Should You Participate In An Employee Stock Purchase Plan (ESPP)?

Should You Participate In An Employee Stock Purchase Plan (ESPP)?

Do you know what’s in your employer’s benefits package? It’s often worth more than you think.

Getting a competitive salary is important, but prospective employees should look at their employer’s benefits package as part of their compensation.  If you work for a publicly-traded company that offers employee stock purchase plans (ESPPs), you are fortunate. This benefit is a desirable part of your overall compensation package while improving employee retention and motivation.

An ESPP is a win-win for both the company and its employees. Owning stock purchased at a discount may be meaningfully additive to employee’s compensation and net worth.

That said, employee participation in  ESPPs is relatively low. According to the 2018 Global Equity Insights report, 70% of North American companies surveyed have implemented share discount plans, with 42% of employee participation. This percentage is below the 48% rate targeted by employers.

Companies can boost this low rate with increased employee awareness through human resource professionals.

Employee stock purchase plans may seem technical or intimidating to employees. Once there is a better understanding of how ESPPs work and provide incentives, more employees may participate in the plan. We have examined the four most common equity compensations, including ESOP, ESPP, ESO, and RSU, in this post here.

What Is An ESPP?

An ESPP plan allows employees to buy their company’s stock at a discount price up to 15% of their salary but no more than $25,000 annually. You can contribute via paychecks. Contributions typically are 1-10% of wages. It is a right way for employees to participate in the success of their company.

Similar to employer-sponsored 401K retirement plans, ESPPs are usually:

  • broad-based programs offered to all employees,
  • participation is voluntary; and
  • handled by payroll deductions.

 

Qualified and Unqualified Plans

According to the National Association of Stock Plan Professionals (NASPP), 82% of companies with ESPP plans are tax-qualified plans under Sec 423 of the Internal Revenue Code. A qualified plan has more restrictions but favorable tax treatment. Non-qualified plans have fewer restrictions but less favorable tax benefits.

To implement a qualified ESPP plan, a majority of shareholders must vote to approve it.  All employees must have equal access to the plan.

A qualified plan allows employees to purchase company stock up to a 15% discount, meaning your share purchase is 85% of its price in the stock market. The plan’s purchase date must be within three years of the offering date, that is, when the company announces its ESPP.

The maximum offering term allowed for employees to participate is 27 months unless purchases are at market value ( is offered by the company, i.e., no discount). The employer can offer the plan for as long as five years.

Favorable Tax Treatment For Qualified Plans

As mentioned above, if you are participating in a qualified employee stock purchase plan (ESPP), you may reap the benefits of tax-advantaged treatment. If you sell shares at a higher price than your purchase price, you will have income (rather than a loss).

The income is taxed treated differently depending on two varying sources. The gain between the market price and discount is considered ordinary income tax. On the other hand, you may pay capital gains tax on the income differential between your sale of shares and purchase price, depending on how long you held the shares.

Capital gains treatment requires  you to have held the shares:

  • a year and a day from the purchase date AND
  • at least two years from the offering date.

Qualified plan holders pay taxes during the year of the sale of shares. If you don’t satisfy the timing, you pay ordinary income tax. Capital gain rates are lower than ordinary income tax rates.

How The Tax Treatment Works

Significantly, the qualifying disposition occurs in the year when the stock was sold and is taxed accordingly. The taxation of income discount from market value is at a higher rate. If you hold the shares short term, your income from its sale will be treated as ordinary income and treated at a higher tax rate. However, if you own shares long time according to the qualifying disposition rules, your income will be taxed at the capital gain rate.

An Example

Carol bought one share with a 15% discount offered by her company. The stock has a $20 market value, and she pays $17 per share based on her 15% discount. She held the stock for more than a year and a day from her purchase date and more than two years from her company’s offering date.

She sells the stock at $30 per share. Carol earned $13 per share ($30 less $17) with two different tax treatments. The difference between $20 less $17 or $3 will be recognized as ordinary income and taxed at her 33% tax bracket. The remaining $10 will be taxed at the capital gain rate of 15% because she held the shares long enough according to the rules above.

Carol enjoyed a pretty favorable return on her investment or 13/17 or 76% before calculating the tax impact. Her after-tax return is effectively 62%. This is based on using the $3 x (1-.33)= $2  plus $10 x (1-.15) =$8.50. As such, it equates to $10.50/17 or 62% after-tax.

Long Term Holding Period For Tax Advantages

Most plans allow the employee to immediately sell their shares upon their purchase without requiring vesting or holding period. However, if you sell your shares before the required holding period, then your entire income is taxed as ordinary income at a higher rate. You might want to annualize your return if you held less than one year. To calculate your return on an annual basis, use a formula like here.

However, a 2017 NASPP Deloitte Consulting Survey reported that two-thirds of companies that offer an ESPP say participants hold their purchased shares under Section 423 for at least one year and a day and get the favorable capital gains treatment.

The unqualified plan has fewer restrictions, except the plan still requires majority shareholder approval. These plans do not have tax advantages like the qualified plan. Instead, employees pay the ordinary taxation rate.  

Most Plans Have 15% Discount From Market Price

According to surveys, the employees’ discount price for shares is 5%-15% lower than the market price, with 15% being the most prevalent discount. Employers usually impose a limit of 10% of after-tax pay. In any case, the IRS allows purchases up to $25,000 of stock annually.

Look-back provisions are standard. The employer will calculate the stock price as the lower between the offering date or the purchase date.

Eligibility

Offering periods are generally six months, twice per year though some companies have shorter periods of 1-3 months or as long as 18 months.

An employee cannot participate in a plan if they own 5% or more of company shares.

Companies may require that an employee work at the company for a specific duration, such as one year, before participating in the plan.

The ESPP may exclude contractors, highly compensated employees, and part-time employees from participation.

Benefits For Employees

 

Easy To Purchase Stock

Companies make it relatively straightforward for all employees to participate in the plan, purchasing the stock through their paychecks on favorable terms assuming employees get a discount.

Potential for Higher Returns On Stock

ESPPs can provide employees increased compensation, especially if there is a 15% discount offered by the company, even if there is a look-back. Most plans have purchase periods of 6 months.

So your purchase price is discounted either at the beginning of the end of the period. Assume the stock price is $15 at the beginning of the purchase period. Let’s say it goes up to $20 at the end. The lower of the two-time frames is $15, but you will pay $12.75 per share at a 15% discount. If you sell your shares at $20, that is a 57% return. Not too shabby!

On the other hand, if the stock price stays at $15, you pay $12.75, and the market price for your stock remains $15, and you decide to sell. Your gain is not 15% but a  built-in profit of 17.6%. The calculation is ($15 less $12.75 purchase price)/$12.75=17.6%.

Dollar-Averaging

If the stock goes down, you can hold on to the shares or do dollar-averaging. Investors use the dollar-averaging strategy when they believe it is an opportunity to make purchases at lower prices, potentially reducing your cost basis. You should only do this if you remain comfortable with your company’s future and can afford more shares.

Favorable Tax Treatment

Contributions to the ESPP are deducted from your paycheck and taxed at ordinary rates like your salary. If your plan is qualified, you will be eligible for tax advantages if you hold the shares long enough according to IRS rules discussed above.

Stock Appreciation + Dividends + Long Term Holding = Rewarding

If you can afford to buy shares at a  successful company’s discount, holding for the long term may be beneficial. In addition to stock appreciation, your company may also pay dividends generating more income. If qualified, this income may receive a more favorable capital gain tax rate.

All stocks are risky but generally are in an asset class with higher returns than other securities such as money markets or bonds.  To reduce risk, make sure you have a diversified group of stocks besides the company shares to avoid being too concentrated.

Buying a stock at a discount through your employer’s stock purchase plan is an excellent way to begin investing and benefit from compounding growth.

Better Confidence And Control Over Financial Well-being

Employees positively benefited by buying company shares through an ESPP. Among the findings in the two year Fidelity study released in 2016, employees:

  • feel more in control over their financial well-being,
  • were less likely to borrow from their 401K retirement account,
  • showed improved productivity and morale at work; and
  •  held the shares they bought with a great sense of ownership.

The ESPP provides employees with a boost to earnings and a psychological benefit of feeling more valued. Workers tend to stay in companies longer when they are better compensated, and morale is strong. For companies, ESPPs are often an excellent recruitment and retention tool.

 Drawbacks

While employee participation in an ESPP has many benefits, notably increased compensation to their salary and feeling more valued as an employee, there are some drawbacks.

No Guarantees Of A Higher Stock Price

It is not predictable when or if the company stock price will rise above your purchase price. You are not required to sell your share at a predetermined price or time. However, you may want to cash out your shares for greater liquidity to buy a home or pay for your child’s college education.

Consider making only the purchases you can afford.

Concentration In One Stock Is Risky

Employees like buying their employer’s stock, especially when the company is doing well. However, be careful about having too much concentration in one stock when the company is paying your salary. Concentration in few stocks can be very risky. Companies go through downturns due to the economy, increased competition, increased regulation, management changes, and potential fraud.

Those that worked at companies like Worldcom and Enron received generous compensation, including discounted stock purchase plans. Employees were loyal to these companies, benefiting the companies with lower turnover. Many employees stayed on for many years, grateful in the knowledge that they owned many shares in those companies and would retire with significant net worth.

Enron and Worldcom filed for bankruptcy in late 2001-mid-2002, rendering their respective stocks virtually worthless. Many employees lost the vast majority of their savings and investments.

Diversification of your portfolio is important for all investors. You should own stocks in multiple industries and different asset classes, such as various bonds and real estate.

Final Thoughts

If offered by your employer, your employee stock purchase plan is a desirable benefit of your compensation plan. Participation in a qualified plan with a discount to the stock market price is a great way to earn incremental income, have tax advantages, and get a psychological boost at work. Consider buying shares you can afford, hold your shares for the long term, and diversify your investment portfolio.

The benefits outweigh the risks as long as your ownership of your company shares is not too concentrated. Thank you for reading!

Have you reviewed your company’s benefit plan? Do they offer an ESPP, and are you participating? Let us know about your plan. We would love to hear from you.

 

 

 

 

 

 

 

 

18 Tips To Pay Back Student Loans Faster

18 Tips To Pay Back Student Loans Faster

You have probably been hiding under a rock if you haven’t heard a lot about the growing US student debt burden. These loans are a weight on those who carry these amounts early in their careers. For some, it may delay marriages, having kids and buying homes. This phenomenon may affect all of us in a reduced housing market and overall economy.

 College Is A Big Responsibility

Take control over your student debt and repayments. True, your parents may have helped you saving early through 529  tax-deferred savings plans. Now it is up to you to be responsible about your loans going forward. We provide some actions you can take to minimize your burden better and potentially faster.

Student Tuition and Loan Statistics:

  • Average annual 4 year college tuition in 2018-2019 was $35,830 for private colleges; $10,230 for state residents at public colleges; and $26,290 for out-of-state public colleges. This is before room and board which could add $10,000 or more to annual costs.
  • 70% of students borrow for college.
  • Average debt is $37,172 with a monthly payment of $393
  • A typical college grad may complete their degree with multiple loans

 

18 Tips On Handling Student Repayments Better:

 

1. Parents Should Save As Early As They Can

As soon as your newborn has a name and a social security number, parents should open up a tax-deferred plan to save money for college tuition. Look through the various investing options, including target-date funds. There are several plans to consider, notably your state’s 529 Savings Plan.

By saving early, you may be able to put a significant dent in your child’s borrowing needs later on with compounded benefits.

2. Don’t Borrow More Than You Need

When looking for colleges, consider affordability in your choices. Rather than borrow, think carefully about grants, scholarships, and work study. Working part-time may help to pay for some of your living expenses. For many students, attending community college is a right choice for many reasons, including affordability.

3. Organize and Keep of Track of Your Loans

You are responsible to know what your respective loans are. The National Student Loan Data System (NSLDS) will help you organize your loans. It is a database organized by the US Department of Education to keep track of all federal loans. The NSLDS will provide information on lenders, balance and repayment status for each of your student loans and options you may eligible for.

While you can go to your school’s Financial Aid Office, the NSLDS provides you with most of what you need, notably your loans, lender/loan servicer, balances, interest rates and monthly payments. Organize the information in your own spreadsheet to monitor progress and potential changes you need to make.

Compare what the NSLDS shows for your loans to what is reflected on your credit report. Make it a good habit to periodically review your credit report to make sure your loans appear correctly.

4. Pay On Time By Automating Your Loans With Auto-Debit

According to the Federal Reserve Bank of New York in the first quarter 2019, 9.54% of student loans were delinquent by 90 days or more. This rate is actually understated. Half of the loans are in deferment, in grace periods or in forbearance and temporarily not included in the calculation.

Delinquency or being in loan default can cause serious consequences. For example, late payments add damage to your credit score and ability to borrow in future. It can even result in wage garnishment.

Automatic payments are a great way to manage your finances, pay on time and avoid penalties. Signing up for auto-debit which is offered by most federal and private student loan lenders may even chip 0.25%-0.50% off the loan rate as an incentive.

5. Keep Lender(s) Up-To-Date On Your Contact Information

You may want to run from your lenders but you can’t hide from them. Whenever you move, let your lenders know by updating your address and any other contact information that has changed. You don’t want to miss any mail like late notices or updates from them.

6. Know The Grace Period of Your Loan(s)

Grace period refers to a period from the time you graduate, leave school or drop below half-time college status until the time that repayment begins. Not all loans have grace periods.

For most loans, interest still accrues during your grace period, which results in interest capitalization. (More on that later). Typically, available grace periods are 6 months. It is a longer time frame if you are in the Armed Forces.

Review your loans for the specific waiting period you have (or don’t have). Don’t extend the grace period as you will be adding interest costs to your balances. Use this period to be productive by signing up for automatic payments and understand your repayment requirements.

Super tip: While in school and working, consider paying  $30-$50 per month if you are able to towards your loan.

7. Accelerate Your Loan If You Can Afford To

After you graduate, you may be fortunate to land a job with a generous salary and annual bonus. If you don’t get a bonus, you may find other ways to earn more– salary raises, second job, living at home–and reduce your loan bills.

Putting some of that extra money towards your required monthly bill is a good idea. This higher payment, especially if you can do it regularly, will ultimately lower the overall interest amount on your loan.

However, weigh the pros and cons carefully if you have important alternatives for that money. This could include other priorities like employer-sponsored retirement plan, setting up an emergency plan, or investing.

8. Pay Off The More Expensive Loan First

If you have more than one loan and are thinking about paying one off early,  I recommend reducing the balance of your highest cost loan first (this is the avalanche method). This will lower your overall interest amount. Others may say eliminate the smaller debt amounts first (snowball method) because the psychological boost may matter to you.

That said, if you have the capability to make any payments that reduce your balance, you are a winner!

9. Avoid Certain Repayment Options

The standard federal student loan repayment period  is 10 years while private loans may be 7-15 years according to Edvisors.com. Before reviewing the options, I prefer loans that are fixed and predictable with the shortest term possible. The longer you pay, the more interest you are paying on top of the loan.

You can consider changes later on. For example, refinancing to a lower rate is optimum if your credit score is high enough.

There are several options for federal loans, including fixed versus graduated monthly amounts. If you choose the graduated method, you may start at a lower amount with it rising slowly. This is intended to mirror your compensation progress.

High Debt: Income Ratio

There are ” Pay As You Earn” and income-driven repayment schedules if you have a high debt:income ratio. The federal government determines the monthly payment amount. It is based on a percentage of your discretionary income of 10% or 15%. The length of time for these loans are 20-25 years which adds more interest to your total cost of the loan.

Income-driven repayment plans may be a good option if you find yourself suddenly unemployed.

10. Do Not Extend Your Loan Beyond 10 Years

You may want to extend your loan from 10 years to 20 years or more. While it will lower your monthly payment it raises your total cost of the loan. This is not a good idea unless you absolutely cannot make the standard payment. The sooner you can get rid of this debt, the quicker you will have financial flexibility and the ability to plan for your future

11. Refinance Your Loan If You Can

Student loan refinancing is available for qualified borrowers to lower the interest rate and change repayment terms on their private and federal loans. To qualify for a new loan, you should have a good paying job, be financially responsible with a decent credit score (eg. 700 or above). If your credit score is too low, consider a co-signer to help you.

The College Investor, a top expert in student loans, recommends the best lenders for refinancing.

It doesn’t make sense to refinance the loan if you are considering one of the federal forgiveness programs, have poor credit, already have a low interest rate or a repayment plan that is income-based.

12. Consolidate Your Loans For Free

A consolidation loan allows you to combine several unsecured debts into a single new more favorable loan. You may benefit from a lower interest rate and/or a lower monthly payment. If you are consolidating all of your federal loans you can quickly complete a Direct Consolidation Loan form online through StudentLoans.gov for free.

13. Capitalized Interest May Be Costly

Capitalization of unpaid interest is additive to the principal loan amount. It can occur under several situations, such as after a period of forbearance or deferment or end of the grace period.

In certain situations, the federal government will pay the interest costs, specifically on needs-based subsidized loans, so you won’t incur capitalized interests. However, they do not pay accrued interest on unsubsidized loans during deferment or forbearance periods. This could lead to bigger loans or larger payoffs.

14. Use Tax Deductions

According to the IRS, your student loans from federal or private lenders may be deductible up to $2,500 of the interest paid in the previous year of a qualified loan. To qualify, the borrower must have earned less than $80,000 annually (or $165,000 if filing jointly).

15.  Work For Companies That Repay Student Loans As A Benefit

Don’t expect billionaires en masse  to offer you to pay off your student debt as Robert F. Smith committed to 2019 Morehouse graduates. That said, there is a growing list of companies that are stepping up to assist employees with their loans. It is a perk high on most college grad lists according to recent surveys.

When you get a job offer, examine company benefit plans for potential help with your loans. If it is not explicitly stated in their package, try to negotiate for some relief on your repayment plan.

16. Where Forgiveness May Be Available

For those employed in government, nonprofit and other public services jobs, relief may be possible after 10 years of employment. Additionally, there are pockets of the country, especially in rural markets, clamoring for certain majors, like nursing that will forgive part or all of your loans if you relocate there.

Outside of these special situations, the number of borrowers who were granted Public Service Loan Forgiveness (PSLF) is generally low. As of September 30, 2018, there were 423 student loan borrowers were granted forgiveness out of 49,669 applications filed. That is, the vast majority of students seeking forgiveness are rejected.

17. Students Loans Are Not Easily Discharged In Bankruptcy

Bankruptcy is a complex process in general. Federal student loans are particularly difficult to discharge if you declare Chapter 7 or Chapter 13 bankruptcy. You need to prove “undue hardship” for bankruptcy. The Federal Student Aid website provides guidance as to what undue hardship is.

A borrower seeking bankruptcy would need to prove:

  • They cannot maintain a minimal standard of living.
  • Show evidence that there would be hardship for a significant portion of the loan repayment period.
  • A good faith repayment effort was made prior to the bankruptcy filing.

Even if you were able to discharge your student debt, the bankruptcy public record stays on your credit report for 7 or 10 years depending in the chapter you filed. Therefore, it is a lose/lose situation you do not want to consider unless you are in dire financial circumstances.

18. If You Are Unemployed

First thing you should do if you find yourself without a job is apply for unemployment benefits to mitigate your lost income. Then talk to your lender or loan servicer about potential relief. For federal loans, you can apply for deferment or forbearance for a temporary pause. Deferment can be as long as 3 years while forbearance is up to one year. Private lenders may also offer deferment and forbearance, but they vary so check their plans.

However, with deferment and forbearance, you may be still responsible for the interest that continues to accrue on your total balance.

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Conclusion

A college education is expensive but ultimately worth it. As a college professor, I am a bit biased. Most students take on student loans. Being responsible about your debt is a priority to ensure that you may have a bright financial future. Hopefully, some of these tips will help you better manage your debt burden successfully.

What experiences have you had with your student loans? What tips have you used to help you? We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personal Finance Lessons In Classic Literature

Personal Finance Lessons In Classic Literature

We can learn personal finance lessons in classic literature. We find stories of conspicuous consumption, overspending, too much debt, poor investing choices, and errant estate planning in abundance through the classics. Many of our favorite authors and stories, like Mark Twain, recount such happenstances, some from their follies and financial disasters.

Here are some of my favorites that may enhance your library and knowledge about money:

 

The Custom of The Country by Edith Wharton

 

Edith Wharton is among my favorite authors. She richly writes as an insider and social observer of the glamorous turn of the 19th century wealthy New York and European societies. Before she was Wharton, she was Edith Jones. Her father’s family was the basis of “Keeping Up With The Joneses,” a term associated with conspicuous consumption.

She is better known for her novels, “The Age of Innocence” and “House of Mirth.” However, “The Custom of The Country” has it all. Undine Spragg of Apex City convinces her parents to move east to New York City. While her father was making a decent living that supported the standard of living in the small town they came from, he is out of his league in New York.

Undine–beautiful, vain, spoiled, ambitious, and selfish–likes to get her way. Her parents are used to giving in to her harsh consequences to themselves. She believes she is entitled to a rich, luxurious lifestyle and intends to live it to the fullest.

Rising on the back of better-situated friends and the consumerist society, Undine favors immediate and quickly acquired satisfaction. She marries Ralph, intellectually her superior, a member of an old respected New York family. Undine has a son but no interest in him.

Lifestyle Inflation

Ralph comes from a comfortable financial position, and there are no expectations that he will work for a living. However, he is no match for Undine’s constant and growing materialistic demands.

As they are short of funds, Ralph ultimately has to work and does so unsuccessfully. He makes poor investments and can’t keep up with her bills. Higher costs accompany his increased income, inevitably leading to lifestyle inflation. 

He is a doting father while Undine spends her time in Europe with friends.  Her father still gives Undine an allowance that doesn’t go far. She uses other people’s money, keeping company with wealthy men in her pursuit of wealth at any cost.

Ralph and Undine divorce eventually. Ralph and his family have custody of their son if only because she had no interest in her child. Undine learns the hard way that abandoning her husband and son is not valued by the society she keeps. Her friends find her less attractive and lacking culture. She goes to art galleries to match their interest, but her lack of knowledge challenges her. Fearing that she is now an outcast, she marries Raymond, a French count, and aristocrat. She obtains custody of her son. This event devastates Ralph, who commits suicide.

Though Undine is now an aristocrat and countess, she is dissatisfied as she learns that her new husband’s wealth is bound by his legacy, mainly on the walls of their castle she shares with her mother-in-law.

Overspending Leads To Unpaid Bills

Undine continues her indulgent overspending despite Raymond asking her to stop spending. He finally tells her to pay her bills. Undine sees herself as deserving of money, and when it is not forthcoming, she feels victimized.

“She had everything she wanted, but she still felt, at times, that there were other things she might want if she knew about them.”

Undine was fiercely independent and yet passionately imitative. She wanted to surprise everyone by her dash and originality, but she could not help modelling herself on the last person she met.

Moral of The Custom of The Country

Money ultimately did not buy Undine happiness. Her overspending ruined her family. Social climbing was her career, but she lacked culture, education, and depth. She did not fit in where she wanted to be. Her ability to dress the part through conspicuous consumption and lavish lifestyle only helped her part of the way.

Madame Bovary by Gustave Flaubert

Emma, a beautiful and educated young woman, marries Dr. Charles Bovary. She is soon bored of her provincial life with Charles. They have a daughter, but Emma is soon disappointed as a mother. She has romantic fantasies about Leon, to who she is attracted. She does not act on her passions until later with another man who then abandons her.

Emma finds Leon again and acts on her passions for him. They are happy for a time. Soon, they abandon their relationship. As Emma is disappointed in her life, she begins to indulge herself, fancying luxury goods by buying on credit from the crafty merchant Lheureux. She spends lavishly on herself and her lovers.  Wanting control over her finances, she forces Charles to give her power of attorney.

The merchant calls in her debts. Emma pleads for money from her lovers and others, but they turn her down. Creditors repossess her house, and they are in ruin. She swallows arsenic and dies a horrible death.

There are clear parallels between Undine and Emma. They both exist in their self-absorbed natures and the abandonment of their families. Both are bored by their own lives, do not enjoy motherhood, and want to strike out independently. They envision their lives as more bountiful with food, drink and filled with laughter.

Don’t Borrow For What You Can’t Afford And Don’t Need

From a money point of view, overspending is their passion, and they lack the ability or desire to curb it.  Both women spend money they don’t have to obtain luxury. High-cost goods are wants, not needs. They buy on credit and are not able to pay the bills. Indeed, Madame Bovary has some sense of morals when she takes her own life. Undine Spraggs goes on to another marriage, this time with a man from her past life in Apex.

Thankfully, there are better ways for women to achieve financial independence.

Moral of Madame Bovary

Spend less than you make. Beware of spending on credit. Don’t take on debt you cannot afford. Madame Bovary could have benefited from an emergency fund.

The Great Gatsby by F. Scott Fitzgerald

I read this novel in high school and again, not too long ago. It resonated differently from both angles of life, adding layers with age.

Jay Gatsby is a neighbor of the narrator, Nick, a bond salesman who has moved to posh Long Island. Gatsby is a mysterious millionaire who throws lavish parties for his 1920s society guests. It is a decadent time where excessive lifestyles are the norm. Cars are providing people with mobility and the ability to be seen.

We learn that Gatsby’s money is ill-gotten through bootlegger dealings. All of the novel’s characters, especially Jay Gatsby and Daisy Buchanan, have sacrificed their morals. Despite their wealth, they cannot obtain happiness. Gatsby does not fulfill his dream of being with Daisy, a parallel to F. Scott Fitzgerald’s American Dream of those wanting to acquire wealth.

Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that’s no matter–tomorrow we will run faster, stretch out our arms farther….And then one fine morning–So we beat on, boats against the current, borne back ceaselessly into the past.”

The Moral of The Great Gatsby

We may not easily get our dreams if they are an illusion.  Make reasonable goals, especially financial objectives that may be attainable with careful planning.

Miser And His Gold, Aesop’s Fables (In Its Entirety)

A Miser had buried his gold in a secret place in his garden. Every day he went to the spot, dug up the treasure, and counted it piece by piece to make sure it was all there. He made so many trips that a Thief, who had been observing him, guessed what it was the Miser had hidden and one night quietly dug up the treasure and made off with it.

When the Miser discovered his loss, he was overcome with grief and despair. He groaned and cried and tore his hair.

A passerby heard his cries and asked what had happened.

“My gold! O my gold!” cried the Miser, wildly, “someone has robbed me!”

“Your gold! There in that hole? Why did you put it there? Why did you not keep it in the house where you could easily get it when you had to buy things?”

“Buy!” screamed the Miser angrily. “Why, I never touched the gold. I couldn’t think of spending any of it.”

The stranger picked up a large stone and threw it into the hole.

“If that is the case,” he said, “cover up that stone. It is worth just as much to you as the treasure you lost!”

Moral of Miser And His Gold

This ancient tale deals with the improper use of a property. A possession is worth no more than how we make use of it. There is an opportunity we bear by leaving cash in non-interest bearing accounts. We need to invest our money for returns, diversifying our assets into different allocations. 

The One Million Pound Note by Mark Twain

The irony of reading this excellent short story written in 1893 is how Twain lost a fortune in the 19th century after poor speculation in many failed businesses. Twain loved risk and opportunities. His two big bets were venture capital and start-ups.

One of my favorite Twain quotes: “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”

Henry Adam survived a mishap on the seas after two old brothers rescue him. Virtually penniless, without shelter and food, he wanders the streets of London. His rescuers beckon Henry. He realizes that the two brothers are wealthy. They have made a bet with each other centered on a 1 million pound note that they want to give to an honest-looking stranger, that is, Henry.

The Brothers’ Bet

One brother bets that no one would survive in possession of this note. A person can’t spend a note of this size without suspicion of theft and would end up in jail. The other brother believes that a man can live 30 days and makes his bet.

When the brothers call Henry over, they give him an envelope to not open it in front of them. He looks into the envelope from the brothers and sees the money. Hungry, he goes into a restaurant to eat a meal. He presents the note, but the owner cannot cash it and gives Henry credit for one month.

Perplexed, Henry reads the letter accompanying the note and realizes that the money is a loan without interest from the brothers for 30 days. As one brother believes, if he can last 30 days, he will get his wish based on any situation he favors.

30 Days Credit

Henry, walking around in tatters, gets clothing from a tailor, who also provides him credit for 30 days. Now better dressed and fed, Henry has become a celebrity. He gets short-term loans as no one can make break the note into smaller ones. At a party, he becomes smitten with a young woman, Portia.

Henry uses his fame to endorse a mining company stock deal by an old friend selling it because of financial difficulties. With Henry’s help in spurring demand in the stock deal, many people subscribed to the offering as they trusted him.. He earns a significant commission for his efforts and gets wealthy on his own.

Finally, A Happy Ending For A This Story

When the 30 days are up, he goes to the old brothers with Portia. He gives them back the 1 million dollar pound. He is now wealthy and can pay back all of his debts. The story reveals that At a party he attended, Henry had met Portia, a woman he liked. She is the daughter of the brother that won the bet. When asked what he wants, he answers that he wishes to be his son-in-law.

Moral of One Million Pound Note

The best moral of all the stories is that money did not corrupt the man’s character as it does more often. Here, Henry Adams was indeed an honest man, used his fame to help his friend in need. Both gained wealth through the deal. Henry was able to keep his wealth abundant enough to pay short-term loans and marry the woman he loved.

These money lessons are valuable for a lifetime:

  1. Spend less than you make and buy more rationally.
  2. Know the difference between needs and wants.
  3. Don’t spend to impress others.
  4. Create an emergency fund for times of unforeseen circumstances.
  5. Minimize debt by paying your credit card balances in full or reduce your spending.
  6. Save diligently and deploy into retirement and investment accounts.
  7. Invest early, and diversify to minimize risk, and use long-term strategies.
  8. Yes, Money Can Buy You Happiness

We cover these topics in our Personal Finance email course in greater depth.

Final Thoughts

You can learn lessons from anywhere as long as you open to learning. If you like money lessons from classic short stories, I recommend Jason Zweig’s article. He also writes for the Wall Street journal.

Have you read any of these classics? Have you found any money lessons you would like to share? We are constantly reading and re-reading the best books! We would like to hear from you.

Thank you for reading! If you found this of value or interest, please visit The Cents of Money for articles on all personal finance topics.