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.

 

 

 

 

 

 

 

 

8 Types of Insurance You Need

8 Types of Insurance You Need

We need to protect ourselves from events that happen out of our control. You can’t predict everything but, you can shield your income, property, and possessions from the possibility of financial losses that could result in bankruptcies. Unforeseen circumstances like accidents, natural disasters, illness, injury, or even death may present risks to our assets and families.

Types of Insurance You Need:

  • Auto
  • Homeowners/Renters
  • Life
  • Disability
  • Long Term Care
  • Health Insurance
  • Umbrella

 

“Insurance is the only product in the world that both the seller and buyer hope it is never actually used.”

Author Unknown

Buying insurance is the best way to manage the risk of losses that could be financially catastrophic to you. Nowadays, there are insurance products for just about everything. Many are not necessary to spend your hard-earned dollars on. Insurance expenditures (health and personal insurance) amount to 13.8% of pre-tax income according to BLS Consumer Expenditures Survey 2017.

Discussing insurance products are often uncomfortable. It requires us to think about probabilities with dire consequences. However, ignoring the topic could leave you exposed to avoidable losses. First, let’s explain some terminology used by the insurance field.

A few simple terms to understand:

 

What is Insurance

Insurance is a way to have protection from financial losses. That coverage provides a guarantee of compensation for individuals in return for a payment of a premium.

The Premium

Premium is the monthly or annual cost for insurance coverage.

The Policy

An insurance policy is a contract between the person buying insurance (the insured) and the insurance company (the insurer) sold by insurance agents.

Deductibles

The deductibles are the specified money amount the insured must pay before an insurance company pays a claim.

Exclusions

Exclusions are the cases that are not covered by your policy.

Policy Limits

An insurance limit is the maximum amount of money an insurer will pay toward a claim if the policy covers it.

8 Types of Insurance Your Household Needs:

 

1. Auto Insurance

Driving a car is the single most extensive exposure to catastrophic losses for Americans. Poor driving judgment or adverse weather can result in significant property damage, personal injury losses, and death. It is illegal to operate a vehicle without assuming financial responsibility.

Nearly every state requires motorists to have car insurance. The rules vary in the minimum amounts that are needed. New Hampshire is the only state that doesn’t mandate drivers to carry car insurance. That said, motorists are still responsible for paying bodily injury and property damages if they cause the accident.

Still, one out of six drivers is uninsured in the US. Those uninsured are either refusing to buy insurance or cannot afford it. If caught without coverage, drivers may be subject to fines, suspension, or points on their licenses.

The Insurance Information Institute reports in 2017 that the average loss per claim on cars is:

  • Physical damage per claim, on average, is $3,425 for collision and comprehensive losses.
  • Liabilities for bodily damage are $15,270 and $3,638 for property damage.

Car insurance combines the liability and property coverage needed by owners and drivers into a single package. Liability insurance covers the insured if found responsible for losses–bodily injury and property damage– suffered by others.

Medical payments insurance, also known as personal injury protection, can help pay medical expenses regardless of who is at fault. This insurance covers you, your passengers, any family members driving or riding in the insured vehicle at the time of the accident.

Some states require uninsured or under-insured motorist insurance for those injured in an accident caused by a driver who has no or insufficient auto liability insurance.

Collision or physical damage insurance protects against losses caused by damages to the car. This insurance kicks in whether the vehicle is repairable or replaced. 

Comprehensive coverage covers losses that aren’t caused by accident but through theft, vandalism, fire, or flood.

2. Homeowner’s Insurance

Your home is usually your largest asset. Here is where our families live and spend precious time with our children and pets. We depend on and seek sustenance, privacy, and security in our home. The shelter is among life’s most essential needs. When your home is damaged, repairs are usually costly and may be rendered uninhabitable.

Whether you own or rent your home, you face the risk of suffering property damage and liability losses. Homeowner’s insurance will combine the property and liability coverage into a single policy.

Dwelling Damage

Property damage should cover damage to the dwelling, other structures on the property, damage to dwelling contents, including personal property, and expenses caused by having to live elsewhere if the home is not livable. Your property coverage should be at least 80% of your home’s replacement value. This estimate is the industry standard. 

Personal Property Damage

Property or dwelling coverage doesn’t cover your personal property.  To determine coverage for personal property, itemize your inventory of furniture, appliances, and furnishings by the purchase price, cash value, and replacement cost.

Your coverage is 50%-70% of the actual contents and personal property value in your home.

Liabilities To Others

Liability losses occur when the homeowners are negligent or fail to exercise due caution in protecting visitors to their home. For example, if you forget that you left the oven door open, you may be liable for the burn sustained by your friend’s child. Liability coverage provides help for our responsibilities to others.

3. Renter’s insurance

You should buy renter’s insurance when renting from homeowners.  The homeowner is your landlord and likely has insurance for the dwelling and furnishings if provided as part of your lease agreement. However, their coverage does not protect your possessions.

3 Coverage Benefits:

1. The renters’ policy will cover a tenant’s personal property if it is damaged, destroyed, or stolen in the event of fire or theft.

2. Another benefit is the liability coverage it provides for medical bills, damages, and legal defense costs from injuries caused by you, another family member, or a pet.

3. Finally, your policy should cover temporary living expenses if your place is so damaged it is uninhabitable. Most policies will help you with hotel bills and meals.

Therefore, renters insurance is needed and is generally affordable.

4. Life Insurance

Life insurance is protection for families that are fully or partially dependent on your income. If a working parent passes away, their income is lost. Parents or single parents with young children need life insurance protection to help replace that lost income. Your dependents usually mean your spouse, children, and extended family members like aged parents.

Some employers may provide life insurance as a perk but usually in smaller amounts as a “starter” policy for employees to add more coverage.

Your coverage is often associated with your lifestyle needs. You want to cover your families’  living expenses and financial commitments required for the mortgage, car, and expenditures for college tuition for your children. Simplistically, insurance agents often refer to a rule of thumb that you use a multiple of 10 times your income.

There are two main types of life insurance policies: term life and whole or cash value life insurance. I recommend that you consider combining both policies for full coverage. Many families buy term life because it is more affordable but prefer whole life for its more permanent coverage.

Life insurance is an important topic, and we address it more fully here.

When you have a life insurance policy, make sure to designate your beneficiaries. Review and make changes to your designations when life changes occur.

5. Disability Insurance

According to Healthcare.gov, a disability is a limit in a range of major life activities. Impaired activities include seeing, hearing, and walking. It also encompasses tasks like thinking and working. Humans are potentially frail. That is why they invented disability insurance. Accidents or illness can happen to just about anyone at any time. More than one in four of today’s 20-year-olds will become disabled by retirement age.

That statistic should be cause for concern. Disability insurance replaces a portion of your earnings when you cannot work due to illness or injury. This insurance is a valuable perk if offered by your employer. You must opt-in before becoming disabled to be covered.

In 2018, 42% of private industry workers had access to short term plans, while 34% had access to long term plans. When private employers offer disability insurance to employees, they pay the full cost of short term coverage for 85% of plans and 94% of long term plans.

The two forms of disability insurance are:

Short-term plans typically last between 3-6 months, although it could go as long as two years. Employers may partially pay for the short term plan. Coverage kicks in between 1-14 days after the employees are unable to work. You can skip this policy if you have an emergency fund that may pay for essential living costs like your mortgage, rent, and car bills for six months.

Long-term plans provide coverage of five years or more. This insurance will pay a percentage of your salary, usually 50%-60, depending on your policy. Usually, the employee must pay the premium for such coverage if they opt-in to the policy. If your employer is offering disability at a group rate, it will likely be less expensive than purchasing a plan on your own.

A disability may result in the primary breadwinner being unable to work for a significant period of years. This event could be a considerable hardship without disability insurance. The average long term disability claim lasts 34.6 months. Few Americans have enough cash flow to cover income during that length of time.

6. Long Term Care Insurance

Long-term care insurance is a very long term contract. It provides reimbursements for custodial care costs in a nursing facility, assisted living, or at home. You would usually buy a policy in your 50s and up when you are in good health.

You may qualify to receive Medicaid reimbursements for custodial nursing home care if you have spent down most of your assets. That means you have to be poor to get home care assistance from Medicaid. On the other hand, the wealthy have enough assets to pay for long term care. The middle class is most in need of long-term care to protect their savings and have better quality care.

Skilled nursing care is expensive for those requiring 24 hours per day supervision. The average yearly cost in 2017 for these services in a semi-private room was $85,776.

The services provided by this kind of insurance are those not covered by regular health insurance or Medicare. Reasons for long term care are those needing extended care. This type of care helps with daily living activities: eating, dressing, grooming, bathing, and care associated with severe cognitive impairment.

Long-term care insurance has its fans and foes — and for a good reason. Policies can be expensive, especially if you purchase coverage when you’re older and still healthy. It is difficult to know how much coverage you’ll need, let alone if you’ll need it at all.

There may be viable alternatives that have emerged that may be worth pursuing, like health savings accounts, long term care annuities, and Life Plan Communities.

Some employers may offer long term care insurance for their employees at a group rate. If you’re planning to self-insure, it may be a good idea to work with a financial planner who can help you evaluate your coverage needs.

7. Health Insurance

According to The Henry J. Kaiser Family Foundation, 91% of the US population had health insurance in 2017. More than half of Americans had access from their employer. Since 2010, more people have health insurance due to the Affordable Care Act. However, that means 9% or about 30 million people are uninsured, while many remain under-insured.

Health care is expensive, even if you have an employer-sponsored plan, because certain costs are not covered.

What are the costs of a health insurance plan? Review your plan carefully for these features:

  • Know what the premiums are or the amount you pay per month.
  • Exclusions that are typically not covered in your policy.
  • Annual deductibles are required to pay the initial portion of medical expenses.
  • Co-payments, or co-pays, require you to pay a certain dollar amount each time you have a specific covered expense item. Co-pays are for doctor visits and prescriptions.
  •  The out-of-pocket maximum is the most you will pay in a policy period (typically a year) before the insurer pays 100% of your covered costs.

 

The Dangers Of Medical Debt

Even if you have health insurance, you may still have responsibilities for some medical costs. The Kaiser Family Foundation/ New York Times survey found that 26% of Americans have problems paying medical bills.

Medical debt left unpaid will eventually end up on your credit report. Try to negotiate it with your vendor if you are facing financial problems. Often, you may find out that the insurance only partially covered your bill. It is your responsibility to find out those facts as it could be as harmful to your credit score as defaulting on your credit cards.

Bankruptcies resulting from unpaid medical bills make healthcare the number one cause of those filing or more than 66% of the total.  If you’re uninsured or underinsured, you may be exposing yourself and your family to potential financial catastrophe. One unexpected major medical emergency or adverse diagnosis could amount to hundreds of thousands of dollars of expenses.

My college students often tell me that they do not have health insurance because they are healthy. That may be so for that point in time, but one major medical problem could be devastating costs. Medical insurance is expensive. Some part-time jobs may offer some coverage.

Health Savings Accounts (HSAs)

If you have high-deductible health insurance plans, it may allow you to open a Health Savings Account (HSA). The HSA may pay for current or future healthcare expenses out of your savings.

An HSA is a unique tax-advantaged account that provides for qualified medical cost reimbursements. The money you contributed to your account reduces your taxable income, and money grows annually unless you withdraw. Like a 401K retirement account, invest money in bank saving funds for liquidity purposes.

There are annual contribution caps of $3,600 for singles and $7,200 for families in 2021. With a high-deductible plan, the insured is responsible for more of the up-front healthcare costs, but you’ll pay a lower monthly premium.

8. Umbrella Insurance

Umbrella insurance is a tremendous and essential policy to have. It is also known as excess liability insurance. This policy extends the basic liability coverage provided in different policies, including home, auto, boat, and tenant. It offers broad coverage to protect your assets and future earnings from lawsuits. By buying this policy, you are adding to the liability protection you have already purchased.

For example, if you have $800,000 in assets, you can buy a $1 million umbrella liability policy to add to the $200,000 liability insurance you have on your home and car. This coverage closes a critical gap.

Policy limits are $1 million-$5 million. A $1 million umbrella policy costs about $200-$300 per year. This cost is a small cost for significant protection. Over 75% of umbrella losses are auto-related.

Final Thoughts

Buying insurance is not an activity we clamor for. Yet not having coverage may have financial consequences that could be catastrophic for you and your family. Insurance is a competitive industry, so do comparison shopping.

Review your workplace benefits plan to identify what they may provide on a group basis. Supplement what your employer has provided, but you would likely be paying a reduced price compared to individual plans.

Thank you for reading! What kind of insurance do you think is most important? Not necessary? Please share with us. We would like to hear from you!

 

 

 

 

51 Ways To Save Money In College

51 Ways To Save Money In College

“He (She) who will not economize will have to agonize.”

 

Confucius

 

Saving money during college is a perfect way to develop good financial habits. Learning how to manage money on a tight budget, pay down debt, control spending and make money may be among the best lessons they get in college.

Contrary to popular belief, college students are better budgeters than graduates starting their first job.

As a college professor, my students often share how they spend less on books, entertainment and food. Many of the tips below come from those discussions. Being frugal is a badge of honor for my students who have been raised in homes of modest means.

Parents, I encourage you to share can share our list with your college-bound students. Likewise, if you are on way to college, there are ways your parents may be able to help you as well.

51 Ways To Save Money In College (And Prepare For The Future):

 

Before College

1. You should be working during the summer to have some spending money.

2. Take Advanced Placement (AP) courses, if offered in high school. Make sure to do well on AP exams so that you can get full credit.

3. The College Level Examination Program (CLEP) offers 34 exams that cover intro-level college course material. With a passing score on one CLEP exam you could pick up three or more college credits at more that 2,900 colleges and universities. Your learning of these topics could have been through a high school course, independent study or on-the-job training.

4. Apply for work study, grants and scholarships.

5. Attend community college for the first two years at lower tuition rates. It is a great alternative for many students. You might even be able to live at home, saving dorm and food costs.

Be Resourceful At College

6. Don’t buy new textbooks. Instead, look to rent your books from Chegg, Amazon or Barnes & Nobles. They may also sell your textbooks in  ebook form. Rental  and ebook prices have come down quite a bit in recent years. Even traditional text publishers have digital book offerings.

7. Reach out to your classmates and ask around for used books as early as possible. Ask your professors as they may have a list of previous students interested in selling books. There are flyers all over your campus with offers. Buy the paperback version which is significantly more affordable.

8. Find out about amenities offered on and around campus. See if there are discounts for school supplies and  laptops. Often computer labs on campus may be selling refurnished computers with maintenance provided for a period of time.

9. Use your college library and the public library for your books, ebooks, music, and videos.

10. Learn about school resources that are provided for students. Take advantage of free help like tutoring, writing, computer IT and printing. There are probably free or discounted entertainment and food offerings at certain times such as club fairs or special events. As a faculty advisor for one of the largest clubs on campus, I purposely buy extra food for students who attend our presentations.

11. Be aware of application and enrollment dates. You need to know the deadlines for dropping courses and getting partial or full reimbursement.

Budget Your Living Expenses

12. Live at home if you are near campus. At the very least, you may be able to do your laundry and pick up snacks in a pinch.

13. Review your alternatives between living in the dorm, house or an apartment. Look at safety, walking distances, affordability and free transportation between campus and home. When renting a house or apartment, consider your potential roommates wisely.

14. Monitor your costs for utilities, food, snacks and such. Don’t waste energy. Make sure to pay your bills on time. Don’t ramp up unnecessary late charges. Do your roommates share your financial values like shutting the lights when they leave?

15 Review your on-campus dining plans for healthy affordable choices. Consider potential alternatives in your college’s vicinity. Cook for yourself. Make salads or even ramen noodles in a bind.

16. Buy non-perishable items in bulk. Unless you are cooking for a pack of students, it usually doesn’t make sense to buy food in bulk if it is perishable.

17. Limit eating out and avoid alcohol which is more expensive in restaurants. Look for special deals for college students.

18. Use coupons and rebate apps to save on groceries and other personal care items.

20. Avoid Starbucks and invest in a cheap coffee drip pot or a one cup Keurig.

Transportation

21. Having a car at school is expensive. Everyone will want you to drive them and will rarely pay you back for gas. Check out public transportation and look for student discounts. Walk, bike or carpool instead.

22. Find the cheapest ride-share in your area if you need to go somewhere not covered by public transportation.

23. Book trips early when you know you are heading home. Look for discounts or consider traveling on off-days.

Entertainment

24. Make sure to use available Wifi on campus and at home so you don’t go over budget on your data plan.

25. Pick one streaming service like Netflix or Amazon Prime. Think of cable as a luxury you can have when you go back home. With more video streaming providers, competition may drive not prices. Look for lower prices.

26. Look into Amazon for their deals called Prime Student. They have a free 6 month trial that include a ton of perks.

27. Social events on and around campus or in nearby parks are usually free or cheap.

28. Get free music from Pandora and Spotify. The ads are not that bad!

29. Get discounts from businesses in your school’s neighborhood.

True Story

I gave my students a term project to go to every business within a 15-20 block radius of the campus and arrange for student discounts. They had a form to be filled out by the business which pledged a discount (usually 5%-10%) for customers with a college ID, In return, the business’ name and address would be posted on the school website, generating some good traffic for them. The businesses included restaurants, bakery, laundromats, groceries, bowling alley, movie theater and a bagel place.

With a few exceptions, many owners wrote us letters of gratitude and kept their discounts in place for students. One of my former students who had already graduated called to profusely thank me and my students for the project. Her family was the owner of the nearby bagel place. She told me business was booming.

Money And Banking

30.  Look carefully at offers for credit cards with the lowest interest rates. Review their terms for what they charge in fees and penalty rates.  Students are particularly vulnerable to these issuers. I believe a secured credit card is a great way to strengthen your credit score when you are under 21 years old. You can put down a security deposit up to $500 which serves as collateral.

The CARD Act

The Credit Card Accountability, Responsibility and Disclosure Act, or the CARD Act did not stop these vendors from marketing on college campuses to students. The issuers did make it more difficult for students under 21 to get a card without a co-signer. If you are between 18-21 years old, you can be an authorized user on your parent’s card,  get a secured card or a student credit card which is unsecured.

31. Pay your credit card bills in full. Do not carry any kind of balance or stop using your card.

32.You should set up a high yield savings account with a local bank. You should be able to get free checking as a new account holder.

33. Make sure to track your spending to avoid any unnecessary checking overdraft fees. There are a few good budget apps (Mint, PocketGuard, Wally) or do on a spreadsheet.

34. Check your credit report periodically. Monitor for errors you need to correct. Watch out for potential fraud that needs to be addressed immediately. Several of my students have been victims of identity theft.

Shopping

35. Never engage in impulsive shopping.  Do window shopping without money instead.

36. Look for school discounts for a laptop. Consider what essentials you need in a computer and not necessarily what you want. There are a lot of choices, including refurbished computers, which may be good for college students. You don’t need a printer. Your school probably offers students a card every semester that provides free printing (eg. 500 copies) at the school’s expense. Also, you can probably email your assignments to your professors.

37.You may even be able to get free anti-virus software to protect your computer and smartphone.

38. Buy generic brands for over-the-counter drugs and groceries. You will be saving over name brands without compromising on quality.

Health & Fitness

39. See if your school provides free flu shots through their nursing department or medical school. There may be a local urgent care facility for basic medical needs that is affordable through your family’s insurance plan.

40. Rather than join an expensive gym, check out on-campus facilities and their track field.There may be discounts for a gym nearby. Our campus is known for massage therapy classes and students always enjoy that free perk after classes.

As A Student

41. It is very important you attend class, read your book, do the assignments, avoid absences and latenesses. Reach out to your professors for help. They want you to do well.

42. Do not take an “Incomplete” in any class without knowing the consequences. Nine of 10 students who have taken an “INC” never complete the work required. The grade turns into an “F”and they lose the credits and have to retake the course. This potentially delays their graduation, reduces their GPA and adds cost.

A Saga About An Incomplete

43. Talk to your professor and understand the time period required for making up the assignment. One of my smartest students was on her way to an “A.” She let me know in early December that she was travelling with her family to South America and would miss the term paper deadline.

We both agreed that an INC would be a placeholder for her final grade. She would complete the term paper in January when she was back. I gave her the new deadline which was in the first quarter of the year. She even had a pretty good draft and I was pretty sure it would be done on time.

Just to be sure she would stay on track and complete the class, I sent emails to remind her in January. I did not receive an answer. Worried, I phoned her at home and she said I would have it soon. I never did get it. That Fall she told me that her grade had turned into an “F” but there was little I could do.

College students are huge procrastinators. Your professors know that and remind students in class and on school websites. Learn how to better avoid procrastination.

Work in College

44. It is essential to do well in school. At the same time, it is important to work on or off campus. The average full time college student makes $195 per week. According to a 2016 Digest of Education Statistics, 43% full time students were employed while 78% of part time students work. The majority of college students make between $7,200 – $42,000 per year.

45. There are many types of jobs you can do part time to add some money to your account. When you are busy, you often excel at time management. You can be a tutor, work in the learning or computer center. You can work at a restaurant or grocery. Many students consider working during January or during the summer to save more money.

46. As a full time student you can become a resident advisor or assistant on campus. This position is desirable and looks great on your resume. Compensation varies but you may earn free or reduced housing, a stipend, a meal plan or dollars towards your tuition.

Pay Down Student Debt

47. With all the money you may be saving and making, consider making small but regular payments to your student loans. Even $10-$20 per month helps to reduce the total amount. More importantly, it is a good financial habit. You may think it is early to think about student loan repayment but it is a good idea to be proactive with your student debt.

My Best Wishes On Getting A Good College Education

48. Make the most of your college experience. Do it in four years.

Two more tips:

49. Invest in Yourself. Become a sponge and learn everything you can. Develop soft skills such as critical thinking and problem solving. Strengthen your communication skills. Get out of your comfort zone and take electives that you may not get a chance to do again. Join the Mock Trial Team, the Federal Reserve Challenge, or Debate Team. Join any worthwhile competition.

50. Be ethical even if the world doesn’t always seem to value that trait. Your employers will.

51. Before you know it, you will be meeting prospective employers for your first job out of college. Go to job fairs or any networking events so you can begin to speak to those who may become important to your future. It is never too early to think about your next move. When looking for a job, consider the company’s benefit plan.

Conclusion

Saving money in college may be easier than you think. You need to make an effort to manage money on a tight budget, pay down debt earlier than required in small increments, control spending, surround yourself with like-minded friends, and make money when opportunities arise. Most of all, be a diligent student so you don’t have to repeat courses unnecessarily.

 

And have some fun!

What kind of financial experience did you have when attending college? Any tips we left out you would like to add for our budding college-bound folks? Please share with us! We are happy 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 whether in everyday life or in classic literature. Through the classics, we find stories of conspicuous consumption, overspending, too much debt, poor investing choices and errant estate planning in abundance. Many of our favorite authors and stories, like Mark Twain, recount such happenstances, some from their own 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– is accustomed to getting her way. Her parents are used to giving in to her at 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 who is intellectually her superior, a member of an old respected New York family. They have a son Undine has no interest in.

Lifestyle Inflation

 Ralph comes from a comfortable financial position and is not expected to work. However, he is no match for Undine’s constant and growing materialistic demands.

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.  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 costs.

Ralph and Undine divorce. 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 is in. Her friends find her less interesting and of poor culture. She goes to art galleries to match their interest but is challenged by her lack of knowledge.

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 tied up in his legacy, largely 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 own 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 with Leon, a man she is attracted to. 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 unfulfilled 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. Her house is repossessed and they are in ruin. She swallows arsenic and dies a horrible death.

The parallels between Undine and Emma standout. 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 on their own. 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. Certainly 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 his pursuit, 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 obtain 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

Dreams may not be easily gotten 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 wrong use of property. A possession is worth no more than how we make use of it. There is an opportunity we bear by leaving cash in no-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 wonderful short story written in 1893 is how Twain lost a fortune in the 19th century after poorly speculation in many  failed businesses. Twain loved risk and speculation. 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 survives a mishap on the seas and is ultimately rescued. Virtually penniless, without shelter and food, he wanders the streets of London. Henry is beckoned by two old wealthy brothers. 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 the possession of this note. A person can’t spend a note of this size without suspicion of theft and being thrown 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 that he is not to open in front of them. He looks into the envelope from the brothers and sees 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 that accompanies the note and realizes that the money is a loan without interest from the brothers for 30 days. If he can last 30 days as one brother believes, he will get his wish based on any situation he favors.

30 Days Credit

Henry, walking around in tatters, goes to get 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 change of the note. At a party, he becomes smitten with a young woman, Portia.

Henry uses his fame to endorse a mining company stock deal being sold by an old friend of his who was having difficulty. With Henry’s help,  the offering was well subscribed because of the trust others had in 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 Portia is the daughter of the brother that won the bet. When he is 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 here, 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 with diversification minimizes risk and long term strategies.

8. Yes, Money Can Buy You Happiness

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

If you like money lessons from classic short stories, I recommend Jason Zweig article. He also writes for the Wall Street journal.

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

 

 

 

 

 

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