What Did We Learn About Money in 2020?

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

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

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

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

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

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

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

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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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