What Did We Learn About Money in 2020?

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

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

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?”

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

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

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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Lessons In Entrepreneurship

This weekend marks a big milestone for Ace Academy: We turned 1! Looking back at the past year, I still can’t believe this idea came to life. I’m not the kind of person who takes big risks or who likes to chart my own path, so starting a new venture is completely foreign to me. But there is no better teacher than experience. Here are some of the lessons I want to share.

  • Have a clear vision. The best thing you can do when starting out your business is to come up with a business plan. What special need are you fulfilling? How will you drive business, and what’s your timeline? Do you have an exit strategy? If any of these questions are unclear to you, take the time to figure out the answers now. Creating a business plan does not just help you. Having details of your business readily available attracts more potential investors and gives future employees a clear direction.
  • Learn to set limits. When you start on a new project, the tendency is to put all of your energy into something because you are trying to prove yourself. This makes it easy to get burned out and may set the stage for little or no work/life balance. By setting boundaries for yourself from the beginning, you are establishing a pattern of working more efficiently.
  • Pursue your passion. Entrepreneurship is not easy. There will be setbacks along the way, things that you don’t know to expect, lots spent with little in return. That is why it is so important to pursue something you love. If you’re not sure you can stick by your idea for the long haul, test the waters while keeping your day job. That’s exactly what Daymond John from ABC’s “Shark Tank” did. He kept waiting tables at Red Lobster as his clothing line started to take off. Just consider it your passion project.

While it’s only been a year, Ace Academy has already reached thousands of views across the globe, including China, Europe, India, and the United States. Thanks for subscribing and following along as we continue to learn and test new ways to explore money. Welcome to a new school year, ace!

Homework: Think of an entrepreneur you admire. How did they get their start? What lessons did they learn along the way? If it were you, what would you keep the same or do differently?

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Happy Birthday, Warren Buffett!

One of the great living legends, Warren Buffett, celebrated his 90th birthday yesterday (August 30, 2020). To most, he is known as one of the richest men in the world, but to me, he is known for being an ordinary gentleman, and his character is far richer than all the money in the world. You see, I have the extraordinary privilege of saying that I have met a few billionaires in my life within the last decade, including the famous Warren Buffett. No picture to prove it, but having spent maybe a total of 60 seconds of my life around him was enough to feed me 60 years of wisdom. Here’s what I learned.

Fancy is overrated. Growing up, I saw some of the wealthiest people drive beat-up cars. Warren reminds me of them. After all, the guy eats McDonald’s and chugs Coca-Cola every day even though he can afford to spend way more on food. The day I met him, he was wearing a sweater and slacks. The next day, when all of his Berkshire executives joined him (yes, I met them too), it seems he requested that they wear the same type of attire to an executive meeting. No business suits. So there they were, a bunch of billionaires sitting at a round table in sweaters and jeans. I love this scene because it reminds me that just because you have a lot of money doesn’t mean you need to show it. In fact, not spending money on flashy things is a good way to stay wealthy.

Be generous with others. Since I worked in hospitality when I met Warren Buffett, I know that he believes in paying tips. I have also met people who don’t tip … at all. And yes, many of those people were rich. What’s the purpose of having money if you don’t use it, especially when it’s warranted? Tips fuel the service industry, and often, service workers rely on tips to compensate for low hourly wages. Sometimes that little bit of tip money can make a huge impact. For someone like Warren Buffett, sharing his wealth in this manner is worthwhile, not only to build a solid reputation, but also to influence others to do the same. 

Everyone deserves respect. Remember the scene in Pretty Woman where Julia Roberts gets treated with disgust by the boutique store associate in Beverly Hills because she is not wearing expensive clothes? That store should take a lesson from Warren Buffett. When Warren arrived, there were several people trailing him. I thought for sure, he’s going to ask one of them to take care of logistics, but lucky for me, I was wrong. Warren personally came up to me. We exchanged greetings and shook hands before I sent him on his way. Such a brief interaction, but a lasting impression. The mere fact that he took the time to interact with a commoner like me is something that sticks with me to this day. And the interaction was humble, no air of attitude. It doesn’t take a lot of money to treat others with respect. Who knows? That person may write about you one day! 

While Warren Buffett is known for his financial savvy, the lessons that I learned from my interaction with him had little or nothing to do with making money and had more to do with being a quality human being. It’s a good reminder that money can’t buy a good personality, nor can it erase a bad one. That’s the richest lesson of all. 

Warren, if you’re reading this: Happy Birthday, and may our paths cross again in the future, hopefully for longer than 60 seconds this time!

Homework: Which important figures do you admire for their financial savvy? What money lessons have they taught you? Feel free to share in the comments below.

Summer Break: Ace Academy is taking a short break, but will be back in late-September, just in time to celebrate our one-year anniversary! Subscribe below to get articles delivered right to your inbox.

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Credit Reports: Annual Check-Up Time!

What do you call an annual health check-up for your credit? A credit report! If you have ever used a credit card in your name or borrowed a loan from a financial institution, you have credit history. Your credit history shows whether you can be trusted with borrowing money and paying it back.

Your credit history gets filed at three bureaus: Equifax, Experian, and TransUnion. Whenever you apply for a new loan or credit card, the company that is offering the loan or credit card will check your credit with one, two, or all three bureaus. That is why you need to make sure your credit history is accurate. How do you check your credit history? Through a credit report!

Every twelve months, you are entitled to request your credit report at no charge from each bureau. Notice I said each bureau. You can request all three bureaus at the same time or you can view each report at different times in the year. If you are about to get a new loan, such as a mortgage, you may want to check all three before you apply. But if you are just doing a routine check-up, you could request one bureau first, the next one in four months, and the last one in another four months. It’s almost like getting three reports each year!

What are some of the things to check on your credit report?

  • Payment History. Does the report show that you made payments late, even though you were on-time? Paying on-time will tell future lenders if you are dependable when paying back borrowed money.
  • Available Credit. How high is your credit limit, and are the amounts of current balances listed properly? Contrary to popular belief, having too much credit, even if not being used, is a bad thing because it makes borrowing any more money a risk factor. From the lender’s perspective, there might come a day when you max out all your credit cards and then can’t pay them back.
  • Accounts. Are all the accounts listed correctly? Have you closed unnecessary accounts that you no longer use? Nowadays with identity theft and stolen credit cards, it’s of utmost importance to review your credit report carefully. If anything appears incorrect, contact the credit reporting bureaus.

Credit reports sometimes get confused with credit scores. A credit score is generated from your credit history, but acts more like a quick rating. A credit report goes into greater detail about your credit activity. Compare it to a friend asking what score you got on a test versus going over the actual test questions and mark-ups. Although the credit score is not typically noted on your credit report, some credit card companies are now offering free access to credit score monitoring as an added benefit for cardholders.

Why the need for three credit bureaus instead of one? There are times when your information doesn’t get captured by one of the credit bureaus. Each bureau also weighs certain types of credit differently, so your credit score could alter slightly from one bureau to the next. Regardless, it’s a good way to check one against the other, instead of getting all of your information from one source.

Just as you visit the doctor for an annual check-up, do your finances a favor by getting a copy of your credit report. It’s free!

Homework: Request and review your credit report by visiting www.annualcreditreport.com. How would you rate your own creditworthiness?

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