s goals as well as any significant constraints. Defining these elements is essential because the plan needs to fit the investor’s current reality. Before creating a financial plan, individuals should first perform a quick self-evaluation:

  • Are you currently spending more than you earn?
  • How much have you already saved?
  • What is your current net worth?
  • Have you created an emergency fund with three to six months of expenses?
  • Are you saving for kid’s college, retirement, or to purchase a home?
  • How much money is available for investing?
  • What is your risk tolerance?
  • Are you buying a stock for fundamental or technical reasons?
  • Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
  • Determine your view of market sentiment: Is momentum generally tilted up or down?

Simple Financial Plan

“I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely, she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.” Mark Singer, The Changing Landscape of Retirement – What You Don’t Know Could Hurt You

Regardless of the reams of evidence of how critical planning remains, Americans are not spending the time or resources to plan for their financial future or plan for retirement. However, it is relatively straightforward to create a plan. A simple financial plan will include many of the following parts:

  • A personal net worth statement—a snapshot of what you own and what you owe. This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.
  • Cash flow is essentially income minus expenses—exactly how much money comes in and goes out every year, and understand if it is sustainable in the long term. The foundation for a budget includes identifying fixed and what’s discretionary expenses and if necessary, devise a debt management plan.
  • A budget–helps to manage your money, to consider your immediate needs and wants, and to prepare you to achieve your long-term financial goals
  • An Emergency fund–ensure adequate cash on hand to cover three to six months of living expenses to handle any unplanned expenses or loss of income.
  • A debt management plan—is a crucial part of becoming financially responsibilities. Debt can be used smartly to achieve one’s financial goals, or debt can be used poorly to buy things a person may not need with money he or she does not have.
  • A retirement plan—specifying how much you need to save each year to achieve the lifestyle you and your family hope to maintain. This includes a recommendation on how best to maximize Social Security benefits, to incorporate any pension funds and to utilize personal savings.
  • An analysis of how current investment portfolio aligns with short, intermediate and long-term goals.
  • A plan for college education funding offspring.
  • A review of employee benefits, including equity compensation or deferred income planning.
  • A review of insurance coverage—the key is to make sure that you have the right types and amounts and that you aren’t paying for unnecessary coverage.
  • Planning for special needs—for a child, parent, or other dependent.
  • Recommendations for creating or updating your estate plan, including charitable giving and legacy planning

Financial planning and managing your money:

  1. What are your long term financial goals including a retirement number and what does financial independence look like for you and your family lifestyle dream.
  2. Determine and track your financial net worth (assets – liabilities)
  3. Figure out your personal cash flow (income – expenses) that reflects the money coming in minus money going out…determine the source of money and where it is going…develop a budget.
  4. Align your financial goals to your spending.  Connect your spending habits to your priorities. Objective is to become financial independent in both the short and long term.
  5. Manage health, home owners, automobile, personal liability, long term care and life insurances to manage and mitigate your personal risks.
  6. Avoid debt and reduce taxes legally by starting your own business or investing in tax free or deferred assets.
  7. Create an investment plan and strategy for purchasing assets such as equities, real estate or a business. A plan helps an investor focus on long term goals and helps remove emotions (greed and fear) and bad behaviors from investment decisions.  Markets will always go up and down.  You only lose money if you sell assets and lock in the loss.  Buy real estate in great locations and companies doing sensible things and participate in global growth.
  8. Have a trust and estate plan in place to protect your assets. Ensure your goals and desires for your assets reflect your values and objectives.

Retirement and Financial Planning and Goals 

“Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” Pablo Picasso

The first steps of retirement planning are to define your long term retirement and financial goals, to establish your number, and write a retirement plan. 

Any sound financial plan requires that you figure out your retirement expenses in advance. And, a retirement can now last 30 years. A retirement plan isn’t something you set up once and then leave unattended. A successful retirement plan takes patience, attention, and discipline.

  • Planning for retirement involves identifying assets and sources of income, and matching against retirement expenses.
  • Planning for retirement involves setting financial, health and emotional including spiritual retirement goals.

An individual may have a higher probability to achieve their goals if they have a specific savings number and long-term goals in mind, which can help keep an individual on track along the way. It gives someone a target against which they can measure progress.

Key elements of a strong financial plan:

  • An emergency fund
  • A budget to determine cash flow and calculating net worth
  • Paying down and avoiding debt
  • Health and disability insurance
  • Start saving and investing early, pay yourself first and put it on automatic
  • Pay yourself first
  • Create long term goals
  • Saving and investing for retirement and/or college
  • Saving and investing for shorter term goals like vacations or a home purchase
  • Trusts, wills and estate planning

It is important to find creative ways to spend less — such as exploring local or nearby attractions that are free or less expensive.

After creating your financial goal or plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial goals and plan. Americans aren’t saving enough for retirement.

But how much is enough? Strategies to calculate the size of the nest egg you’ll need for your  golden years. But then life happens, and in life there are unknown variables and unexpected events that can throw a wrench into even the best-laid plans. Still, it’s better to have a plan, rather than to fly blindly into the sunset.

  • One popular rule of thumb is that you’ll need to have saved 10 times your final annual salary by the time you are 67.
  • Another way to calculate this ultimate goal is to look at current living expenses—annual or monthly—and assume that, in retirement, you will incur about 80% of those expenses.
  • Some retirement planning professionals suggest using “the 4% rule” to determine how much retirees can withdraw from their retirement account each year in order to provide a continuing income stream. 

Sock away as much as you can.

Power of Compound Interest

Use the power of compound interest —which is interest earned on top of interest — to potentially enhance returns.  Because compound interest builds on itself over time, investors who start early tend to have a significant advantage over those who wait,

compounding-no-amtd

Calculate how much money you may need once you get to retirement.

There are several common financial retirement concerns individuals have. Managing risks are important for retirees because retirees don’t have time to wait for a recovery of the economy or the market after a down period.

  • Investment Loss – One of the biggest financial fears retirees may have is investment loss. Because the markets move cyclically, there’s a good chance you’ll experience a market downturn during retirement.
  • Running Out of Money – Once you’re close to or in retirement, a market decline cannot be weathered and running out of money becomes a serious concern.
  • Major Health Event – As we get older, it’s common to see an increased need for health care. It’s natural, as a retiree, to worry about a major health event that can set you back financially. But it’s possible to prepare to some degree for such events.
  • Inflationary Effects – Inflation is sometimes considered the “quiet killer” of retirement. Over time, prices rise, making your money less valuable. A dollar today is worth more than a dollar tomorrow. Keeping up with inflation is an important part of retirement planning.

Although it may seem like a long way off, starting earlier can help you accumulate wealth and deal with unexpected bumps along the way. It’s important to consider:

  • What do you want out of retirement?
  • How much do you currently take in and spend?
  • How much will you need to maintain a comfortable lifestyle?

As a rule of thumb, you’ll need between 60-80%* of your current income to maintain your standard of living, but this will vary based upon how soon you enter retirement. To help you estimate these considerations use our tools below.

Financial independence and building wealth comes with the knowledge and financial literacy. It’s okay not to spend more than you earn and sacrifice short term benefit for long term financial independence. Think about the end goal — to secure your well being physically, emotionally and financially!

Manage Your Investments and Cash Flow

It’s easy to put things off until tomorrow… or maybe the next day. But with retirement, planning for cash flow (income) and nest egg are required today. And contributing regularly can help you accumulate assets faster.

Developing a financial plan, monthly budget and learning to stay within their boundaries will help you make these contributions. Additionally, your financial plan and budget will help you track your spending, cash flow, net worth and develop the discipline that can help you when you finally enter retirement.

When creating a budget, carefully weigh competing demands such as:

  • Paying off debt
  • Managing a mortgage
  • Taking a vacation
  • Raising a family
  • Saving for college or retirement

See how these financial considerations – and waiting to invest for retirement – can cost you in the long run.

Implement Your Plan

After assessing your situation, it’s time to look into available choices and then start investing. When weighing your options, consider:

  • How involved you want to be in managing your assets.
  • Whether there are any benefits to using your employer’s retirement plan.

Depending on your answers to these questions, some products may be better suited to your needs. If you’re the do-it-yourself-type, an index fund that mimics the S&P 500 may be the best choice. For those who aren’t comfortable with or don’t want to be managing their assets closely, a managed portfolio such as a target date fund might be the right way to get started.

Evaluate and Adjust Your Plan

It’s important to monitor your financial plan and investment strategy regularly. As your situation changes, you may need to adjust your allocations or investment strategy. No matter what plan you’re using, or whether you’re doing it on your own or with the help of a financial advisor, it’s important to evaluate your progress from time to time.

The starting point for financial planning start with goals you can achieve. If you don’t know where you’re going, how can you plan to get there? So before you get into the details of saving, budgeting and investing, take time to think about what’s most important to you and what you want your money to achieve.

  • Have an financial plan that is simple, goal oriented, realistic and actionable.
  • Understand your plan, follow it, and adjust it when things change in your life.

Put your plan into action.

  • Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
  • Don’t wait. If you invest now, you’ll start earning sooner.

Stay on track.

  • Do periodic checkups to keep your portfolio healthy.
  • Keep in mind that long-term goals are more important than short-term performance.

References:

  1. https://www.aboutschwab.com/modernwealth2019
  2. https://www.brownleeglobal.com/saving-vs-investing/

10 Money Lessons He Wished Heard — or Listened to — When Younger | MarketWatch

Posted on by

Updated: February 23, 2020

Jonathan Clements, author of “From Here to Financial Happiness” and “How to Think About Money,” and editor of HumbleDollar.com., is the former personal-finance columnist for The Wall Street Journal. He has devoted his entire adult life to learning about money.

That might sound like cruel-and-unusual punishment, but he has mostly enjoyed it. For more than three decades, he has spent his days perusing the business pages, reading finance books, scanning academic studies and talking to countless folks about their finances.

Yet, despite this intense financial education, it took him a decade or more to learn many of life’s most important money lessons and, indeed, some key insights have only come to him in recent years.

Here are 10 things he wished he’d been told in his 20s—or told more loudly, so he actually listened:

— Read on www.marketwatch.com/story/10-money-lessons-i-wish-id-listened-to-when-i-was-younger-2020-02-12

1. A small home is the key to a big portfolio. Financially, it turned out to be one of the smartest things he had ever done, because it allowed him to save great gobs of money. That’s clear to him in retrospect. But he wished he’d known it was a smart move at the time, because he wouldn’t have wasted so many hours wondering whether he should have bought a larger place.

2. Debts are negative bonds. From his first month as a homeowner, he sent in extra money with his mortgage payment, so he could pay off the loan more quickly. But it was only later that he came to view his mortgage as a negative bond—one that was costing him dearly. Indeed, paying off debt almost always garners a higher after-tax return than you can earn by investing in high-quality bonds.

3. Watching the market and your portfolio doesn’t improve performance. This has been another huge time waster. It’s a bad habit he belatedly trying to break.

4. Thirty years from now, you’ll wish you’d invested more in stocks. Yes, over five or even 10 years, there’s some chance you’ll lose money in the stock market. But over 30 years? It’s highly likely you’ll notch handsome gains, especially if you’re broadly diversified and regularly adding new money to your portfolio in good times and bad.

5. Nobody knows squat about short-term investment performance. One of the downsides of following the financial news is that you hear all kinds of smart, articulate experts offering eloquent predictions of plummeting share prices and skyrocketing interest rates that—needless to say—turn out to be hopelessly, pathetically wrong. In his early days as an investor, this was, alas, the sort of garbage that would give him pause.

6. Put retirement first. Buying a house or sending your kids to college shouldn’t be your top goal. Instead, retirement should be. It’s so expensive to retire that, if you don’t save at least a modest sum in your 20s, the math quickly becomes awfully tough—and you’ll need a huge savings rate to amass the nest egg you need.

7. You’ll end up treasuring almost nothing you buy. Over the years, he had had fleeting desires for all kinds of material goods. Most of the stuff he purchased has since been thrown away. This is an area where millennials seem far wiser than us baby boomers. They’re much more focused on experiences than possessions—a wise use of money, says happiness research.

8. Work is so much more enjoyable when you work for yourself. These days, he earn just a fraction of what he made during my six years on Wall Street, but he is having so much more fun. No meetings to attend. No employee reviews. No worries about getting to the office on time or leaving too early. he is working harder today than he ever have. But it doesn’t feel like work—because it’s his choice and it’s work he is passionate about.

9. Will our future self approve? As we make decisions today, he think this is a hugely powerful question to ask—and yet it’s only in recent years that he had learned to ask it.

When we opt not to save today, we’re expecting our future self to make up the shortfall. When we take on debt, we’re expecting our future self to repay the money borrowed. When we buy things today of lasting value, we’re expecting our future self to like what we purchase.

Pondering our future self doesn’t just improve financial decisions. It can also help us to make smarter choices about eating, drinking, exercising and more.

10. Relax, things will work out. As he watch his son, daughter and son-in-law wrestle with early adult life, he glimpse some of the anxiety that he suffered in my 20s and 30s.

When you’re starting out, there’s so much uncertainty — what sort of career you’ll have, how financial markets will perform, what misfortunes will befall you. And there will be misfortunes. he’d had my fair share.

But if you regularly take the right steps—work hard, save part of every paycheck, resist the siren song of get-rich-quick schemes—good things should happen. It isn’t guaranteed. But it’s highly likely. So, for goodness’ sake, fret less about the distant future, and focus more on doing the right things each and every day.

You can follow Jonathan Clements on Twitter @ClementsMoney and on Facebook at Jonathan Clements Money Guide.

Ideas for Frugal Living | Three Life Lessons | Fidelity

Posted on by

“The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully”

Three (3) lasting lessons from my frugal parent

Frugal living can help separate the important financial expenses from the not so important. Learn helpful lessons and ideas on frugal living here.

BY JEANNE THOMPSON FROM FIDELITY – 06/07/2019

I’ll never forget my first “real” vacation.

Most of our family vacations were camping trips where we slept together in a tent or a pop-up trailer and my mom cooked for my 4 siblings and me at the campsite. But the summer after fifth grade, my father decided to take me, my mom, and my 2 older sisters with him on a business trip to California.

That trip really stood out. I remember relaxing by the pool in sunny San Diego, sipping Shirley Temples with my sisters. We were fascinated by the elevators in our big hotel and rode them up and down until we were sternly told to stop. Simply put, it was paradise.

This trip was an unusual extravagance for my parents, too. You can’t raise 5 children on a limited income without being very frugal. And my parents, who were both first-generation Americans, were used to getting by on very little. Excess was not an option. At Christmas, my mom would save nice wrapping paper and reuse it; boxes were also recycled for many holidays to come. Folding a little piece of wrapping paper in half, writing a note inside, and taping it to a gift worked just as well as buying a greeting card. She reused everything from tin foil to plastic baggies. Her approach to money and possessions was pretty consistent: “Make do with what you have.”

These habits and quirks used to make us laugh. Today, I appreciate the example my parents set. I resist spending money on big-ticket items. My car, for instance, is a 2010 model and has 150,000 miles on it. And most of the furniture in our house is at least a decade old (if not a few decades). I’m not about spending a lot on furniture —with a teenage son, our couch becomes a dumping ground for lacrosse equipment more often than not. I even save nice wrapping paper from time to time, much to the amusement of my kids. And because of the warm memories from that long-ago California trip, I’d much rather spend money on experiences my family can enjoy, like vacations, than on stuff.

Maybe it’s wishful thinking, but I like to believe that my parents’ mindful approach to spending lives on in my kids, who seem to appreciate the value of a dollar on some days at least. My college-age daughter takes pride in her 5-star rating on a ride-hailing app because it entitles her to discounts and coupons. My son, a high school senior, is already savvy about mutual funds and 401(k)s—thanks to conversations he tunes into at home and an intro to business class he takes at school. Both kids know that they need to budget for indulgences beyond the basics and that they’ll have to pay for them with money earned from their jobs.

Both of my parents are gone now, but their frugal approach to working diligently and saving money allowed them to raise kids. And not only that: They put enough away to build a nest egg that funded some retirement travel to Europe, Russia, and Alaska in their golden years. By then my father came around to reasoning: “You can’t take it with you.”

They still managed to leave something behind. The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully—are with all of us. And those occasional splurges they encouraged us to enjoy are as sweet as those long-ago Shirley Temples under the warm California sun.

— Read on www.fidelity.com/mymoney/frugal-living-ideas-and-life-lessons

Jobs, Coronavirus, and the Budget | First Trust Economics Blog

Posted on by

Brian S. Wesbury, Chief Economist

Date: 2/10/2020

In January, US payrolls expanded by 225,000, not only beating the consensus forecast, but also forecasts from every single economics group.  Since January 2019 (12 months ago), both payrolls and civilian employment – an alternative measure of jobs that includes small-business start-ups – are up 2.1 million.  The labor force – those who are either working or looking for work – is up 1.5 million, while the jobless rate fell to 3.6% from the 4.0%.

The labor force participation rate (the share of adults who are either working or looking for work) increased to 63.4% in January, the highest reading since early 2013.  Participation among “prime-age” adults (25 to 54) hit 83.1%, the highest since the Lehman Brothers bankruptcy in 2008.   

Meanwhile initial claims for unemployment insurance hit 202,000 in the last week of January, and initial claims as a percent of all jobs are at the lowest level ever.  In other words, the job market and the economy look strong.

Only a few months ago, some analysts were saying that the inversion of the yield curve – with short-term interest rates above long-term rates – was signaling the front edge of a US recession.  Now a recession seems nowhere in sight.

Lately, financial markets have become very jumpy on any news – good or bad – regarding the coronavirus.  We aren’t immunologists (or doctors) and would never make light of a virus that has killed more than 900 and infected over 40,000, but data released by the World Health Organization (WHO) cautiously suggests a positive turning point has been reached.

— Read on www.ftportfolios.com/retail/blogs/economics/index.aspx

Solving the Financial Literacy Problem

Posted on by

“A compelling body of evidence demonstrates a strong association between financial literacy and household well-being. Survey after survey shows that households that demonstrate low levels of financial literacy are those that tend not to plan for retirement, borrow at high interest rates, and acquire fewer assets.” Shawn Cole

Numerous reports show that a majority of American adults lack basic financial knowledge, behaviors, habits or skills to make good decisions about managing their money. Poor money management habits and a lack of financial literacy continue to be significant concerns for Americans and might pose a future a threat to the continued prosperity of America, since we cannot expect government to run huge fiscal deficits to provide essential needs of its citizens.

Additionally, it is one problem that has caused many Americans to be left behind despite ten years of economic expansion and a roaring bull stock market over that same timeframe. The economic good times have benefited high income and high net worth Americans; and it has led to an ever widening income gap, wealth gap and retirement gap within the United States.

Lack of Financial Literacy

“The number one problem in today’s generation and economy is the lack of financial literacy.” Alan Greenspan, Former Chairman, Federal Reserve

Forty-seven percent of college students surveyed said they do not feel prepared to manage their money. Managing money remains the most daunting challenge for college students for the fourth year in a row.

A recent survey, by financial firm AIG and education training company EVERFI of more than 25,000 college students, revealed that students struggle with even basic financial literacy about things like student loans, credit cards and investing.

When asked six personal finance questions, the survey revealed that more than one in 10 college students answered none of questions correctly, and another 20% got just one question right. Still, more than half got just two or fewer questions correct — even incorrectly answering simple questions about net worth and savings.

Furthermore, fewer than 1% of college students taking the test got them all right.

This survey reveals a widespread problem inside America. It reveals that there is a Financial literacy problem in America and one that we must solve.

This is a major issue because of the financial realities facing college students and all Americans. For example, according to Sallie US:SLM data revealed that 83% of college grads have a credit card, though only about six in 10 say they pay the balance on time and in full each month.

Not Taught in High School

“You can come from humble beginnings, live frugally, invest as much as you can, save 10% to 20% of your paycheck, invest in low-cost ETFs, and become a millionaire.’—Dan LaSalle, Olney Charter School’s assistant principal

Why the shortfall in financial literacy? The reason is because not many students in the U.S. learn about personal finance in school, regardless of the income-level where they live. According to the nonprofit Next Gen Personal Finance, only five states require high-school students to take a personal-finance class: Virginia, Alabama, Utah, Missouri and Tennessee.

In other states, personal finance classes are often offered as an elective. (https://www.marketwatch.com/story/how-one-high-school-is-teaching-hundreds-of-students-to-become-millionaires-2019-05-03). As a result, we have a nation where a vast majority do not understand or even the basics of smart money management habits and behaviors.

“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” T. Harv Eker, author Millionaire Mind

Financial Literacy is one solution

Financial literacy is about knowing how money is made, spent, and saved, as well as the skills and ability to use financial resources to make decisions. These decisions include how to generate, invest, spend, and save money.

This concept is applicable to both individuals and organizations. Individuals must be able to balance a checkbook, comprehend personal income taxes, and understand the concept of budgeting in order to make wise decisions with money. These skills are vitally important; yet, many individuals lack this basic knowledge and consequently are unable to meet their daily expenses.

References:

  1. https://everfi.com/insights/white-papers/2019-money-matters-report/
  2. https://www.marketwatch.com/story/solving-americas-financial-literacy-crisis-starts-with-teachers-not-laws-2019-11-19
  3. https://www.marketwatch.com/story/more-than-half-of-college-students-fail-this-6-question-money-quiz-would-you-2019-06-05
  4. https://www.marketwatch.com/story/how-one-high-school-is-teaching-hundreds-of-students-to-become-millionaires-2019-05-03

Dividends Income Strategy

Posted on by

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” John Rockefeller, founder of the Standard Oil Company

For retirees, dividends are a source for cash flow and a great form of income security in their post work years. For smart investors, dividend investments represent one of the closest things they can find to guaranteed income and possible capital appreciation.

John D. Rockefeller, founder of the Standard Oil Company and the world’s first billionaire, was a vocal advocate of dividends. He once commented that, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Dividend investing provides a steady income stream from the distributions of a company’s earnings to its shareholders. It works well for investors looking for long-term growth and for individuals preparing for or living in retirements who have a lower risk tolerance.

Dividend stocks are companies that pay shareholders a portion of earnings, or dividend, on a regular basis. These payments are funded by profits that a company generates but doesn’t need to retain to reinvest in the business. Dividend stocks are a major factor in the total return of the stock market. About 3,000 U.S. stocks pay a dividend at any given time.

Divdend income investor.

Dividend paying stocks are major sources of consistent income for investors. They can create income and wealth when returns from the equity market are highly volatile or at risk. Essentially, dividend–paying stocks have become an attractive alternative to bonds for investors looking for a reliable stream of investment income.

Companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by providing payouts or sizable yields on a regular basis. If you’re looking to build wealth or generate income, dividend stocks are pretty hard to beat.

Dividend-focused stocks do not offer much price appreciation in strong bull markets. However, they do offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk.

Companies that pay out dividends generally act as a hedge against economic uncertainty or downturns. They tend to provide downside protection by offering payouts or sizable yields on a regular basis.

Dividend stocks offer solid returns in an era of ultralow bond yields and also hold the promise of price appreciation. The S&P 500 index’s yield was recently around 1.9%, about even with that of the 10-year U.S. Treasury note.

Dividends also offer a number of advantages beyond income, one being that qualified dividend income is taxed as a capital gain and at a lower rate than ordinary income receives. The top federal capital-gains tax rate is 23.8%. Payouts can also help buffer volatility in tumultuous markets, providing returns even during a market decline.

Dividend stocks can reduce the amount of volatility or beta in a portfolio. Essentially, dividend investing is boring, and lacks the thrill of a small cap tech stock with exponential revenue growth and avoids the volatility of small caps.

Dividend Payout Date

Getting a regular income from the companies investors own are a testament to their discipline, the health of their business, and their confidence in its future. Companies will announce when their dividend will be paid, the amount of the dividend, and the ex-dividend date. Investors must own the stock by the ex-dividend date to receive the dividend.

The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.

Dividend Payout Ratio

Dividends are typically paid from company earnings, but not all dividends are created equally. If a company pays more in dividends than it earned, then the dividend might become unsustainable. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable.

Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a dividend payout ratio of above 100% is definitely a concern.

Another important check is to see if the free cash flow generated is sufficient to pay the dividend, which suggests dividends will be well covered by cash generated by the business and affordable from a cash perspective.

Still, if the company repeatedly paid a dividend greater than its profits and cash flow, investors should be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

High Dividend Yield

A high dividend yield strategy does have several drawbacks. Those disadvantages include vulnerability to rising interest rates and the potential exposure to financially challenged companies that may have trouble maintaining and growing dividends. Since the stock prices of firms with stable cash flows tend to be more sensitive to fluctuations in interest rates than those with more-volatile cash flow streams.

With lower interest rates and the stock market trading at near all-time highs, the high dividend paying stocks and ETFs could be excellent picks at present. Dividend ETFs provide investors with a diversified portfolio of dividend-paying stocks that allows you to invest and collect income without having to do nearly the amount of research you’d need before buying a large number of the individual components.

Another source of income are preferred stocks. Preferred stocks are known for offering higher dividends than their common stock counterparts. In fact, they can be viewed as a safe haven in case of a market pullback as the S&P 500 is up nearly 24% so far this year.

Stocks with a history of above-average dividend yields typically can be a sign of companies with deteriorating business fundamentals. While that can be the case in certain situations, there are many companies with strong underlying fundamentals that are some of America’s largest and most stable companies.

Bottom line, don’t fall for a high dividend yield in a vacuum. It may not paint an accurate picture of the stock’s potential. Instead, look at the company’s fundamentals and determine how dividend payouts change over time. That may indicate a company’s financially stability. Also, it may illustrate long-term dividend potential.

Dividend-Growth Strategies

An investor should not buy dividend stocks just for the sake of dividends to generate income…they should also be seeking capital appreciation to keep up with inflation and mitigate the risk of the long term loss of buying power of the dollar, as well. The most successful dividend investors seek dividend paying stocks that have the potential to grow their dividend each year.

Dividend payers with a history of dividend growth over a prolonged stretch (10 years’ worth of dividend hikes) tend to be highly profitable, financially healthy businesses. While dividend growers prioritize delivering cash to their shareholders, they’re balancing that against investing in their own businesses. Such firms have often held up better than the broad market, as well as the universe of high-yielding stocks, in periods of economic and market weakness.

During the market downturn from early October 2007 through early March 2009, dividend appreciation stocks, such as Dividend Aristocrats, held up better as a category versus the broad market and versus high dividend yield benchmark.

Dividend-growth strategies also look appealing from the standpoint of inflation protection, in that income-focused investors receive a little “raise” when a company increases its dividend. Dividend-growth stocks will tend to hold up better in a period of rising bond yields than high-yielding stocks. That’s because dividend-growth stocks’ yields are more modest to begin with, so they’re less vulnerable to being swapped out when higher-yielding bonds come online.

The dependability of dividends is a big reason to consider dividends when buying stocks. Not every stock pay a dividend, but a steady, dependable dividend stream can provide a nice boost to a portfolio’s return.

Sources:

  1. https://finance.yahoo.com/news/dividends-capital-gains-differ-195903726.html
  2. https://www.fidelity.com/learning-center/investment-products/stocks/all-about-dividends/why-dividends-matter

Passive Investing

Posted on by

The ‘father of passive investing’, Burton Malkiel, Princeton University professor emeritus of economics and author of the famous investing book, “A Random Walk Down Wall Street“, believes that most investors should invest passively. This idea is embodied by exchange-traded funds that track major stock market indexes, such as the S&P 500, and passive mutual funds.

Malkiel’s theory is that investors are better off buying a broad universe of stocks, index funds, and minimizing fees rather than paying an active manager who may not beat the market. Index funds, also known as passive funds, are structured to invest in the same securities that make up a given index, and seek to match the performance of the index they track, whether positive or negative. As the name implies, no manager or management team actively picks stocks or makes buy and sell decisions.

In contrast, active funds attempt to beat whichever index serves as the fund’s benchmark, although — and this is important — there is no guarantee they will do so. Active managers conduct research, closely monitor market trends and employ a variety of trading strategies to achieve return. But this active involvement comes at a price. Actively-managed funds typically have significantly higher fees and expenses.

A 2016 study by S&P Dow Jones Indices showed that about 90 percent of active stock managers failed to beat their index benchmark targets over the previous one-year, five-year and 10-year periods; fees explain a significant part of that under performance.

Vanguard’s John ‘Jack’ Bogle – Stay the Course

Many industry leaders, including Vanguard’s John ‘Jack’ Bogle, who pioneered index funds, were influenced by Malkiel’s theory on passive investing.

John ‘Jack’ Bogle

Jack Bogle, who founded the pioneering investment firm Vanguard in 1975, is widely regarded as the father of index investing. Index investing is a strategy that functions best when investors sit on their hands for decades. This strategy is far removed from the thrill and excitement of trying to beat the market by picking individual stocks — but one that research says works.

Over the decades, Jack Bogle’s philosophy has acquired a plethora of devout investors whom follow his teachings. His followers, known as the Bogleheads, embrace long-term commitments to broad, boring investments. Bogleheads choose investments that are low-cost index mutual funds and exchange-traded funds (ETFs).

These low-cost index mutual funds and ETFs are designed to mimic their respective benchmark stock or bond markets, not beat them. Bogleheads’ core belief— stay the course — is so essential to their investment strategy. Bogleheads’ key tips for beginners are:

Early investing is better than perfect investing

Don’t get overwhelmed with your options and let decision paralysis keep you from investing sooner. The magic of compound interest is where your money grows that much faster because you keep earning interest on your interest. To illustrate the strategy, a person who starts investing small amounts in their early 20s will be better off than someone who starts later and invests larger amounts later to catch up.

Stay in the market; Don’t try to time the market

For Bogleheads, the best way to invest is through passively-managed index funds like those pioneered by Vanguard. That way, while your investment will rise and fall with the market, you’re not a victim to any particular company’s misfortune.

Investing in passively-managed funds is a core Boglehead tenet — and research shows the strategy is a sound one. The majority of actively-managed funds have underperformed the stock market for nearly a decade, according to an annual S&P Dow Jones Indices report. In other words, trying to pick winners doesn’t work; simply riding out the market’s ups and downs does.

Don’t peek; Set it and forget it

It is advised that investors check their investments a few times a year—but they shouldn’t react to market volatility or short-term corrections. The key to passive investing is to “set it and forget it”— that is, once you know what you’re investing in, leave it alone, let the market do its thing and be patient.

Over the past decade, passive investment has been closing the gap on active management. Yet, the ‘father of passive investing’ believes there are still too many investors who are not taking advantage of passive investing. Malkiel believes strongly that “…[passive investing] works. It’s the best thing for individual investors to do for the core of their portfolio.”

Keep it simple

In a nutshell, the best approach is a simple, low cost, diversified portfolio of index funds that matches the market return. Don’t try to beat the market—ignore hot tips and check your returns infrequently.

References:

    https://www.cnbc.com/2020/01/02/burton-malkiel-says-his-passive-investing-idea-was-called-garbage.html
    https://money.com/theres-a-super-secret-conference-dedicated-to-investing-legend-jack-bogle-heres-what-its-like-on-the-inside/
    https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

7 ways to build wealth today, according to financial planners – Business Insider

Posted on by

“The very first step to building wealth is to spend less than you make.” Brian Koslow

  • Wealth building doesn’t happen overnight, but financial planners say a few steps can put you on the right path.
  • Start by tracking your cash flow, calculating your net worth, eliminating bad debt, and, making saving and investing a habit.
  • Then, they suggest using high-yield savings accounts or a 401(k) with an employer match to keep those savings growing.

The key to accumulating wealth isn’t always simply to make more money. Sometimes, it’s about using what money you have more effectively or using what you financially control to your advantage. Maybe it’s as simple as moving your savings into an account with higher interest rates, spending less than you earn, or taking advantage of an employer’s 401(k) match.

Most importantly, experts say one of the most important elements to building wealth is to believe that it is possible and simply give it time. The best ways to start building wealth today, according to financial planners, are straightforward and simple.

The seven (7) ways, according to Business Insider, to build wealth are:

  1. Figure out your net worth
  2. Start saving automatically
  3. Take advantage of your employer’s 401(k) program
  4. Look at your cash flow
  5. Don’t just let money sit — keep it growing
  6. Make your savings, investing and accumulating wealth a priority
  7. Be patient and think long term

Financial Milestones

One rule of thumb for building and monitoring wealth says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40, and so on. If you fall short, don’t fret, it’s never too late to increase your savings rate and it never hurts to aim high—

Take full advantage of your employer match, if one exist. For example, with a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 each year. Most people’s pay consists of a package that includes salary and employer benefits. You wouldn’t accept a $3,000 pay cut without a fight; by letting your employer match go to waste is kind of the same thing.

Build an Emergency Fund

Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. And, once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.

Retire Bad Debts

It imperative to eliminate or reduce bad debts. We all know which ones they are: the loans used to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a Sailor at an open bar. And, making only the minimum monthly payments on credit card and consumer debt. It is recommended set a deadline for repayment and getting rid of the growing interest and debt.

Benefits of a Budget

Money is often stretched in many directions. Daily expenses, entertainment, life events and long-term goals—all competing for the same dollar. Budgeting can help ensure you’re covering the essential monthly expenses, saving for the future and, with some discipline, have some extra cash to reward yourself for your good work.

— Read on www.businessinsider.com/best-ways-to-build-wealth-starting-today-2019-8

https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

The Power of Habit: Why We Do What We Do in Life and Business

Posted on by

Habits are choices that you continue doing repeatedly without actually thinking about them.

The Power of Habit, written by New York Times business reporter Charles Duhigg, explains why habits exist and how they can be changed. According to Duhigg, if people can understand how behaviors became habits, they can restructure those patterns in more constructive ways.

Additionally, understanding and changing habits is one of the most important thing in developing good personal financial behaviors or eliminating bad personal financial behaviors.

https://youtu.be/W1eYrhGeffc

Source:

  1. https://charlesduhigg.com/books/the-power-of-habit/
  2. https://www.shortform.com/summary/the-power-of-habit-summary-charles-duhigg
  3. https://fastertomaster.com/the-power-of-habit-by-charles-duhigg/