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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The Road To Recovery

Everyone tells you to “Save, Save, Save,” but no one talks about what happens if you can’t save or you found yourself in a pinch and spent all your savings. Are you doomed for a life of poverty? Not necessarily.

When I worked in finance, there was a common theme in every situation I met. All of my financial clients wanted something they didn’t have, and all of them had to work towards it. Whether they had savings or didn’t have savings or even worse, had debt and no savings, there was always a solution. Is it possible to fix financial mistakes? Yes! And one more glimmer of hope: It gets easier along the way.

When it comes to people and their money, the most difficult hurdle to overcome is erasing a deeply ingrained mindset. Like the lavish lifestyle they lead. Or the age they think they can retire. Or their way of buying things and then figuring how to pay for them afterwards. But if they take the right steps to alter course, something interesting happens. As they get closer to their goals by doing things differently, they don’t remember how they did things before. That’s exactly what happened with my clients. That lavish lifestyle of the past? Who cares when you have food and shelter? Retiring at 58 vs. 55? Beats having to think about going back to work at 70. Can’t afford to buy an extra handbag when you have 3 others? Big deal! Those were the responses when I reminded them of where they had come from.

If others can do it, you can too. When faced with one of these hurdles, here is how you can get on the right track.

Living Large. Do you find it hard to save on a monthly basis? Then your answer is to downsize! Cut expenses you don’t need, and lead a more modest lifestyle. For instance, go with a smaller home. Take public transit or opt for a used car. Give yourself a budget for dining out. No matter if you earn $30,000 or $100,000 a year, everyone can afford to save. Don’t just take it from me. Look at how Suze Orman reacts to a millennial who spends $720 a month on a car when she makes $80,000 a year. At least she makes her own coffee.

Retirement Loan Vs. Withdrawal. Normally taking out retirement savings before retirement is a big no-no, but when faced with financial hardship, there might not be a lot of choices. If a retirement loan is allowed, that is the better option compared to a withdrawal, assuming you can pay back the loan later. You will lose out on the opportunity for market gains that you could have seen with that retirement money, but you don’t have to wash away your hard-earned savings. With either a loan or withdrawal, not staying invested will likely carry some impact to retirement. This may mean delaying retirement age or adjusting what life looks like in retirement. Since the rules have changed with the CARES Act of 2020, consult a financial or tax professional before taking a loan or withdrawal from your retirement.

Credit Card Debt. One of the hardest money challenges to get out of is credit card debt. It’s a vicious cycle. Just when you’re done paying one thing, something else strikes and you’re stuck with a new debt. It’s tempting, too, since you’ve done it once, what’s borrowing again? To get out of the cycle, you need to understand the root cause for debt. Where are you spending your money that it’s landing you in debt? If you’re spending more than you make, then you need to draft a budget and stick to it. Freeze or cut your credit card in half and instead use a cash allowance for everything on your budget. If you’re living within your means but still encounter debt, was it the result of an unanticipated expense? Chances are that your emergency fund is too low or that you don’t have one. Rather than putting all available income towards paying off debt, set aside a portion to bulking up your emergency fund. That way, if another unexpected event occurs, you have cash to pay for it, not your credit card.

With a change in perspective and a lot of work and discipline, you can turn around any money situation. Financial challenges can happen, but remember, there is hope!

Homework: What did you take away from watching Suze Orman’s video commentary? Name some of the good and bad financial choices reflected in the video. How can you apply these lessons to your life?

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So You Got A Stimulus, Now What?

By now, most Americans have received a boost in the form of a stimulus, in this case, free money from the federal government to combat financial woes stemming from coronavirus. Now that you have money you didn’t have before, what do you do with it?

The most likely option is to spend it, as intended, to stimulate the economy. However, now is not really the time for an impulse purchase, so spending it on practical things like rent or food makes the most sense. If you are one of the 40 million filing for unemployment, spending your stimulus on basic needs becomes a clear-cut choice.

The next option is to save it, that is, if you have sufficient income to meet existing financial obligations. For those with an ample emergency fund and no need to dip into it, it might be time to invest more money towards your long-term goals. If you don’t already have a comfortable rainy day fund set aside, then add that stimulus cash to your rainy day fund.

For those not needing to rely on stimulus money, consider sharing it with others or donating to a cause you believe in. Perhaps it’s the mom-and-pop store you frequented before quarantine or the religious institution where you now join weekly service through Zoom or a non-profit organization that is suddenly without as many donors as before. No matter who you give to, your support not only provides for them, but it also lifts the economy as a whole.

Share, Save, Spend. Sound familiar? These are the 3 financial pillars we frequently talk about. You don’t have to choose just one either. You could use that stimulus money in two ways or all three! For those who did not receive a stimulus check or received less than the full amount, that’s ok. The 3 S’s still apply to you too, even though you have to rely on your own pocketbook.

While a stimulus provides a nice boost, the key is to not depend on having one. That way, if and when you get a stimulus, you have choices!

Homework: Do some research to find out what Americans did with their stimulus. Does this match your predictions?

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Spare Change

In the modern day of cashless transactions, cash still remains a popular mode of payment. According to the US Federal Reserve in 2019, cash ranks as one of the top two payment methods, used in 26% of transactions, just behind debit cards (28% of transactions). For children who don’t have a bank account yet, cash probably accounts for 100% of transactions. If cash is used so often, counting money is important for everyone, whether spending money or receiving money.

Take the following QUIZ to see how your children do when handling cash:

  • Do they know how to limit spending to what’s on hand? (i.e. Can $15 cash buy a $20 toy?)
  • If they get change back from a purchase, can they quickly verify that they received the right amount?
  • Working the cash register, can they count money quickly to make sure that the customer paid correctly?
  • If there are no dollar bills but a lot of quarters available, can they produce the right amount of change?

If your children need to brush up on these skills, or if they are just starting to learn about cash, below are several ideas that might help.

Ages 3-6: Sort change by denomination. Use clear containers/jars or an empty egg carton to separate pennies, nickels, dimes, and quarters (or your own country’s currency, for international readers). Or whenever you have spare change, give them a coin and ask for the name of the coin and amount, letting them keep whatever they identify correctly.

Ages 5-9: Ever heard of the muffin tin coin counting game? Write small amounts onto paper cupcake liners (for instance, $1.10 on one liner, 88-cents on another liner, 63-cents on another liner, etc). Pop the liners into a muffin tin, and then provide a bunch of loose change for the children to fill each liner with the correct amount in change.

Ages 9-12: Now that multiplication and decimal numbers have been introduced, learn to add tax and/or tip. Looking at a menu, what can you order with $15, assuming you account for tax and tip? If you pay with $20, tally the change due using bills and coins. Take a handful of past store receipts, and calculate how much change you get back if you paid with the closest denomination of 10 (such as paying $30 for a receipt totaling $25.79).

What children can comprehend about cash depends on their age, but starting early will empower them to make their own decisions around money. When children become adept at counting cash, they can mentally tally against their budget when shopping or dining out. Keeping to a budget allows them to live within their means and save for the future. That’s why understanding cash is so important to becoming financially independent!

Homework: Try one of the activities above. For older kids who want an extra challenge, work with parents to decide on a spending limit the next time you dine-out or order food delivery. After everyone else in the family has selected from the menu, choose your own item(s) from the menu that will allow the total after tax/tip to remain under the limit.

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The Download On Deals

What does “saving money” mean? Setting aside money for the long term is typically how we define savings, but another important discipline for building wealth is finding savings when we spend money. When you pay less than full price, you are saving money. One transaction may not seem like much savings, but many transactions together add up to big savings.

Spotting deals can take some work. Fortunately, with some practice, it becomes easier. Here are tips to help you become a better spender, and by that, I mean a better saver.

  1. Read the fine print. Often, sales and coupons have exclusions, so make sure you read the fine print ahead of time.
  2. Have a plan. Just like writing out a grocery shopping list, circling items in the weekly ad or compiling all coupons before starting to shop will allow you to capture every deal.
  3. Stack those deals. One of the best feelings you get from shopping is when you stack a coupon on top of a sale. Qualify for a rebate afterwards, and rise up to the ranks of a pro shopper!
  4. Choose an alternate. If you’re not crazy about the brand name product, you can get more for your money with generic. Or go with a substitute, like buying groceries that are in season instead of ones that are not.
  5. Be patient. Sometimes the things you want are not available at a lower price right away, but you know the price will come down in time. If you can go without that item for a little longer, wait.

Although getting the best deal requires some effort, the satisfaction you get is worth it. Once you’ve had some practice, being a smart shopper will become second nature!

Homework: Set a spending limit to buy all the groceries you need this week. Involve kids by giving them $10 to purchase some of the necessary categories on your list. For example, if fruit is one of the categories, they can choose whichever fruit(s) will last one week. Challenge them to get as much leftover change as possible on the entire purchase.

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Needs Vs. Wants

This week’s lesson is a short one, but a very important one: Needs Vs. Wants. Everyone has both things they want and things they need. But when faced with spending a finite amount of money, needs come first.

Learning about needs and wants starts at a young age. The good news is that you can learn the difference without spending any money at all. Use everyday situations to guide your decisions. For instance, what will you eat for dinner? Instead of choosing only dessert, which you may want, pick an item from each food group you need: grains, proteins, and vegetables. Another example could be how you choose to spend your time. Are you doing necessary chores and homework or playing games or watching TV instead? We have needs and wants in everyday life. Knowing the difference and putting needs first will come in handy when it comes to spending money wisely.

Homework: Take inventory around the house or at a store, and identify which items are needs and which items are wants. If the difference between both is still confusing, there are many helpful kids’ videos on “Needs Vs. Wants.”

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“Playing” With Cash

With all the cashless ways to use money in this day and age, it’s difficult to show kids the value of a dollar. Substitutes just aren’t the same. Do you sense the same satisfaction from earning an extra $500 when it is deposited directly to your account instead of visiting the bank with a paycheck? Would you buy that $20 sweater if you only had $15 in your wallet vs. pulling out a credit card? When a friend pays back via Venmo for a coffee that you bought with your parents’ money, do you still return the money to your parents?

The old adage is true:

It’s never too early to teach kids about money.

Before children enter the world of direct deposit, credit cards, and Venmo, get them acquainted with cash. What do bills and coins look like, how do you make change, how do you get money, and what choices do you have with money? If your children are still too young to do math, play a game of “pretend” with them. Run through the following exercises with just $1 dollar. Wouldn’t you rather have children learn with $1 dollar than make mistakes when dealing with much more money later on? Exactly. Start NOW!

Exercise 1: From Earning to Spending

Ask your children to create an ad for a product or chore task that you can buy for $1 dollar. Pay $1 dollar once the product or service is sold, and then ask them to spend that $1 dollar on themselves, whether it be for food or a toy. Challenge them to spend $1 dollar on something they need (like lunch), not something they want (like candy). Maybe they can find a way to get both?

Exercise 2: Saving Money

Give 50-cents to your children, and ask them to hold onto the money for a week. Tell them that you will double whatever remains at the end of the week. Each day that week, tempt them with a treat, such as ice cream, and charge 5-cents for it. If they can hold onto the entire 50-cents for a whole week, you will match all 50-cents, so that they are rewarded with $1 whole dollar at the end of the week. If they are tempted into spending down to the last 15-cents, you match 15-cents, so they end up with only 30-cents.

Exercise 3: Borrowing Money

This exercise is easier with an allowance, so let’s play out that scenario first. As the creditor, you offer to lend 90-cents, if your children deduct 25-cents from each allowance payment for the next 4 payments (totals $1 dollar to demonstrate interest charged on the 90-cent loan). Do they take the loan?

If there is no allowance to repay from, opting into the loan means your children agree to do one extra household chore every week for 4 weeks. If that chore is missed in any of the 4 weeks, the “credit score” takes a hit, which means no more loans. Was the loan worth it?

Homework: Try one or all of the exercises above. What lessons did you learn?

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Allowance

April marks National Financial Literacy Month in the US, so why not take this time to learn (and teach) about money? It can be difficult to understand money at a young age because children cannot make money through employment like adults do. By the time children reach an age where they can work for money, they have already witnessed many financial transactions and have pre-determined values and practices around money. There is a void between when children form money habits and when they can start to earn money of their own. That is the case for an allowance — to fill in this gap.

Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance.

Just like money doesn’t come free for adults, children should “work” for their allowance, doing things like household chores or achieving good grades. Once children are old enough to start helping around the house (usually by age 3), it’s time to consider an allowance. Other than money that is gifted and the occasional lemonade stand (or passion project), an allowance gives children money of their own to manage.

Deciding on all the rules around an allowance requires some planning ahead. Here are some questions to think about.

  • Does the amount change every year based on bills or obligations that the child assumes, such as a cell phone, or school lunch, or gas? Or does allowance simply increase by a pre-determined amount each year?
  • What frequency makes the most sense — weekly, bi-weekly, monthly?
  • Would it be easier for you and your child to handle allowance in cash or through direct deposit or cashless transfer (Venmo, Zelle, etc.)?
  • What situations warrant a partial or zero allowance?
  • Does paying allowance rely on task completion? If so, how do you measure and monitor on an ongoing basis?

Ideally, the requirements are the same for each child and do not stray from the plan over time, but you can certainly make exceptions if financial circumstances change. Pay reductions and unemployment happen in real life, so the allowance may have to be lowered or paused at times. On the flip side, when times are good, consider adding a bonus for a job well done or starting a matching contribution when certain savings milestones are met. An allowance should teach about both the good and bad times.

If you’re puzzled on where to begin with an allowance, stick to this simple plan. Base the amount of allowance on the age of the child, and pay on a weekly basis. For a child who is 3, the allowance would be $3 per week. For a teenager who is 15, allowance is $15 per week. This continues until your child starts working or graduates from high school, whichever comes first. Lean towards paying allowance in cash, so that your child can hold the true fruits of their labor.

Once an allowance is in place, then all the other lessons about money become easier to learn. A good first lesson is Share, Save, Spend. From there, help children understand taxes by automatically deducting a household tax. Instead of paying $4 per week, the household tax reduces allowance to $3 per week. Set up an auto-savings for one-third (1/3) of the allowance to deposit directly into a bank account for long-term savings. If children need to borrow money, ask them to come up with a payment plan, and reduce allowance by the amount of the payment plan accordingly. These are the lessons that will mentally prepare children for a future of managing their own money.

Happy Financial Literacy Month!

Homework: There’s no such thing as free money! Before starting an allowance or making the next allowance payment, parents and children can collaborate together on a chores chart or achievement chart to earn that allowance.

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The Rhyme And Reason For A Roth IRA

Rap Ode To Roth IRA

Here's the thing about Roth IRAs.
Pay taxes now, no delays.
You won't owe any more while your investments grow.
Once you're ready to retire, it's ALL your money to sow!
Add contributions up to the annual max, 
Then pick the investment(s), and see how it stacks!
Don't touch the money before age 59 1/2,
'Cuz taking earnings early costs a penalty and tax.
Don't wait! Start a Roth soon as you can,
Earn that compound interest -- That is the plan! 

The topic of retirement savings is especially pertinent right now for two reasons: either people are considering tapping into retirement savings as cash runs short or on the opposite end, they are looking to invest more money while market prices are low. One type of retirement savings account, the Roth IRA, caters to both. Let’s dive deeper into both scenarios.

Roth IRA – Taking Money Out

Contributions to a Roth IRA can be withdrawn with no penalty and no tax at any time, as they were taxed once already. This is one retirement savings vehicle that offers more withdrawal flexibility than others. However, earnings, or how much your money grows, are subject to both tax and a penalty if taken before age 59 1/2. There are some exceptions to this rule, but a Roth IRA is largely meant to be used for retirement savings.

In response to financial hardships caused by COVID-19, the CARES Act changed a few rules this year. For those in financial need, the early withdrawal penalty on Roth IRA earnings is waived for 2020, and distributions up to $100,000 are allowed before age 59 1/2. These distributions of earnings are considered income and will be taxed as such, but there is the option to spread the tax burden over 3 years or pay back the “loan” within 3 years to avoid paying taxes. Before you withdraw from your Roth IRA, carefully consider what this means for your retirement. In addition, taking money out of any investments could mean selling at a loss. Consult your financial advisor and tax advisor if you are contemplating a withdrawal of retirement savings.

Roth IRA – Adding Money In

For those in a position to invest right now, adding money to a Roth IRA (up to the max) not only takes advantage of stock market lows, but also yields more tax savings down the road if you expect to be in a higher tax bracket in the future. The Roth IRA works especially well when investments have a long time horizon for growth because you get to keep every penny gained without sharing a cut of the profits with taxes.

An attractive option this year may be a Roth conversion, which converts an existing IRA to a Roth IRA by paying taxes on the amount converted. If your income is lower this year than most years, you may fall in a lower tax bracket and therefore, pay less tax on that Roth conversion than you normally would. Furthermore, as a result of the market downturn, your investments may be worth less than previously, so less taxes would be owed. It’s a good idea to check with a financial advisor and tax advisor before making these financial decisions.

Making The Right Choice

No matter the impact that COVID-19 has on our financial lives, savings are still important. In fact, times like these make us realize that having savings gives us one more safety net when falling on hard times. So regardless of whether you are saving for retirement or saving for a rainy day, the point is to remember to SAVE!

Homework: Pay tax now or pay tax later? One reason to choose a Roth IRA (pay tax now) vs. traditional IRA (pay tax later) is if you believe your tax rate will be higher when you withdraw the money. Use the following math problem to understand the difference.

Say you earn $5,000 this year that you pay 20% tax, or $1,000, and you decide to contribute the remaining $4,000 to a Roth IRA. You add no more money to that investment, and it averages 6% annual growth over the next 36 years — How much will your total investment be? (Hint: Use the Rule of 72 to get $32,000 for the Roth IRA.) Assume instead that you defer paying tax until withdrawal by investing the full $5,000 in a traditional IRA– How much will your total investment be after 36 years of 6% annual growth? ($40,000.) After 36 years, if your tax rate is 20%, your total investment will net the same amount in either the Roth IRA ($32,000) or traditional IRA ($32,000) after taxes. If your tax rate decreases to 15% after 36 years, the traditional IRA ($34,000) nets more than the Roth IRA ($32,000). If your tax rate increases to 25% after 36 years, the traditional IRA loses ($30,000), and the Roth IRA wins ($32,000).

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Back To Basics

As a result of the financial turmoil caused by COVID-19, there is a lot of confusion about what is the best thing to do with your money? Let’s face it. Watching a paycheck disappear or get reduced is scary. And seeing investments bounce up and down daily can be unsettling. During uncertain times like these, it’s important to keep to the basics.

Just as you use a compass to navigate through a storm, use the following basic principles to point you in the right direction.

  • Focus on your rainy day fund. Although you might need to lean into your emergency fund right now, that doesn’t mean squandering it away. Try to preserve cash as best you can, and use a budget to identify where you can reduce expenses. You may already notice your discretionary spending has gone down with shopping malls closed and social outings cancelled, but challenge yourself to find extra ways to cut costs. If you are still receiving a paycheck, devote more cash to your reserves. Getting a tax refund? Put it in your cash reserve. Expecting a stimulus check? Put it in your cash reserve. When you can keep a steady 3- to 6-month emergency fund (amount depending on your level of comfort), then you can shift focus towards other financial goals.
  • Don’t sell your investments in a panic. Despite the stock market taking a bumpy ride, now is not the time to sell all your investments. Doing so could lead to significant losses that you may not recover once the market rebounds. A 401(k) loan or IRA loan may sound tempting, but taking money out of your retirement accounts could mean selling investments at a loss. Keep that in mind when weighing this option.
  • Avoid debt if you have cash. More options have become available to delay bills, like mortgage and rent payments. Be careful to examine what this means for your financial future. Simply put, these are loans, which means they must be paid back someday. Are you certain you can pay back the balance by the imposed deadline? What if, in the post-coronavirus world, wages are lower, and income doesn’t cover regular monthly bills along with what’s owed? For these reasons, it’s best to consider borrowing as a last resort, when all other cash is depleted.
  • If you have money to invest, dollar-cost average. For those who have a comfortable rainy day fund set aside and have spare cash outside of those reserves, you may be wondering what to do with your spare cash? Assuming that you’re not tapping into that emergency fund, there is no need to hoard more cash than you already have. Now that stocks have dipped to lower prices, it’s a great time to buy shares at a discount. But instead of timing the market, divide that investment over a period of time, otherwise known as dollar-cost averaging. As long as you keep a long-term outlook, chances are pretty good that you’ll come out ahead.

Navigating through a financial rough patch may seem complex, but doesn’t have to be with these basic principles in mind. As we go back to normal, these principles shouldn’t go away. Saving for a rainy day fund is always a good idea, as is keeping a long-term outlook on investments and avoiding the cycle of debt. Stick to the basics, and your money will stick with you!

Homework: To emphasize the importance of a rainy day fund and maintaining a comfortable amount, try this game with a deck of playing cards. How does your number do?

How To Play: Once the cards are shuffled, remove half the deck, and place the other half face down. You will draw from this half. Start with a number between 0 and 60; a multiple of 10 works best. As you draw a red card, subtract the number on that card from your original number. As you draw a black card, you have 2 choices: add that number or toss it. For example, drawing a red card with 6 means subtracting 6, and drawing a black card with 5 means adding 5, or 0, depending on how you decide. Royal cards and aces equal 10. If your deck includes jokers, add 10 when you draw a joker, regardless of red or black card. If your number ever dips below zero, game over. If you successfully finish through the half-deck, what number is left?

In this game, each card symbolizes money. The original number and ongoing tally is your rainy day fund. Red cards symbolize unforeseen expenses. Black cards represent income, which you can either save (add) or spend (toss). Joker cards can represent a rare windfall, such as stimulus money. Finding the right number for your “rainy day fund” and maintaining that number is key to winning the game!

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Money Lessons At Home

Now that everyone is home due to Coronavirus COVID-19, it’s a great chance to spend that quality time together brushing up on subjects that school may not focus on, like learning about money! Here are some suggested activities that can make learning about money FUN!! Some ideas come from personal experience, but I found neat ideas from others too, so click through the links to learn more. And of course, there is one more fun activity you can do on family game night — Monopoly! Happy studying, ACE!

Activities (Sorted By Grade Level)

  • Preschool – Kindergarten
    • Share, Save, Spend – Review the purpose of each bucket before beginning. Give play money (or real coins), one bill/coin at a time, for your child to place in 1 of 3 buckets. At the end, count the money in each bucket. Was the total amount distributed evenly?
    • Compound Interest In MarshmallowsThe Marshmallow Game is all about delayed gratification and the rewards that come with it. If your child likes something better than marshmallows, use that treat.
  • Grades 1 – 6
    • Mini Society – Find goods around the house to buy and sell to each other. This exercise teaches negotiation, pricing, supply and demand, entrepreneurship. You set the rules in this market!
    • Heads Up! Money Style – Ellen Degeneres’ popular cell phone game, Heads Up!, may not have a category for finance/money, but that shouldn’t stop you from making one. Write money phrases or words on index cards, and then place all the cards on a table, with the words facing down. The words can be simple, like “credit card,” or a little tougher, like “401(k).” Now let the guessing begin! Do your kids understand each financial concept?
  • Grades 7 – 9
    • Get A Job! – Parents should post chores around the house as jobs for hire. Children can practice writing a resume and then interviewing for the part. Parents can either pay real wages or reward with TV/tablet time. This mom actually held a job fair for her kids!
    • Stock Market Investor – Starting with a hypothetical investment of $10,000, pick 10 stocks for your portfolio. Track the investments over a year, and see how they perform. Just because it is fake money, don’t make decisions that you wouldn’t normally make! Get to really know your risk tolerance and investment style.
  • Grades 10 – 12
    • Beans for BudgetsThis activity is brilliant and works for college kids too! It’s better with small groups, but it can still work on an individual. You start with 20 beans that you decide where to “spend” them on. Occasionally something happens that causes you to re-think where you put your money!
    • Decoding Documents – It’s time to get acquainted with what bills and paychecks look like. Take a handful of real statements — paystub, investment, credit card — and learn what each line means. Are you ready to graduate from the school of personal finance?

Homework: What other activities help to learn about money? Contribute your ideas in the comments!

Spring Break: Ace Academy will skip the next two weeks’ lessons and be back in session during the first full week of April. Stay safe and healthy!

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Target Date Funds

Set it, and forget it!

– Ron Popeil
(Infomercial King,
Founder of Ronco)

If you are watching your savings go up and down in the stock market with a queasy stomach, you’re not alone. The natural human reaction when this is happening is to take all your investments and cash out. But that’s exactly what fuels a downturn in the stock market, a mass sell-off when too many people cash out at the same time. Panicked investors are actually selling low, instead of selling high when the market is doing great. How do you avoid this gut reaction to follow the herd?

If you’re the type of investor who gets nervous during stock market drops, you would benefit from something called target date funds. To understand target date funds, we first need to understand mutual funds. A mutual fund, which can be shortened to a single word – fund – is a bundle of investments purchased altogether. This bundle may contain only one type of investment, like a stock fund or a blend of types, like stocks, bonds, commodities, etc. The bundle might even be comprised of multiple funds, in short, a fund of funds.

To visualize this, say you are at a farmer’s market, and you buy some carrots, celery, and lettuce. Those veggies bundled altogether are like a mutual fund. Now let’s bundle another set: corn, cucumber, and zucchini. That’s another mutual fund. Bundle the two veggie sets together, and you have a fund of funds. A huge benefit to using mutual funds is the diversification it offers in one investment. With the veggies we bought, you can make veggie soup on a rainy day or salad on a sunny day. Mutual funds offer the same variety, so that you have some investments that perform better than others at different times. They also cost less bundled together than purchasing each investment by itself.

When you select a mutual fund, you automatically accept all the investments bundled within. There is no hand-picking like you do with individual stocks or bonds. A mutual fund has one or more mutual fund managers who pick for you. It’s almost like enlisting someone to do your farmer’s market shopping for you. At times, the fund manager(s) may decide to change some investments inside a mutual fund, like switching one stock to another. This is much like picking strawberries over watermelon, based on what’s in season.

As you can guess, this carries a cost, known as the expense ratio. It is not a dollar amount, but rather a percentage (%). So if the fund averages a 10% return that year, and the fund’s expense ratio is 1%, you see a 9% return on your money. If the fund loses money, that same expense ratio still applies. Try to find an actively managed fund with a low expense ratio (around 1% or less), and you’ll still be better off than trying to match the time and expertise of a fund manager when picking investments on your own.

Now let’s get into target date funds. A target date fund is also a mutual fund, in which the investments within change from aggressive (more stocks) to conservative (more bonds/cash) as you near a specified target year. As an example, Fidelity Freedom 2055 Fund currently contains 93% stocks and 7% bonds, whereas Fidelity Freedom 2020 Fund contains 54% stocks and 46% bonds. Why switch from more stocks to less stocks? The idea is to get more return by taking on more risk when you have many years before you plan to take money out of the fund. As you get closer to your target year, being more conservative allows you to withdraw money without worrying about swings in the market and without suffering big losses when it’s time to cash out.

Although you have many choices where to invest your money, a target date fund is a simple choice that gives you the sophistication of investing in many areas while not needing to check your portfolio every minute of every day. Think of it like auto-pilot. You buy just one target date fund, which is already diversified with many investments inside, and stick with the same investment until you need to use the money. This is the ultimate investment choice for someone who wants to, as Ron Popeil put it, “Set it, and forget it!”

Homework: Are you a target date fund or an a la carte kind of investor? Where could a target date fund work well for you?

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ABC’s of Health Insurance: From HMO to PPO

With the spotlight on coronavirus, medical care and the means to pay for medical care become ever important. Just one visit to the doctor averages $200-$600, and hospitalizations cost anywhere in the tens to hundreds of thousands of dollars! Most people do not have that kind of money laying around, and even if you do, would you want to spend it all on medical bills? Health insurance allows you to pay only a fraction of the cost of medical care, while the insurance company pays the rest. Like any other insurance, you pay on a regular basis for the insurance, no matter if you are sick or healthy. But in the event that you require medical attention, the cost of care won’t become a huge burden to your finances.

The case for having health insurance can be a topic of debate, with some countries mandating universal health care through public funding and taxes and others leaving the decision up to the individual. Given the cost of medical care nowadays, the case for having health insurance seems like an easy choice. What’s not so easy is deciphering the language of health insurance, especially when deciding which insurance plan to choose. Use the glossary below to help you “talk the talk” of health insurance!

Glossary

  • Coinsurance: The percentage (%) you owe for medical services. If your coinsurance is 20%, you pay $50 of that $250 medical bill (or 20% x $250).
  • Copay: The fee per doctor visit. A $25 copay for an office visit means you only pay $25 for the visit, instead of the full rate. Some insurance plans use a copay for urgent care visits and ER visits too.
  • Deductible: The amount you pay before insurance benefits kick in. For example, if you have a $1,000 deductible along with 20% coinsurance on a medical procedure that costs $5,000, you pay a total of $1,800 = $1,000 deductible + $800 coinsurance ($4,000 remaining x 20% coinsurance). Ever hear of high-deductible health plans (HDHP)? That means the deductible is higher than normal, usually starting in the thousands of dollars.
  • EPO: Exclusive Provider Organization, or EPO, is a type of health insurance plan that restricts all medical benefits to network providers and hospitals. Any care sought outside of the network will not be covered.
  • HMO: Health Maintenance Organization is another type of health insurance plan that adds more restrictions, but offers lower medical costs like little or no deductible and lower coinsurance. The main difference between an HMO plan and EPO/PPO plan is that the HMO typically requires a referral from your primary doctor to see anyone else for a medical problem. In an effort to keep costs low, it is rare that you will ever be referred out-of-network, so when choosing an HMO, make sure you are comfortable with the network of providers and hospitals.
  • HSA: Health Spending Account, or HSA, allows you to save money from your paycheck to be used solely for medical expenses (cannot be used for premiums). The benefit to using an HSA vs. paying from your own pocket is that money saved in an HSA never gets taxed. For instance, if your income tax is 13%, only $1 of every $1.15 earned goes in your pocket. Fifteen cents ($0.15) goes to taxes. Putting that money in an HSA means you get to keep the entire $1.15, but only spend it on health care.
  • In-Network: These are the preferred providers for your insurance plan. In-network providers and hospitals charge a lower copay or coinsurance than out-of-network options. With HMO and EPO plans, your benefits may not even extend beyond in-network providers, so seeking care outside of the preferred provider directory would mean paying for medical expenses on your own.
  • Out-Of-Network: Health insurance companies require you to pay more to see out-of-network doctors and hospitals. In the case of HMO or EPO, you will likely pay the full rate to seek out-of-network care, since no insurance benefits apply.
  • Out-Of-Pocket Max: Once you spend the out-of-pocket maximum for the year, the insurance will take over all expenses beyond that limit. Let’s say your out-of-pocket max is $3,000 in a given year, once you have paid $3,000 in medical expenses that year, the insurance will pay any remaining or future medical expenses for the year.
  • PCP: Primary Care Physicians, or PCP, are the doctors who provide general care like conducting annual physicals or treating common colds. They refer you to other doctors, or specialists, when the medical issue is beyond their scope. HMO plans usually require selecting a PCP, so all care must either be performed by or referred by the PCP.
  • PPO: Preferred Provider Organization, or PPO, is a type of health insurance plan that allows you to see any provider you choose, no referral necessary. It costs less to see in-network doctors compared to out-of-network doctors, but you have freedom of choice. This choice comes at a higher cost to you, which becomes noticeable in the deductible or coinsurance. If the PPO plan carries a low deductible or low copay and coinsurance amounts, you will likely pay a higher premium for that plan.
  • Premiums: The premium is what you pay on a regular basis for health insurance. If your employer offers health insurance, they usually pay a significant portion of the premium, and you are left with a smaller chunk of the premium. That is why when people leave or lose their jobs and elect to keep the health insurance plan (otherwise known as COBRA), they notice a spike in insurance premiums. The insurance company is not charging more. It’s just the combined cost of paying both employee and employer premiums.

Homework: What type of health insurance do you have? HMO, EPO, or PPO? Become familiar with the deductible, copay and coinsurance. How does the plan suit your needs?

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Diversification

Ever hear the saying, “Don’t put all your eggs in one basket?” Just like eggs, your money is fragile. If the basket drops or breaks, you’re out of luck. That is why you need diversification. Essentially, diversification means spreading your money (eggs) into more than one investment (basket). This way, if one of your investments loses money, at least you have other investments.

What “baskets” can you choose from? First, you need to decide on a type of investment for each basket. The types of investments can be exhausting and some types even offer derivatives, so let’s just keep it high-level: cash, stocks, bonds, real estate. We previously covered these types of investments in the lesson on Compound Interest. So many choices! With diversification, you don’t have to choose just one, in fact, you should spread your money across them all.

“Baskets” are not to be confused with accounts. You can have one account with many investments inside. For example, your retirement account may have a blend of stocks, bonds, and other investments.

There’s more to diversification than deciding what type of investment to place your money in. Diversification extends to the sector you’re investing in as well. Let’s use stocks, which carry a lot of variety. You could invest in telecommunications, medicine, entertainment, finance, and the list goes on. So instead of choosing just one sector, invest your money in different sectors to allow for the best outcome if one or more of your sectors hits a rough patch.

If you are an employee of a publicly traded company on the stock market, your company might give the option to purchase company stock at a discount or they may offer company stock as one of the choices for investing within the 401(k) plan or you can simply choose to invest in the stock in your own brokerage account. It’s tempting because it’s an easy choice. Be very careful when choosing to put money into company stock. While it’s fine to invest in the company you work for, after all it’s a show of pride and support for your work, you don’t want to place a lot of “stock” in one place (couldn’t help the pun!). Think of it this way. What if the company takes a tumble on the stock market and as a result, lays off a bunch of employees, including you? Now you’ve lost both your salary and savings, if you invested your savings in company stock. So again, while it’s ok to invest in your company, limit your investments there, and remember to diversify!

Diversification is a timeless strategy that you can use for investing, but it becomes particularly useful when markets are taking a dip. That is because you may see a lot of your investments lose money, but if you diversify, some investments may trend the other direction, up. It’s important to diversify your investments across as many possible areas, so that you can brave the roller coaster of investing like a pro!

Homework: Choose 3 stocks from different sectors to follow over the course of one week. How did they perform compared to each other? If they all lost money, expand your stock selection to 10 stocks the following week. Was there one sector that did better than the others?

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America Saves Week: February 24-29, 2020

Next week marks an annual campaign that started in 2007 and continues this year 2020: America Saves Week. Even if you do not live in the United States, it’s a neat way to keep savings top of mind. Each day — February 24 to February 29 — is a new savings focus. And the great thing is, we already covered the topics in past lessons! Next week is a great time to refresh your understanding and act on your knowledge! Here is the focus for each day of America Saves Week and links to past lessons that match the daily focus.

Monday, February 24: Save Automatically

Tuesday, February 25: Save with a Plan

Wednesday, February 26: Save for the Unexpected

Thursday, February 27: Save to Retire

Friday, February 28: Save by Reducing Debt

Saturday, February 29: Save as a Family

One of the best ways you can embrace this challenge is to set a simple savings goal. Baby steps are easier to achieve and when done over a period of time, add up to BIG savings. For instance, increase your retirement 401(k) savings by 1%. Or ask your family to skip one day of buying coffee each week and put that money towards a savings goal. Add an extra $20 each month to your rainy day fund. Whatever you decide to do, be proud that you are taking a huge step by making savings a priority!

Learn more about America Saves Week by visiting https://americasavesweek.org/

Homework: There is one day missing from America Saves Week — Sunday. What savings tagline would you give that day? What simple savings goal did you come up with?

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Paying For College: Ways To Save

Last week, we examined how decisions play an important role in paying for college. This week, we look at ways to pay for college. While parents usually assume the responsibility of funding their kids’ education, kids can also be involved in saving for their own education. Let’s look at the ways to save and pay for college.

529 Plan

One of the most popular ways to save for college is through a 529 plan. Named after Section 529 of the IRS tax code, you guessed it! There are tax benefits to saving in this type of account. The main tax benefits are that your savings grow tax-deferred, and your withdrawals are tax-free if used for qualified education expenses. Depending on the state you live in, contributions to the 529 plan may be deductible for state tax purposes, but are not tax-deductible on federal taxes. Not all states offer a 529 plan, but you can still open a 529 plan offered by another state. Keep in mind that a 529 plan is like the flower pot we reference time and time again. You choose the “seed” investments that go in the account, so you can gain or lose money, depending on how your investments perform. We’ll take a deeper dive into the 529 plan in the future, but there is a good introduction provided by the U.S. Securities and Exchange Commission.

Prepaid Tuition Plans

We won’t spend much time on Prepaid Tuition Plans because only a few states offer this option. If you live in a state that offers this option, the plan allows you to buy future credits at today’s tuition prices. As an example, if one course credit costs $1,000 today, but doubles to $2,000 by the time you go to college, you essentially got a 50% discount on education. Think of it as locking in tuition at today’s prices. The downside to this plan is that you are pretty much stuck with choosing a participating in-state college. Although your state’s Prepaid Tuition Plan may offer some portability to other in-state and out-of-state colleges, the penalties and reduced benefits of choosing non-participating colleges make other savings options more viable.

Non-Qualified Account

If you want the most freedom and flexibility, then a non-qualified account will be your best choice for college savings. This can be through a bank savings account or a brokerage account (which allows for investments beyond cash). Like a 529 plan, your savings can go up or down, based on what you invest in. Unlike a 529 plan, your earnings don’t receive any tax benefits, so taxes take a bigger chunk out of savings. However, you can use the money however you choose, even if it’s not for college. The previous options are not as forgiving when withdrawing money for other non-education expenses, charging an extra 10% withdrawal penalty, in addition to taxes on withdrawals.

Financial Aid

We mentioned last week that scholarships are worth a try, since they are essentially free money that does not have to be paid back. Grants are also free money, but not everyone qualifies for grants because they are based on a family’s financial need. Another need-based option is work-study, where students are given a part-time job to earn money while attending school. Finally, if there is not enough money to pay for college upfront, you can borrow money in the form of student loans. While you are required to pay back the money with interest, the interest rates on student loans are relatively low compared to other types of loans, and you usually have a grace period after graduation before repayment begins. Both parents and children need to be involved when it comes to financial aid – scholarships, grants, work-study and loans. The other options begin years in advance, sometimes as early as birth, so parents typically shoulder the responsibility of saving. On the other hand, financial aid planning happens the year before college, so children have reached an age where they can and should be involved in financial decisions.

As a reminder, college decisions are just as important as saving for college. That’s why both parents and children need to be educated (excuse the pun!) when it comes to paying for college!

Homework: Students, test your business skills by giving parents a presentation on 3 different colleges and how you would pay for each one. Whatever format you use to present, be prepared for Q&A at the end!

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Paying For College: Decisions, Decisions

At a recent speaking event, I was asked by a concerned parent, “How do I prepare financially for my kids to go to college?” As important a role as parents have in funding college, the kids have an equal if not greater role in the cost of college education. That is because the kids are the ones applying to schools and deciding where they apply and ultimately where they attend. This question inspired me to answer with a two-part post on Paying For College, with this post intended for future college students and the next post intended for parents or whoever will be paying for college.

Kids have a lot to consider when deciding where to attend college. Let’s weigh the financial impact of those decisions.

State school or private school? When we hear names of private universities like Harvard or Stanford, we all know they come with a hefty price tag. Based on those two colleges, $50,000 a year seems to be the going rate as an undergrad. Is it worth paying all that money to go to them? Maybe. But if you can’t readily afford $50,000 a year, will you be earning enough money after college to pay back your student loans? Do you even want student loans to eat a portion of your paycheck after college? US News & World Report calculated in-state tuition to be 73% less than private colleges. Imagine your favorite gadget or clothes at 73% off. That’s a hard deal to pass up! If your heart is still set on being an Ivy League grad, perhaps it’s worth considering a transfer after you have attended a year or two at a state college. Just remember, there is more than one path you can take.

Live at home vs. dorm/apartment? Another reason to consider an in-state college is to save on living costs. Living away from home can be pretty expensive. Not only do you have the cost of boarding, but you also have to think about food, laundry, dorm/apartment goods and travel to/from home. These are conveniences you didn’t have to worry about when you were in high school. Are you moving your car with you to college? That’s another bundle of expenses, from gas to parking. Living costs are probably as big a decision as college tuition itself.

To work or not to work? In addition to studying and partying, you will probably end up working during college. How else do you afford your college lifestyle? While a job teaches valuable lessons and can propel your future career, it can detract from your time and attention. Keep this in mind before you choose a college with a price tag that requires you to work. On the opposite end of the spectrum, there is the option to take a year off to gather working experience and build savings before continuing education. Some employers even offer to pay for a portion or all of your education expenses. Only you know what options are right for you, but the point is — you have options.

Scholarships and financial aid? Just like you apply for colleges, you can also apply for financial aid. Don’t be afraid to try for scholarships and financial assistance. You’re already filling out forms and writing essays for college applications. What’s another application? You might need some help from a parent to fill-out financial aid forms, but otherwise, this falls in your ballpark. You have to make the effort to apply!

These are some important considerations that not only impact your college decision, but also impact the rest of your life. So even if you’re not the one paying for college, your decisions matter!

Homework: Time to do some research! How much is tuition at colleges you like? What would your living situation be, and how much would it cost?

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Insurance: The Safety Net

What sad news this week with passing of legend Kobe Bryant. Then we hear about all the deaths from the new coronavirus. If you haven’t already, take time to cherish your loved ones. Life is precious.

Events like this make us stop and think: What would happen if something devastating occurred to you or one of your family members? How do you keep up with living expenses? Would you be able to keep your home? Your car? These are all valid concerns, but they don’t have to be concerns at all — with the help of insurance.

You work so hard to build all this wealth, but what’s your safety net to protect it? Especially if you’re still dependent on a paycheck (or Mom’s & Dad’s paychecks), what would you have to give up if you lost that income? Luckily, insurance allows us to buy a safety net for everything we depend on or value, at a fraction of the cost.

There are many types of insurance, but they fall in three main categories, followed by some examples:

  • Family – Life, Travel, Pet
  • Self – Medical, Dental, Vision, Disability Income, Long-Term Care
  • Assets – Homeowners/Renters, Auto/Car, Umbrella

We’ll eventually take a deeper dive into the different examples, but the point is to consider what you need to protect, and make sure you have insurance to cover it. Best case scenario, you never have to use it. But you’ll have peace of mind, knowing that you are taking care of what you love and who you love.

Homework: Take some time to list everything that is important to you, and don’t forget your family members! Do you or does your family have insurance to cover all of the things you value? How does your family protect itself in the event of losing a source of income?

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Do You Need A Rainy Day Fund?

Rainy day fund. Emergency fund. Cash reserve. Call it what you prefer, but the important thing is to have one. What is a rainy day fund? It’s money set aside to weather unexpected “storms” in your life. For instance, did your car break down, and you need money for a repair? Lost your job and need money to survive until you find another job? Have a big medical expense that came out of the blue? When you suddenly need money, you’ll be thankful that you have a rainy day fund.

To build your own rainy day fund, you need to save towards it. Make it one of your savings goals, just like any other big purchase you wish to make. As you accumulate money in your rainy day fund, you may decide to cap it after a certain amount. If you earn steady income, you may find that an amount equivalent to 3 months’ expenses is a sufficient target goal for your rainy day fund. If your income fluctuates from month to month, you may feel more comfortable with covering up to 6 months of expenses through your rainy day fund. Some people choose to continue saving towards their rainy day fund even after they reach a comfortable amount. That way, if they ever need to break into the rainy day fund, they already built in a way to replenish what was spent.

Young savers probably don’t have a reason to save for a rainy day fund. After all, Mom or Dad is the rainy day fund. Kids can break from this mentality by having something to be responsible for. What is a possible sudden expense that can hit? Maybe it’s a vet bill for your pet. Or perhaps a replacement for a broken cell phone. It might even be new cleats for soccer. If kids are given the responsibility, they will more likely build a habit of saving for that rainy day fund.

Why make a rainy day fund a savings priority? Let’s play out the scenario without a rainy day fund. You could tap into savings for other goals to pay for this expense. But that means giving up or delaying those other goals. Some goals, like college or retirement, don’t have much room to postpone. If no savings exists, you would need to borrow money. Borrowing money requires that you pay back the loan, with additional interest, and that payback eats away at the money you earn. Not to mention if another unexpected expense occurs, even more money goes into paying debt. To prevent debt from taking control, put that rainy day fund first!

Regardless of what other financial goals you have, a rainy day fund should be at the top of your list. If it suddenly rained, wouldn’t you rather have an umbrella? That is exactly how a rainy day fund works!

Homework: What is the right amount for your rainy day fund? If you do not have one already, how much can you devote from monthly savings to build your rainy day fund?

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The Case For Non-Qualified Accounts

If you have money in an account, chances are that you have at least one non-qualified account. What does it mean to be “non-qualified?” Don’t let the name fool you into thinking it’s a bad thing. Being non-qualified simply refers to “not qualifying” for any tax benefits. Any money you place into a non-qualified account has already been taxed, and any growth on your money is taxed too. While there are no tax advantages, there are good reasons to use non-qualified accounts.

Because non-qualified accounts do not receive tax benefits, there is no limit to how much you can place in these accounts. You also have the freedom to withdraw money as you please, when you please. On the other hand, qualified accounts, such as 401(k) plans or IRAs or 529 Plans, trade tax advantages for restrictions.

There are many non-qualified accounts, but the most common ones are checking or savings accounts at the bank. If you prefer to invest your money, you can use a non-qualified brokerage account to place all your investments (i.e. stocks, bonds, mutual funds). These are just a few examples of non-qualified accounts.

When it comes to qualified vs. non-qualified accounts, it really depends on how you plan to use that money in order to decide which account is right for you. If you need flexibility to withdraw money at any time, non-qualified accounts offer that flexibility. If you have time to allow your money to grow tax-deferred, then a qualified account might be more appropriate. Neither is good nor bad, and you can even use both at the same time!

Homework: Non-Qualified or Qualified? Take a look at your own accounts, and determine which is which. If you have non-qualified accounts, does it make sense for your money to stay in those accounts? What about your qualified accounts?

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The Secret To Smart Investing

The old adage “Buy Low, Sell High” works great … if you have a crystal ball for every investment you make. In reality, no one can predict with absolute certainty the best time to buy or sell an investment. How do you know that a stock is at its lowest price when you buy? How can you tell that a stock price won’t climb higher after you sell? Stop stressing over things you cannot control. That is why you should remove one word from your investment vocabulary: timing.

Now replace that word with something else: dollar-cost averaging.

Dollar-cost averaging is a method of investing the same amount of money on a consistent basis, so that your overall price tag ends up an average rather than the highest point or the lowest point on the scale. Why does this work in your favor? Because you are investing the same amount of money each time, you’re buying more shares when the price is low. That’s smart! You managed to scoop up a good deal. And when the investment price goes up? You naturally buy less shares with the same amount of money.

Think of it like your favorite pair of pants. When they’re on sale, maybe you buy more than one pair. But when they go back to retail price, you stick to just buying one pair. The difference between investing and buying clothes is that with investments, nothing will advertise that they are on sale. That’s where dollar-cost averaging helps you out. This method automatically buys more at a low price.

How do you get started? Chances are if you have a 401(k), you’re already dollar-cost averaging. That is because you already apply the same amount on a regular basis to an investment. But you can do the same without a 401(k). If you have a sum of money, rather than investing it all at one time, consider dollar-cost averaging instead. Let’s use a sample stock purchase to illustrate this strategy.

Dollar-Cost Averaging Example

Investment Amount: $300 per month

Shares of Stock Purchased:

  • January @ $10 / share = 30 shares
    • Average price @ $10.00 / share ($300 paid for 30 shares)
  • February @ $15 / share = 20 shares
    • Average price @ $12.00 / share ($600 paid for 50 shares)
  • March @ $20 / share = 15 shares
    • Average price @ $13.85 / share ($900 paid for 65 shares)
  • April @ $16 / share = 18.75 shares
    • Average price @ $14.33 / share ($1,200 paid for 83.75 shares)
  • May @ $15 / share = 20 shares
    • Average price @ $14.46 / share ($1,500 paid for 103.75 shares)
  • June @ $20 / share = 15 shares
    • Average price @ $15.16 / share ($1,800 paid for 118.75 shares)

Remember when we talked about timing? Can you predict what the price of the stock will be next? You can try to guess, but would you bet all your money on it? Now you understand why timing the market is not such a great idea.

As you notice in the example, the actual price of the stock took a bumpy ride, sometimes jumping $5 up or down between months. But thanks to dollar-cost averaging, you enjoyed a much smoother ride, with the biggest swing being a $2 difference in average price between January and February. Most people cannot pay every second of attention to investing, let alone stomach the bumpy ride. Dollar-cost averaging makes for a much smoother ride. If you were on a roller coaster, wouldn’t you want one with smooth turns, rather than jagged cliffs? That is why smart investors choose dollar-cost averaging!

Homework: Make dollar-cost averaging a new year’s resolution, whether it be through a 401(k) or an investment account. Consider tracking the average price paid per share every month for the next 6 months to see how dollar-cost averaging works.

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The Silent Partner: Cash Flow

Last week we learned that building net worth is a top goal for your personal finances. How do you accumulate net worth? Since net worth relies on assets, the key to growing net worth is to grow assets. Assets like investments help because they grow in value, but what if your investments take a downturn? Then the only way to grow your assets is to add more money. For that reason and to make investment purchases to begin with, you need cash flow. What is cash flow?

Cash Flow = Income (-) Expenses

Income

Income accounts for all money coming in, hence “in” “come.” This could be anything from working wages to monetary gifts to investment growth (take bank interest, for example).

Expenses

Expenses take money out of your wallet. If you need to pay for it, and it does not go back in your wallet, then it’s an expense. Rent, groceries, shopping, pet care are just a few examples. If you calculate cash flow on a monthly basis, remember to include any annual income (such as a bonus) and annual expenses as a monthly amount.

Cash Flow Sample Calculation

Monthly Income ($3,200):

  • $3,200 Paycheck (gross or before taxes and deductions)

Monthly Expenses ($2,800):

  • $1,500 Rent
  • $ 500 Taxes
  • $ 200 Car Loan Payments
  • $ 200 Groceries
  • $ 150 Health Care Insurance and Medical Costs
  • $ 150 Auto (Gas, Maintenance, Vehicle Registration)
  • $ 100 Personal Spending

Monthly Cash Flow = Income (-) Expenses = $3,200-$2,800 = $400

Positive or Negative?

As with net worth, the key to cash flow is to stay positive! Limit expenses to no more than your income in order to live within your means. Not living within your means will require borrowing money, which ends up costing more (sometimes much more) than the paid price. And paying back debt eats away at your income too. So if you encounter negative cash flow, consider lowering expenses or increasing income to get to a positive cash flow.

For those with positive cash flow, the remaining amount is probably used for savings, right? But are there enough savings to reach your goals? Rather than looking at cash flow as available savings, consider subtracting savings along with necessary expenses, and then treat what’s leftover as your spending allowance. Here’s a better equation to follow:

Discretionary Spending = Income (-) Savings (-) Necessary Expenses

Net worth combined with cash flow are a great starting point if you’re figuring out where you stand financially. Anyone can be a financial ace with a bit of math and some money!

Homework: Calculate your cash flow. Is there anything you need to adjust? How are you doing on savings and expenses?

Winter Break: Ace Academy will skip the next two weeks’ lessons and be back in session during the first full week of January. Happy Holidays to all!

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Your Financial Score

How do you determine how well you are doing financially? There are many money “scores” out there, including credit rating (a.k.a. FICO score) or financial independence score. But the best way to get a baseline score and track how well you are doing year after year is to calculate your net worth.

Net Worth = Assets (-) Liabilities

Assets

What comprises assets? These are the things you own that you can assign value. For instance, how much can you sell your house for today? How much would someone pay to buy your car? How much do you have in savings accounts? These are all considered assets because they add value.

Liabilities

Liabilities account for any debts owed. For instance, if you sold a home with a mortgage, would you be able to capture all the money from the sale? No. A mortgage is borrowed money that you have to pay back. The amount you earn is what remains after the mortgage debt is paid off. Therefore, in this case, the mortgage is a liability, since it takes away value from what you own. And liabilities don’t only apply to tangible items, like homes or cars. Student loans and credit card debt count as liabilities too.

Net Worth Sample Calculation

Assets ($480,000):

  • $400,000 House
  • $ 40,000 Car
  • $ 40,000 Savings Accounts

Liabilities ($230,000):

  • $200,000 Mortgage
  • $ 20,000 Car Loan
  • $ 10,000 Student Loans

Net Worth = Assets (-) Liabilities = $480,000-$230,000 = $250,000

Keep Score

Now that you have a starting number for net worth, repeat the same calculation with updated numbers next year, and the next year, and so on. This will be your very own financial scorecard. And net worth should follow the same rules as any game. Stay positive and keep it up!

Tune in next week to learn about cash flow and how it relates to net worth. Or subscribe below to automatically receive weekly lessons in your inbox!

Homework: What is your net worth? Jot down all your assets and liabilities, and see what number you come up with!

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Buying A Home: What Is In A Mortgage?

Are you considering buying a home someday? Unless you have all the cash to buy that home outright, chances are you will end up borrowing some money. A mortgage is a loan specifically used to purchase a home. Consider it the middle man if you are not buying the home with 100% cash. The mortgage company pays the cash for the home, and you pay back the borrowed money along with interest to the mortgage company over time. You become mortgage-free once you pay off the full loan or when you sell the home and return what is owed to the mortgage company.

Zillow data from 2016 revealed that 42% of US homeowners are mortgage-free, meaning the majority of Americans still rely on mortgages to pay for their homes. If that majority includes you, it’s a good idea to get acquainted with some mortgage key terms.

Mortgage Key Terms

  • Down Payment. Why bother with saving money when you can just borrow the money to purchase a home? In most cases, you will still be asked to put a portion down at time of purchase, known as a down payment, to show the mortgage company that you are serious about the purchase. If a borrower tries to flee and dodge payback responsibilities, at least the mortgage company can minimize losses through the down payment they received. The amount required for a down payment can vary with different qualifying programs, typically ranging anywhere between 5%-20% of the home purchase price.
  • Interest Rate. The downside to choosing a mortgage over cash is that you pay more for the house in the long run, due to interest that you must pay on top of the principal loan amount. However, interest rates on mortgages tend to be lower than other loans, such as credit cards. Depending on IRS rules, mortgage interest may even be tax-deductible, so you might be paying less interest than you think. Rates are subject to change, so consider locking the interest rate when you are approved for a loan. The type of loan can be a fixed rate mortgage or adjustable rate mortgage, or ARM for short. If you don’t want to risk the possibility of increased interest on your loan, a fixed rate mortgage will allow you to keep the same interest rate for the life of the loan. If you believe interest rates could decrease, so that you pay less interest during the life of your loan, you would opt for an ARM.
  • PMI. PMI stands for private mortgage insurance and applies to mortgages with less than 20% down payment. This pays for the mortgage company’s insurance in the event that a borrower becomes delinquent on payments, and the mortgage company is left with a debt to pay. If you have PMI because your down payment was less than 20%, not to fret. You can call your mortgage company to eliminate PMI once you reach 20% equity on your home. Equity is how much of the home you own.
  • Mortgage Term. The term on your mortgage is how many years you are expected to pay back the mortgage company until you return 100% of the loan. The most common terms are 15 years or 30 years.
  • Impound Account. Mortgage companies allow borrowers to bundle their property tax and homeowner’s insurance payments into the monthly mortgage payments. It’s entirely your choice whether or not to use an impound account, and there is no interest charged for doing so. Property tax and homeowner’s insurance bills typically hit once or twice a year. For many people, it’s easier to have the money collect in a fund to pay for these bills, rather than keeping track on their own how much to save throughout the year, so that they can afford to pay a big chunk once or twice a year.
  • Foreclosure. This is a worst case scenario, in which a borrower cannot keep up with mortgage payments, and the borrower loses the home to the mortgage company. Unlike credit cards, which allow the borrower to pay a portion of the total charges each month, a mortgage payment must be paid in full and on-time each month.
  • Refinance. If you already have a mortgage, but want to change the term or want to pull money out of home equity or interest rates are lower, you might consider a refinance. This just means you are changing one or more factors on the loan.

A mortgage will factor in the principal loan amount, interest rate and mortgage term to dictate a monthly payment. Most mortgage companies will only qualify borrowers who can prove that the mortgage payment is 35% or less of their income. Your credit score, or trustworthiness, also plays a factor in how much you are qualified to borrow.

Although they are not to be taken lightly, mortgages help many live their dreams of becoming homeowners. Sometimes mortgages allow people to afford homes that make money when the homes are sold. Other times, mortgages allow people to pay off their homes and never make another payment to live there. Whatever the reason, a mortgage can be a great tool to reach those dreams!

Homework: Use an online mortgage calculator to view sample monthly payments by entering a home purchase amount, down payment, interest rate, and term. If you (or your parents) have an existing mortgage, examine the mortgage statement. Is it time for a refinance?

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The 411 On 401(k) Plans

Savings accounts come in many forms, and one of the most popular in the US is the 401(k) plan. It’s essentially a piggy bank that you should not crack open until after age 59 1/2, close to retirement age for most of the workforce which is why it is often viewed as a retirement savings account. To make matters more confusing, it’s named after a tax code, hence a bunch of numbers in the name: 401(k). How it works is quite simple by learning a few fundamentals. And if you work for a non-profit or government agency, most of the following will be true for you too, except instead of a 401(k), you call it a 403(b).

Understanding a 401(k) plan starts with learning how to use it and how not to abuse it. Using it requires being employed by a company that offers a 401(k) plan. This account belongs to you, and you keep it if you leave the employer. A 401(k) relies on a defined contribution, a percentage of your salary (%) that will automatically go from earnings into your 401(k). In many cases, employers will offer a 401(k) match for contributing to the 401(k) plan. You decide how much to contribute, and your employer matches that amount, up to a limit dictated by your employer. So your employer is actually paying you more money than you thought! Isn’t it neat to get an extra $50 or $100 or $200 per month? Just remember though, you have to contribute to the 401(k) in order for the employer to match.

Why use a 401(k) vs. saving at the bank? The difference with a 401(k) is taxation. Money going into the 401(k) is pre-tax, and any growth on that money is tax-deferred. What does that mean? Taxes take a share of any money you make, so as an example, earning $100 really means earning $85, based on a 15% tax rate. However, in a 401(k), that $100 equals $100 going in. If that $100 grows to $150 this year, you keep that $150 in the account, as opposed to taxes taking $7.50 away ($50 growth x 15% tax = $7.50). Keep in mind that this example only illustrates $100. Imagine what this means for $10,000 or $100,000. Now before you go putting all of your paycheck into a 401(k), there is a limit on how much you can contribute each year, set by IRS tax regulations. This year (2019), the limit is $19,000 for the year, with the ability to contribute more if age 50 or older, known as catch-up contributions.

Notice I said that money in your 401(k) is tax-deferred, not tax-free. In a 401(k), taxes take their share when you withdraw money, at your normal tax rate. But the important thing is that your money had more potential to grow because taxes did not eat away at every cent along the way. Thus, the 401(k) is known as a tax-advantaged account, a special type of savings account.

How does growth happen in a 401(k)? Through investing! Often people confuse a 401(k) with the stock market. True, you can place stocks in your 401(k), but stocks are not the only type of investment you can have. Going back to a former lesson when we talked about planting seeds, the 401(k) is just a flower pot, and you get to decide which investments, or seeds, to grow inside. Most employers limit your investment choices to a few, so that you are not overwhelmed by the options.

A 401(k) is not always used as a retirement savings account. Let’s discuss some possible pitfalls with the 401(k). Try to avoid the following:

  • Early Withdrawals. If you withdraw money from your 401(k) before you turn age 59 1/2, you not only pay the taxes owed, but you also get penalized an extra 10% on your withdrawal. That diminishes your earning power.
  • 401(k) Loans. Some 401(k) plans allow you to take a loan. But borrowing from a 401(k) means you lose out on the time that your investments could be growing. Time is something you cannot buy back.
  • Not Capturing Full 401(k) Match. Although you could argue that any contribution to the 401(k) is still savings, not capturing the full employer match is a loss for you. To view it from another angle, if your employer let you choose between $50 more or $100 more per month, and neither option required you to work more, wouldn’t you choose the $100? That’s the same as capturing full 401(k) match!

There you have it! The 401(k). It may seem like a lot to absorb, but just think of the flower pot, and you are well on your way to being an ace at the 401(k)!

Homework: Take a look at your 401(k). Are you capturing full 401(k) match from your employer? Parents can start kids young with a savings match! Learn more by clicking here.

Ace Academy will skip next week’s lesson in observation of Thanksgiving holiday and resume the following week. I also want to take this moment to thank you for reading!

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Credit Card FAQs

Whether you already have a credit card or are thinking about getting one, it’s time to get acquainted. Here’s what you should know.

What is a credit card?

A credit card allows you to borrow money to make purchases and then pay back later. How much you can borrow is based on your credit, or your trustworthiness to pay back the money. There is also a time limit to pay back the money before interest starts to multiply on the original amount borrowed.

Why use credit cards?

Credit cards carry several advantages:

  • Use credit cards in place of cash, which can be bulky in your wallet.
  • Build and maintain credit history. Mortgages and other loans will often check how well you handled past payments. Did you pay on-time?
  • Earn perks like travel miles or shopping points, and sometimes even cash back, with certain credit cards.

What are some key costs of using a credit card?

  • Finance Charges – Do you carry a balance on the credit card after it is due? Then you owe interest on the borrowed money, otherwise known as finance charges. These get calculated as an annual percentage rate, or APR. If you pay in full each month, you have no finance charges.
  • Late Fee – Don’t pay your credit card on-time? There’s a fee for that.
  • Balance Transfer Fee – Trying to move other debt to your credit card, so that you can capture a lower interest rate? Doing so incurs a balance transfer fee, usually a percentage of the amount to be transferred.
  • Annual Fee – Some credit cards carry such good perks or low finance charges that it costs you money to use them. Using these types of credit cards is wise only if the perks outweigh the annual fees.

As you can see, most of these costs don’t apply if you pay your credit card in full each month. Thus, it is actually possible for the cost of using credit cards to be zero!

How does credit card debt happen, and how do I avoid it?

As long as you pay off your credit card in full every time and on-time, you won’t fall into debt. In fact, it should be the only way to use credit cards. Unfortunately, credit card companies give the option to pay a minimum amount, typically 1%-2% of the total credit card balance. Paying the minimum causes the remaining balance to rack up interest, adding to the cost of what was originally borrowed.

To illustrate the real cost of carrying a balance on a credit card, let’s use this example. Say you buy a bike for $100 on a credit card with 18% APR (annual percentage rate). $100 x 18% = $18. You actually pay $18 more dollars on that bike if you let that debt sit for a year. If the credit card company calculates on a monthly or daily basis, and most do, that bike will cost even more. Much like compound interest on investments, debt multiplies itself over time. Avoid debt altogether by buying only what you can afford and paying off the balance in full each month.

Parents can introduce credit cards using a 3-step approach. 1) Start with gift cards. What’s great about gift cards is that you can only spend what you have and nothing more, but you are required to spend in only one place. Nowadays there is the option to get gift cards to use wherever credit cards are accepted. 2) Get a debit card to allow for spending anywhere, keeping within the limits of what is available. A debit card requires an attached bank account to pull funds from, so you will need to set one up if you want children to access their own money. 3) Graduate to the credit card! Only keep the credit card if every statement is paid in full.

Credit cards: Good or Bad?

Only you can decide whether credit cards are good or bad for you. If you can commit to paying off your credit card in full each month, there really is no disadvantage to keeping or getting one. Choose what’s right for you!

Tune in next week to learn about the 401(k) plan. Is it a type of investment? Is it a savings account? Subscribe below to automatically receive weekly lessons in your inbox!

Homework: Know what credit cards are charging you. Become familiar with the costs before getting a credit card, and choose the right one. If you already have a credit card, is it the best one for you?

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Compound Interest

In addition to the seven natural wonders of the world, Albert Einstein believed in an eighth wonder of the world: Compound Interest. What is compound interest? In a nutshell, it’s money making money.

How does one unlock the door to compound interest? Through investing. The easiest way to understand investing is to think of a plant. Start with a seed (investment), and the plant will eventually sprout branches. Some branches will have leaves (interest), but others will sprout new branches, which yield more leaves (more interest). Sure, there may be setbacks, but if your plant thrives, your little seed has grown into something much larger. Imagine if you could do the same with money? You can! That is the power of compound interest. Branches growing more branches.

Time plays an important factor in investing. Just like plants need time to grow, your money needs time to grow interest and then more time for that interest to compound into more interest. The earlier you invest, the more your money can grow on its own. To calculate what time can do for your money, use the Rule of 72.

Rule of 72: Divide 72 by the (%) interest rate you earn, and the answer is how many years it will take for your initial investment to double. For example, if you earn 8% interest on a $1,000 investment, 72 divided by 8 equals 9. Without adding any more money, that $1,000 investment will double to $2,000 in 9 years.

When it comes to investing, your choices vary widely, but they boil down to a few basic types.

Cash

Believe it or not, cash is a type of investment because it has the potential to earn interest. Some common cash investments are money market accounts or certificates of deposit (CD). Although cash tends to be the least likely investment to lose money, it does not typically yield a lot of interest. But for short-term needs, also known as liquidity, this is a good choice to earn a little bit along the way.

Bonds

Have you ever borrowed money and needed to pay interest when you returned the money? When you invest in a bond, you are loaning your money to others, and after some time, they pay back your initial loan with interest. There are many types of bonds you can invest in, so the interest rates and chances of getting your money back fluctuate depending on who you are loaning the money to.

Stocks

Buying stock is essentially owning a part of a company, hence you buy “shares” of that company. A stock earns money when the company is viewed favorably by investors and loses value when the company is viewed negatively. Stocks have vast potential to grow, but also come with the risk of losing money. Much like plants weather different seasons, stocks can take a bumpy ride. This is why stocks should be seen as long-term investments, so that your money is given a chance to ride out any volatility. You may have also heard of investments called mutual funds, index funds, ETFs, options. These are simply variations of investing in stocks and sometimes bonds.

Real Estate

Ever wonder why most people say buying a home is better than renting? It’s because buying a home gives you the opportunity to earn money when you sell the home, assuming the home grows in value. To invest in real estate, do you have to buy a house? No. You can actually invest in real estate companies through real estate investment trusts (REIT) or even buy shares of publicly traded real estate companies on the stock market.

Tying It All Together

When thinking about what to do with your savings, you will most likely take more than one approach to investing. You may even have investments not listed above. The key is to plant those seeds, and then witness the wonder of compound interest!

Tune in next week as we explore credit cards. Good thing or bad thing? Subscribe below to automatically receive weekly lessons in your inbox!

Homework: Do your research! Choose 5 of your favorite companies or brands that are publicly traded on the stock market, and follow their stocks for the next month (or longer). If you initially invested $10,000, how much did you earn?

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Balancing A Checkbook

Ever wonder why the amount left on your account is called a “balance?” That’s because you should get that same number after you “balance” your checkbook.

Like budgeting, all it takes to balance a checkbook is addition and subtraction. However, budgeting and balancing serve different purposes. Budgeting is about looking ahead, whereas balancing is about looking back.

Nowadays with all the available money tracking tools, most people don’t bother to balance their checkbooks. However, I strongly encourage you to add this exercise to your monthly routine, so you can monitor how well you are doing against your budget. Are you spending what you originally planned? Do you need to make tweaks to your ongoing budget?

Let’s Begin!

Let’s use the following example to illustrate how to balance your checkbook. Feel free to substitute your own numbers.

Start with $2,000 in your bank account at the beginning of the month.

Add (+) $3,000 in earned income.

Subtract (-) $1,000 for rent.

Subtract (-) $200 for utilities.

Subtract (-) $200 for transportation.

Subtract (-) $100 for Internet / phone bills.

Subtract (-) $1,000 for purchases related to food and miscellaneous shopping.

After doing the math above, we are left with $2,500. This number should match the remaining balance on the bank account at the end of the month.

There you have it! Now you are an *ace* at balancing your checkbook!

Homework: Balance your checkbook for last month. Did your actual spending match your budget?

What is the eighth wonder of the world? Tune in next week for the answer! Or subscribe below to automatically receive weekly lessons in your inbox!

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Budgeting 101

A budget is just a fancy way of saying a “plan for your money.” Anyone receiving money on a regular basis, whether it be allowance or salary, should have a budget. This tells you exactly where your money goes, so that you only spend what you have. It’s easy to start a budget, but will take some discipline to stick to the plan!

Money Out = Money In

With just a bit of addition and subtraction, you can create a budget. Add all the money coming in, and then subtract every expense line-by-line. Once everything is subtracted, did you get zero? If you get a zero, that means your money is perfectly balanced between what you spend and what you make. If you get more than zero, you can afford to spend more or add more to savings. If you end up with a negative number, you either need to earn more money or lower some expenses.

Share and Save First. Then Spend.

A budget works best when you account for the 3 S’s in the following order: Share, Save, Spend. Treat money you share and money you save as expenses that get subtracted … first. This will get you in the habit of recognizing what you can afford to spend.

Should Credit Card Spending Be Its Own Expense?

The quick answer is NO. Credit cards should not be considered its own expense category on a budget. Since purchases placed on credit cards reflect specific expense categories, the purchases belong in their rightful categories. Say you used a credit card to buy clothes for $20. That $20 gets categorized as “Clothing” or “Shopping.” The exception to this rule is if you are paying off existing credit card debt, you should include an expense line for “Debt Payoff.” We’ll talk more about credit cards in the future.

Monthly vs. Annually

A budget, or plan, works best when you can follow it. Most salaries and bills come on a monthly basis, so I recommend creating a monthly budget, in order to follow along more easily. Just remember to divide any income or expenses that happen once a year into a monthly amount. For example, car registration tabs get renewed annually, so divide the expense by 12 to account for them each month. You may also consider taking the sum of your electric bill over 12 months and listing an average amount each month because costs vary during the winter vs. summer months.

You Did It!

You just created a budget! Stay within your limits when spending in each category. Update the budget with any new changes, and monitor your progress at least once a year. Remember, a budget is only as good as you make it, so be honest with yourself!

Homework: Get started on your own budget! Parents can involve children by working on the family budget together. Did everything balance out to zero at the end?

Now that you are an ace at budgeting, are you ready to balance a checkbook? Tune in next week to learn more! Or subscribe below to automatically receive weekly lessons in your inbox!

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5 Steps To Smarter Spending

Spending money. Let’s face it. We love to spend money, but we don’t love to talk about our spending decisions. Have you ever been in a store when a child asks, “Can we buy that toy?” and then hear a long, detailed response on all the reasons to buy or not buy the toy? Probably not. Instead, we hear a quick response like “maybe” or “nope.”

That conversation is actually a great opportunity to educate children about money. Ask them the questions: What do you need to do to get that toy? Would you rather spend money on a toy instead of eating dinner that week? What else could you buy with your money? Make them aware of the decisions they face when spending money. They will come to appreciate what they have and not spring for every shiny new thing just because they have money.

What might help is to talk through these 5 Steps to Smarter Spending. If shopping on your own, go through the steps as a thinking exercise.

  1. Set a limit. How did you come up with that number? Spending money is fine, but only if it’s within your means.
  2. Trace your money. What did you have to do to earn that money? Understand the value of what you are spending.
  3. Weigh your options. Where else can you spend that money? Don’t forget to factor in basics like food or shelter.
  4. Compare prices. Read my post “What Is The Right Price?” to learn more.
  5. Let go. Every financial coach seems to say, “Don’t spend money!” But I’m here to tell you that spending money is ok. Let me repeat. SPENDING MONEY IS OK! We make money so we can use it. Just be smart about it!

Homework: Practice the 5 steps to smarter spending using a food menu. Bon appetit!

Tune in next week as we tackle budgeting. What is a budget? How do I begin? Or subscribe below to automatically receive weekly lessons in your inbox!

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A Life Of Sharing

You make a living by what you get;

You make a life by what you give.

– Winston Churchill*

I spent the past two lessons on saving money, but now let’s talk about sharing money. In my opinion, of the 3 S’s – Share, Save, Spend – sharing comes first. Why? Because your saving and spending habits depend on how you view sharing.

You’re probably thinking, sharing has nothing in common with the other two. Saving and spending are self-serving, whereas sharing is about others. But let’s examine that for a moment. The money you save eventually gets spent, and who do you give that money to when you spend it? To others. In fact, you could argue that the end goal of all money is to be shared with others.

Can you think of all the ways that your money gets shared? Let’s look at a few.

Charity

Charity donations and/or church tithes are a great way to develop a habit of sharing. Not only do you make a difference for others by giving, but you also feel good about it. Practice sharing first by automatically setting aside a portion to give away each time you receive money.

Taxes

Even though it’s called “paying” taxes, you are actually “sharing” taxes with everyone, including yourself. Tax dollars fuel essential parts of our society. Police, firefighters, roads, and schools name a few. Taxes get a negative reputation because they lower our earnings, money that we feel belonged to us already, when in fact, we should take the same approach with taxes as we do with charity. Set aside what you are “sharing” in taxes first, and then treat the remainder as your own earnings.

Parents can teach young children about taxes by taking back 25-cents of every $1 dollar of allowance or gift money for “household tax.”

Tips

Tips probably belong in the Spend, rather than Share, category, but the act of tipping is sharing money. I have witnessed millionaires who did not tip when the situation warranted it, which led me to wonder: If you have $50 million, what is an extra $5 dollars? Was sparing $5 dollars worth letting down the worker who depended on that tip for income? Avoid becoming a scrooge by factoring in the cost of tip before receiving services.

The Ripple Effect

The beauty of sharing money is that it creates a ripple effect. When you donate to a cause, your friends and family will likely follow your lead. When you tip someone, he or she will likely be more generous when tipping others. Sharing not only enhances your own perspective of money, it impacts everyone else’s mindset too. All the more reason to share!

Tune in next week to learn how to have a conversation about spending. Or subscribe below to automatically receive weekly lessons in your inbox!

Homework: Whenever you receive money, automatically devote a portion for sharing before counting your money. If you don’t already have one, find a cause that you are passionate about and donate!

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*The origin of this quote may be different, according to the International Churchill Society.

How Much Money Should I Save?

The million dollar question (pun!): How much should I save?

Well, there’s a complex answer and a simple answer. In most cases, you’ll get the complex answer.

It depends.

Everyone’s number is different because we each have different savings goals. Saving for a car is different than saving for a house. Saving for a house is different than saving for college. Saving for college is different than saving for retirement.

Some factors that aid in calculating your savings number:

  • How much do you need for your goal?
  • What have you already saved?
  • How long before your goal takes place?
  • Where will you invest your savings, and at what growth rate?
  • How much can you afford to save?

As adults, your savings number will likely be limited to the last question: How much can you afford to save? I challenge you to reverse your thinking: How much can you afford to spend? Recite the following motto, specifically in this order: SHARE, SAVE, SPEND.

Looking at spending last will be a good way to focus on your savings goals and forces you to examine how much you must earn to afford your lifestyle.

A good rule of thumb is to save one-third (1/3).

Earlier I mentioned that there is a simple answer to the question of savings. If you are young and don’t have any major goals yet or are just starting out, a good rule of thumb is to save one-third (1/3). Any time you receive money, share a third, save a third, and spend the rest!

So ask yourself the question: How much should I save? Don’t get discouraged if your number seems high. Remember that you can adjust some factors to reach your savings goal, like decreasing or delaying your goal. Even if you save a small amount now, you are still building the blocks to your financial future. As you continue, increase your savings little by little. Soon enough, you will be savvy at saving without giving it any thought!

Tune in next week to learn why “sharing” is first on my list. Or subscribe below to automatically receive weekly lessons in your inbox!

Homework: The next time you get allowance or money, make sure you know how much is going into each of the 3 S’s: Share, Save, and Spend. Can you save one-third or more? What would a small increase in savings do for your goal?

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A Good Four-Letter S— Word: Save

If having savings is a good thing, why does the act of saving money get such a bad reputation? Do we dread saving money because we live in a world of instant gratification and don’t have the patience to spend our money later? Maybe. Is it tough to accumulate savings when we have other bills to pay? Of course. Do we sometimes get overly enthusiastic when we first start saving, only to jump ship halfway? It happens. How do we overcome these obstacles?

Delayed Gratification

If you were given a choice between winning a new electric scooter or a trip to Disney World, which would you choose? You’d probably choose Disney World because it’s more expensive. What if you can get the scooter now, but the trip requires waiting three years? You’d switch to the scooter, wouldn’t you?

Wait a second! Just a moment ago, you wanted Disney World, remember? Don’t let short-term impulses get in the way of your long-term dreams. If you want something bad enough, it’s worth waiting for. That’s the power of delayed gratification.

(In case you are not a Disney fan, feel free to substitute your own dream purchase in this scenario.)

Automated Savings

Balancing savings and expenses can be a challenge. One solution is to budget, so that your savings take a dedicated amount like any other bill.

Another way to prioritize saving money is through automated savings. Whenever money comes in, whether it be allowance or working income or gift money, automatically save a portion. Direct deposit makes this easy by routing a percentage or dollar amount to an account, which you can assign for a specific purpose.

Celebrate Small Victories

The hardest part about saving may be the journey to reach your goal. It’s easy to lose sight or get distracted if you don’t celebrate small victories. Consider giving yourself a little boost or reward for reaching milestones along the way to your goal. Buy yourself a keychain or take a test drive at the arcade after saving $200 towards your first car. Reward yourself with pizza every time you reach a big step towards your dream trip to Italy. You get the idea.

Parents can help by throwing in a savings match. For instance, offer a nickel for every $1 dollar that your child saves or alternatively, pitch in $5 after your child reaches $100, $10 after reaching $200, and so on. Little incentives go a long way with motivation!

Yes You Can!

Savings takes work. But that work can be fun once it’s automatic and if you put the savings toward an achievable goal that excites you. Figure out what it is that you really want, and then start saving!

Tune in next week to learn how much you should be saving. Or subscribe below to automatically receive weekly lessons in your inbox!

Homework: The next time you are faced with an impulse purchase, ask yourself if you would rather save the money towards a bigger goal. Think of a goal you really want, something that shows saving money is good!

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What Is The Right Price?

As a child, I grew up watching TV game show “The Price Is Right.” But often, I knew the price was NOT right because their prices reflected full retail value, and every one of those goods could be purchased for less.

This begs the question: What is the right price?

Granted there are some items that you cannot pay anything but full price. Taxes are an example. But you’ll find that the vast majority of material goods can be found at a lower price than MSRP, or manufacturer’s suggested retail price. Even services, like a haircut or hotel stay, have deals or discounts if you take the time to look.

target price

That is why you should find what I consider the target price. How much could the price be after a discount? What is the item worth, in other words, what is its value? Most importantly, what is the item worth to you? Practice giving yourself an ultimatum: “If I cannot buy this $35 item for under $20, then it goes back on the shelf.”

Some ways to reach the target price:

  • Get it on Sale
  • Apply a Deal or Coupon
  • Wait until inventory clearance or a new model enters the market
  • Consider getting it Second-hand
  • Negotiate if the situation allows for it

You may find that you miss out on an opportunity because your target price estimate was too low. That’s ok. You will adapt. And hey, it saved you from spending money this time. So the next time you go shopping, play the target price game and see if you win!

Homework: Visit your favorite store and without looking at the price tag, determine a target price for the item you want. As a bonus challenge, resist any urge to buy immediately, and wait at least 30 days to see if you are still interested in making that purchase.