Author: Alice Tong

Alice Tong is founder of Ace Academy, dedicated to teaching financial independence through basic principles of money. Her mission is to spread financial literacy to everyone, particularly children, in hopes that they grow up to become financially responsible adults and lead us into a brighter future.

Test Your Money Knowledge!

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Now that we’re halfway through the year, it’s a good time to recap some of our past lessons. One of the best ways to learn about money is through practice, so rather than reading about what we already learned, why not use an example from someone else? Take a look at the following case study, and then answer the questions to see how you do!

Case Study

Hope wants to buy a condo for $150,000 because she wants to put down roots and invest her money in something that could grow over time. She has saved enough for a 10% down payment, or $15,000. She also has $10,000 in savings for an emergency fund, along with $3,000 in her retirement fund, to which she contributes 4% every paycheck to take advantage of full company matching. Her job brings in a steady salary of $1,900 per month (after-tax). Her current expenses amount to $1,400 per month, of which $900 goes towards rent. If she purchases a condo, her mortgage, homeowner’s insurance, and property tax would total roughly the same as rent. Luckily, she has no debt, outside of a credit card that she pays off monthly. She doesn’t mind taking public transportation, but is considering a car purchase in the next two years. Can Hope buy a condo?

(Note: Correct answers appear in green when clicked, and incorrect answers appear in red.)

What is Hope’s net worth?
$28,000
Correct! Net worth is assets minus liabilities, meaning $15,000 down payment+$10,000 emergency fund+$3,000 retirement fund-$0 debt=$28,000. Hope’s personal assets, things like computers or furniture, may add a little more value, but they probably won’t tip the scale significantly.
$15,000
$10,000
What is Hope’s cash flow?
$1,900
$500
Correct! Cash flow equals income minus expenses, so $1,900 income-$1,400 expenses=$500 leftover cash flow.
$15,000
Is Hope ready to buy a condo?
No, she doesn’t make enough money to support her expenses.
Since Hope has positive cash flow, and her expenses would not increase much with a condo purchase, she can afford to buy a home after all.
Yes, do it girl!
Hope is ready, given her monthly house payment would be roughly the same as current rent payments, and she still has money leftover each month.
In addition to a condo, can Hope also fulfill her wish to purchase a car in the next 2 years?
Maybe.
Correct! Hope is being responsible in waiting a while after her condo purchase to put another chunk of money into a big purchase. She may also have other expenses, for instance monthly HOA dues, that we need to factor into Hope’s expenses before deciding if she can afford monthly car expenses too.
No.
Hope might be able to save more in the next 2 years to allow for a car purchase. She also has positive cash flow, allowing her to add a monthly car payment. However, she should be cautious to allow room for other auto expenses (car insurance, parking, gas, maintenance).
Hope seems to be on solid financial footing, but what might be missing?
Nothing, she is doing just fine.
More savings, especially for retirement.
Correct! Hope has positive cash flow and no debt, which is outstanding, but where is that leftover money going towards? Will she have enough for future purchases or goals? Will she be able to retire at a reasonable age, given her current savings rate?

How did you do? Did you enjoy this case study? Leave your comments below!

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What Is The Most Important Financial Lesson?

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As Financial Literacy Month draws to a close, let’s revisit some financial lessons of the past. What did you learn about money while growing up, and what do you hope to impart to the next generation? Here is a start:

  • A penny earned is a penny saved. (Save, save, save!)
  • Money doesn’t grow on trees. (Work to earn money)
  • You have to spend money to make money. (Invest)
  • You get what you pay for. (The value of goods)

These are all great lessons and important ones, but one that should definitely be on your list is to only spend what you earn (or have).

Why is it important to limit what we spend? If we go overboard with expenses, we rely on borrowing from others. Another word for borrowing money – debt. That not only puts added stress on us to pay back what is owed, it causes a cycle to start. After all, we borrowed once, what’s a little more? And remember compound interest and how awesome it is to watch money multiply in value? It works for credit card companies too. That 10% or 15% or however much interest that we could have been earning on our money is what credit card companies make on us through credit card debt. So let’s just avoid it all by sticking to what we can afford.

How do we keep track of our spending with so many expenses? That brings us to the topic this month: Budgeting. A budget is a plan for spending. Essentially, add up what you earn or take home every month and subtract spending in each category. We can use the following budget as a case study.

What observations do you have of this sample budget? A few areas to note:

  • Expenses add up to income, meaning no overspending. Well done!
  • This budget includes saving as a line item, so that it’s not an afterthought. Even better if that money is directly deposited into a savings account and/or investment plan!
  • Saving could use some improvement, perhaps increasing from 6.7% to 10% or 15% instead.

Creating a budget is a good start, but sticking to a budget is what really matters. A plan only works if you follow through, right? One way to stay within budget is to give yourself a CASH allowance for categories like shopping or food, so you only spend what you have in cash each month. Another way is to track your spending through free tools offered by your financial institution.

As life changes occur, remember to modify your budget accordingly. It may mean cutting certain costs to allow for new ones. And beware of lifestyle creep. Making more money does not mean getting fancier things or dining out more if you haven’t increased your savings as well. And above all, regardless of whether you make a five- or six- or seven-figure income, only spend what you earn!

Investing 101

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Wow. We’re only two months into 2021, and the financial news has already made a splash. Enough hoopla has already been made about GameStop, but I do think there is one teachable moment in all of this. And that’s the buy/hold strategy. Yes, GameStop had colossal gains in a short amount of time. But with it came colossal loss. During its trading frenzy, GameStop went from $20 per share to $483 and then back down to around $40 now. For anyone who bought the stock for more than $40 (or today’s price), you’re probably worried because you’re thinking, what if it goes down further? On the other hand, if you were already invested in GameStop stock from January 1 until now, you’d still be at a gain. By focusing on the end result rather than day-to-day performance, you won’t be bothered so much by the ups and downs that all stocks inevitably endure. 

The best thing that came out of the GameStop experience is that it generated huge interest in the stock market. With recent news putting the stock market at the center of attention, this month’s topic will be especially relevant. Let’s take a look at what you need to know about investing.

Why is investing important? 

We are typically taught that we have to work for money, so naturally the only way to make more money is to work harder, right? Wrong. There is another way. We can also make more money by investing some of the money that we have made. If you ever wanted money to work for you, investing takes your seed money and grows it over time, resulting in what’s known as compound interest. Like plants, not every investment grows. But for those who spend a little time understanding how to invest, the payoff is well worth it. 

How do I get started with investing? 

Anyone can invest their money. I repeat, anyone. Most employers offer a retirement plan where the money you contribute can be invested. Children can use a parent’s brokerage account or start one of their own with an adult as custodian. Many college savings plans, or 529 plans, offer investment choices as well. If you have none of the above, you can get setup easily with a brokerage account of your own. While Robinhood has been making the most waves, there are other established names like Fidelity or Charles Schwab or TD Ameritrade for commission-free trading. 

When should I start investing? When should I stop? 

Ideally we can all start investing from the day we are born. If, like most people, that did not happen, then the next best option would be as soon as there is money to invest and the investment has to be for a long-term goal, like retirement or a big purchase. In case the buy/hold strategy was not clear earlier, don’t worry about timing the market. By remaining invested for the long-term, the end result is what matters, not what happens between today and tomorrow or next month. As for when to stop investing, you just might continue to be invested for as long as you live. After all, the best case scenario is that your money outlives you, rather than the other way around. However, if the money is for a finite goal, like a home purchase or college, then it makes sense to shift investments into something more stable like cash some time before or when you withdraw your money. 

What are the different types of investments? Which ones are best? 

Once you enter the world of investing, there is a plethora of investments you can choose from, with the most common being stocks, bonds, mutual funds, and commodities. Refer back to the Ace Academy article on Compound Interest or just do a Google search to learn about the various choices.

The second question is commonly asked in the financial industry. The truth is, no one can tell you with 100% certainty which investment will perform better or which stock to pick. There are times when a company’s stock may be doing spectacularly well in comparison to its own financials. How is that possible? It’s all up to investor mentality. Before you invest, take some time to study past performance or ask a financial advisor.

What are some smart strategies for new investors?

As mentioned before, investing comes with risk, the risk of loss. However, we can minimize risk with some simple tactics. We already discussed buy/hold strategy. Another strategy is diversification. Instead of putting all your money into one investment, why not spread it out, so one or more investments can perform well when the others don’t? One more tip is to use dollar-cost averaging instead of timing the market.

Although investing may seem like gambling, with a bit of education, you will be better off investing than gambling. So take your money, throw in a dash of diversification, add dollar-cost averaging along the way, bake for some time, and you’ve got a recipe for wealth!

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What Did We Learn About Money in 2020?

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Welcome to a new year! Wait, does this mean we can erase 2020 from our memory bank and just start fresh as if nothing ever happened? If only things were that simple. 2020 wreaked havoc on our jobs, our lifestyles, and our finances. We’re now left with the aftermath, and current-math, of a pandemic. Moving forward is not without its challenges, but at least we have 2020 vision (sorry, couldn’t resist the pun!).

Taking a moment to reflect on the past year, what did 2020 teach us about money? Here are three takeaways:

Have an emergency fund. According to a MagnifyMoney survey, over 4 in 10 people tapped into their emergency cash during the pandemic. With so many unemployed, and tighter restrictions on borrowing money, having an emergency fund puts people more at ease when times are tough. That also means when times are good, we should focus on building and maintaining our emergency fund. Between three to six months is the general rule of thumb, up to twelve months if your situation warrants it.

Keep it simple. In 2020, we revisited needs vs. wants with intensity. Everyone shed junk from our homes during quarantine, companies moved to less expensive states, and many folks downsized to smaller places or moved in with the parents. Although we will eventually go back to vacations and luxury things, we may be willing to sacrifice a bit more the next time around. Budget for the essentials, and perhaps shed some nice-to-have, but unnecessary expenses.

Investors, don’t panic. If you held investments in March 2020, your investments probably took a big dip. Despite the tumble, if you had held onto your investments from January 1 to December 31, 2020, you likely ended the year with a gain. Several stock market indices actually went up in the year of 2020 — the Dow with 7.3% gain and the S&P 500 with 16.3% gain. Here’s a good lesson not to make any sudden moves and stay invested for the long-term.

These lessons don’t just apply to adults. As with the Silent Generation, who was born in or around the Great Depression, children are watching how we navigate the pandemic. We will shape how they behave for the rest of their lives, giving us one more reason to focus on how we handle money this year and beyond.

If getting your personal finances is a priority in 2021 or you want to keep setting an example for future generations, then follow along each month as we dive deeper into topics like savings, employment, investing, and more. At the end of each post, we invite you to answer one question, and as always, your ideas and suggestions are welcome!

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12-Day Money Challenge

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2021 is right around the corner, and it seems like we are all eagerly counting down to the end of the year of COVID. The holidays are a welcome sight, but at the same time, we might go a little overboard with holiday spending. Don’t get me wrong. Spending is a good thing, after all, that’s what money is for. It’s uncontrolled spending that leads to problems later on.

Here’s a solution. Try this 12-Day Money Challenge. Although the temptation is to “spend, spend, spend,” we need to remind ourselves to “share, save, spend.” Now is the ultimate time to maintain those good money habits you have built all year long. Don’t derail all your savings on short-lived distractions. Consider it your holiday gift to yourself: More money for you.

How does the 12-Day Money Challenge work? Each day focuses on a theme:

  • Day 1, Share.
  • Day 2, Save.
  • Day 3, Spend.
  • Day 4, Share.
  • Day 5, Save.
  • Day 6, Spend.
  • Day 7, Share.
  • Day 8, Save.
  • Day 9, Spend.
  • Day 10, Share.
  • Day 11, Save.
  • Day 12, Spend.

On each day of the challenge, pick a dare that goes with the theme. You can use the ideas below or come up with your own. Everyone’s circumstances are different, so make the challenge your own. And no matter where you stand financially, everyone has the ability to do this challenge. If funds are low, share the gift of time instead by running an errand for someone or by volunteering at a local food drive. There are many ways that you can embrace this challenge, and the benefits go beyond building good money habits.

Are you up for the challenge?? Here are some ideas to help you along!

Share

  • Donate to your favorite charity.
  • Treat a co-worker to lunch.
  • Double the tip on your food delivery or restaurant order.
  • Pay it forward — buy coffee for the next person in line.

Save

  • For one day, match every purchase you make by saving the same amount in the bank.
  • Skip buying coffee or lunch that day and put that money towards savings.
  • Keep the change — round up every purchase to the next whole dollar amount, and put the difference in savings (some banks and apps will do this for you automatically).
  • Review your long-term savings accounts to make sure that 1) you’re invested, and 2) your investments still align with your goals.

Spend

  • Spend no more than $5 today.
  • Set a budget for buying holiday gifts.
  • Buy one thing for yourself today, only if it costs 5% or less of what you earned today.
  • Everything you buy today must be on sale or with a discount/coupon.

If you are able to stick with the challenge for all 12 days, congratulations! Maybe extend the challenge into the new year, and rotate the themes each month rather than each day? Sounds like a great new year’s resolution!

Homework: Take the challenge! How did you do? What ideas would you like to share with others?

To our readers: Ace Academy has changed from weekly to monthly lessons, so starting 2021, each month will focus on a new topic (college savings, retirement, etc.). If you have topics you would like to see, please let me know. And thanks for subscribing! Wishing everyone a happy holiday season!

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Why It’s Good To Get A Credit Card … As Long As You Do This

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If you are turning 18, good news! You can vote. And now you are eligible to get a credit card in your own name. Just because you can do something, does that mean you should? As far as voting goes, yes, you should absolutely rock that vote! And yes! You should get a credit card at 18, if (and this is important), IF you pay it off in full every month. Think of it like cash. Only spend on things you can pay back right away.

There’s a reason you shouldn’t wait to get a credit card. Establishing your credit history, or trustworthiness, over a long period of time makes it easier for lenders to work with you when you decide to apply for an auto loan or home loan in the future. Lenders can reject applications based on little or no credit history or they may add more stringent requirements to qualify.

It also doesn’t hurt that credit cards often come with perks, like airline points or cash back, so aren’t you foregoing those benefits by waiting?

What gets people in trouble down the road is not paying in full each month which leads to credit card debt. That $20 sweater ends up costing $30 after interest charges. A $1,000 laptop becomes $2,000. Regardless of the interest APR, or annual percentage rate, carrying a balance on a credit card results in paying more for an item than when initially purchased.

Landing in debt is also a disfavor to your future self. Let’s revisit opportunity cost for a minute. Instead of paying off $100 towards debt, that $100 could have gone to buying something new. It could have afforded a nicer house. It could have doubled or tripled through investments. That is the real cost of not paying off a credit card in full.

Now that you’re convinced you should get a credit card at 18, keep in mind one credit card is enough. Not two. Not three. Not more. In fact, there is such a thing as too much credit, which can negatively affect credit score. If you have too much credit available at your disposal, lenders view you as a risk, and you might not qualify for additional loans. So while it’s a good thing to get one credit card, it’s just that. One credit card.

The key is to start early and treat your credit card like cash, only buying what you can afford right away and paying back what you spend each month. From my own experience, having a credit card at the age of 18 and responsibly building my credit history over a few years allowed me to purchase my first home all by myself. It has also given me many free flights too! What will you unlock?

Homework: Which credit card do you choose, and why? If you have multiple credit cards, pick the best one or two and then get rid of the rest.

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Opportunity Cost: The Ultimate Game Of “Would You Rather?”

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Would you rather be a bear or hippo?

Which superpower would you rather have: Flight or Invisibility?

Now let’s try a money question:

Would you rather pay $900 a month for 5 years to drive a BMW now or instead wait 5 years while saving $800 a month in a 2% interest-bearing account to buy that same car?

Before we answer that question, let’s weigh the options. Paying $900 a month means we don’t have to wait on the car purchase, so if we need a car right away, that would likely be our selection. However, we are paying $6,000 more (or 60 months x $100 / month), which could have gone to savings or spending money. Investing $100 a month at 7% interest over 30 years would give us an extra $113k. Perhaps we throw a third option to the mix: Buy a $25,000 car instead of a $50,000 car?

By choosing the $900 a month route, we are essentially rejecting the possibility for greater wealth in the future. By choosing the $800 a month route, we are rejecting the immediate timeframe for owning a car. The price we pay for the choices we reject is known as opportunity cost. Every path we don’t choose has a cost associated with it. And while everyone has different answers, the key is to pick a choice that aligns with our needs and our vision for the future. Opportunity cost is just a big game of “Would You Rather?”

Opportunity cost is just a big game of

“Would You Rather?”

Whenever you make big financial decisions, instead of phrasing it: “Should I do this,” maybe try ” Would I rather do (this) or (that)?” This allows you to explore the alternatives. If you’re buying a place, would you rather buy a $350k condo now or save to buy a $500k house later? If you are paying down credit card debt, would you rather pay $200 above minimum or set aside some of that money, like $100, for an emergency fund? If you are saving money, would you rather keep it as cash or invest in bonds / stocks?

How do you go about making the right choice? The best way is to plan ahead. Plot out your future goals, and then calculate what you need to do to reach your target. If you have a complex situation that requires professional advice, look to the help of a financial planner or coach. October just so happens to be National Financial Planning Month in the United States, so what better time to start planning!

Homework: What are some financial decisions you need to make? Test each decision by asking “Would You Rather?” Are there any decisions worth changing?

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A Tale Of Two Investors

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Investing at an early age was one of the best things that happened to me. It propelled my understanding of money, but it also helped me gain an interest in money. Not just any kind of interest. Compound interest. Much like a flower, money requires time in order to blossom. Of all the things money can buy, it can’t buy time. That is why investing early is so important.

To illustrate the difference between investing early and investing late, let’s read a little story about Investor A and Investor Z.

The Early Investor A

Investor A sets aside $1,200 / year (or $100 / month), beginning at age 22. Since the money is intended for retirement several decades later, Investor A takes an aggressive stance and invests in the stock market, yielding 7% interest per year. Thirty years later, at age 52, Investor A chooses to stop saving any more money, but keeps the investments for another 10 years until age 62. After 40 years (saving for 30 of those years), how much has Investor A accumulated?

Cash In: $36,000

Cash Out: Approximately $223k

The Late Investor Z

Investor Z waits until age 32, or 10 years after Investor A, to start saving. At the same investment rate of $1,200 / year with a 7% market return, Investor Z continues all the way until age 62. Thirty years later, how much has Investor Z accumulated?

Cash In: $36,000

Cash Out: Approximately $113k

Doing The Math

Based on this story, foregoing 10 years of market gains costs Investor Z about $100,000. What if instead Investor Z chooses to save more money due to a late start? To reach $223k in thirty years would require saving $2,360 / year (or $197 / month). That means more cash in: $70,800 ($2,360 x 30 years), instead of $36,000 ($1,200 x 30 years). And to think, time alone could have made that!

While this story demonstrates the value of getting an early start on investing, late bloomers should not be discouraged. If anything, this is a lesson to start investing as soon as possible. The more time goes by, the more you miss out on growing your money. Keep in mind that investments go up and down, so having more time to smooth out the dips also helps. Overall, working with a long time horizon certainly benefits you more than investing over a short time horizon. How would you like to see your money double, triple, or more without adding more money? The key is to start NOW!

Homework: Do the math. Find an online calculator or use one from your financial institution to determine how much you can accumulate if you start investing now. What would it look like if you wait 10 years to start? How much more would you need to save to get the same end result?

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Live Within Your Means

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Do you remember being told “No, you can’t have that” when shopping with Mom or Dad? Or maybe now you’re the parent telling your children “No.” What if instead the children make the call on what to buy and what not to buy? Either that makes shopping a lot easier or a heck of a lot more expensive!

Children don’t get a lot of practice on how to live within their means. That’s because they’re not the ones making the money. But wouldn’t it be better for children to learn at an early age how to spend money wisely? That’s where teaching the skill of prioritization comes in. As adults, we prioritize things every day: at home, at work, and yes, even out shopping. We understand that there is a limit to what we can or can’t do, so we need to decide what matters most, even if it involves sacrificing for the greater good.

The best way to learn about prioritization is to practice. When it comes to money, a budget serves as a useful tool to figure out what’s important. A budget will not mean much to a toddler, so let’s tackle this skill by grade level.

Preschool – Elementary

For young kids, set a limit on shopping purchases. Either using the money that children have set aside for spending or providing them with a stipend, let them choose what item(s) they want to buy. You may want to guide their choices by providing 3 of your own recommendations. However, the only way this works is if they feel that the money belongs to them, so they should make the final decision.

Junior High – High School

Since the teenage years introduce allowance and wages, children can shoulder some of the expenses they incur, like cell phone, gas, or food. This opens up the realm for ongoing expenses and non-tangible expenses which is good practice for adulthood. A simple budget could look something like:

$65 / Month Earned (or $15 / week)

(-) $20 Cell Phone

(-) $20 Savings

(-) $25 Spending

College and Beyond

College brings heavier expenses, so this budget will require ongoing monitoring and possibly revisions along the way. A sample budget might start out:

$1,500 / Month Living Allowance

(-) $1,000 Rent

(-) $200 Food

(-) $150 Car

(-) $100 Spending

(-) $50 Cell Phone

But later get tweaked:

$1,500 / Month Living Allowance

(-) $1,000 Rent

(-) $200 Food

(-) $150 Car

(-) $50 Public Transportation

(-) $150 Spending

(-) $50 Cell Phone

(-) $50 Gym

As we can see from this example, the student prefers to have more spending money than a personal vehicle. Regardless of what was chosen, the student was able to prioritize without going over budget.

Putting Priorities To Work

Keeping expenses low is especially important during this time of financial hardship for many. That is why it is even more timely to bring children into the conversation, so they can gauge their own priorities and figure out how they can aid in the family’s finances. The next time you go shopping, try asking your children, “To buy or not to buy?”

Homework: Give these prioritization exercises a try! How did you / your child do? Were any decisions tougher than others? If you found yourself analyzing the other possibilities, you just learned about opportunity cost!

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