Finding Income In A Low Yield Environment As The Pandemic Persists

Finding Income In A Low Yield Environment As The Pandemic Persists

Where can you find more income in this low-yield environment?

“Cash is king” is an old expression that implies that this most straightforward form of money has the most significant merit for investments. Liquid assets are desirable for their ability to be easily be converted into cash in times of financial stress. Finding income from low-risk investments has been challenging since the Great Recession.

When the stock market tanked in March 2020 due to the pandemic impact on our economy, those with cash on the sidelines were able to grab stocks at battered prices and benefit substantially. However, if you stayed in the market, you received the rewards rather than bailing out during the market. We have some suggestions that balance risks and returns.

How The Fed Affects Interest Rates

The Fed, through its monetary policy, takes action to deal with economic downturns. In 2020, they brought down the fed funds rate to nearly zero and expanded our money supply through aggressive quantitative easing measures. These necessary actions caused market interest rates, already low since the Great Recession, to drop to their lowest levels historically.  We have commented on the Fed’s role in our economy and its impact on the markets here.

If you are an income investor, the low yield environment has been frustrating to earn returns. Retirees, and those who are risk-averse, often favor income investing. However, income investing is for anyone who wants to balance the risk in their portfolio.

Income generation will likely be a key priority for many people. According to experts, income investors are confronted with low interest rates today, limiting their returns. So what are their choices? They can be patient or consider adding some risk to the portfolio, which will add better returns. I have faced a similar dilemma, concerned about having too much risk while reaching for yield.

What Is Income Investing?

Several investment strategies, such as growth, value, income investing, or a combination, give you a more balanced portfolio. We wrote about growth investing vs. stock investing here. Income investing centers on building a portfolio of investments that are structured to generate income in predictable streams.

Income investors seek low risk, low volatility, stability in their investments that generate income to replace earnings after retirement. The income comes from interest payments earned from having cash in a high yield savings account, interest from bond yields, and stocks’ dividends. An income investing-oriented portfolio may be too conservative to build a retirement fund for someone in their 20s or 30s who have longer time horizons and better tolerate risk.

A more balanced portfolio can combine investments that provide more growth combined with less risky investments. Such a portfolio could have a mix of money markets, Treasury securities, municipal, and high-grade corporate bonds. To add more risk, stocks with good track records for paying reasonable dividend rates can be part of this balanced approach.


Macro Background On Interest Rates And Inflation

Interest rates, the amount charged by a lender to a borrower, are keyed off the Fed’s fed funds target set as one of its primary policy tools. When the economy is weak, the Fed reduces the fed funds rate to stimulate the economy, influencing other borrowing rates. Consumers, if incented with a lower mortgage or car loan rate, spend and borrow money. Related post:

 11 Reasons Why Investors Need To Understand The Fed

As the economy recovers and strengths, inflation rises. If inflation is too high, the Fed will raise the fed funds rate to cool off the economy. Inflation is when there is a general and steady increase in a basket of goods and services. Inflation reduces your future purchasing power compared to the money you have today. We have been experiencing low inflation, below the Fed’s target of 2%.

How Interest Rates And Inflation Impact The Markets

Interest rates and inflation rates can have a significant impact on stocks, bonds, and other investments.  When interest rates fall, the interest payments received from bank deposits decline. The low interest rates will cause lower yields from income-generating investments like CDs, other money market securities, and bonds. Income investors rely on these investments for predictable income streams and preserve their capital, but higher yields are hard to find unless you add risk. There are different strategies for an investor to add more income by balancing risk and diversification.

 The low-interest-rate environment should remain for the foreseeable future. What about inflation? Low interest rates, if they do their job in stimulating the economy, can lead to higher inflation. If there has been a concern, it has been about zero inflation or deflation. Deflation is problematic because it means reduced pricing in goods and services.  Lower prices could lead to reduced wages, lower production hurting our economy.

Trade-Off Between Risks And Returns

All investors need to consider the risks and returns for their investment choices. Typically, risks and returns are positively correlated. Moving in the same direction means that making low-risk investments is usually commensurate with low returns, while taking high risks should be compensated with high returns.

Wouldn’t we all seek low-risk investments to be rewarded by high returns? Madoff’s high return strategy turned out to be a spectacular Ponzi scheme.

Low-Risk High-Return Strategies

I can point to a few legal low-risk, high return strategies if you look for income generation from money in savings. Here are a few possibilities  that may be beneficial for your pocket:

Refinancing your mortgage may produce savings, net of fees if you are currently paying a higher mortgage.

Paying off high-cost credit card debt will positively return if you are being charged double-digit rates and carrying balances.

Reduce or eliminate other consumer loans if you can refinance loans at lower rates.

Improving your credit scores ahead of planned borrowing may produce some savings.

Lifelong learners can seek out learning new skills or training that can bump their salary.

Various Risks To Consider When Investing

Before anyone becomes an investor, you should understand that all investments carry risks. There are no free rides, but you can protect yourself from the downside of losing hard-earned money. While you may not be able to control all the risks, there are ways that you can protect yourself from them. The ability to take on risk varies by individuals based on age, income, net worth, lifestyle, time horizon, family responsibilities, and tolerance.

Here Are Some Of The Potential Risks:

Interest Rate Risk

Interest rate risk is a risk that occurs when interest rates rise, causing bond prices to fall. Bond prices and their yields have an inverse relationship, moving in opposite directions. When there is a high demand for bonds, bond prices rise, yield declines, and vice versa.

All money market securities and bonds have interest rate risk. As interest rates rise, the market value of existing debt securities tends to drop because newer bonds have higher yields.

Inflation Risk

Inflation risk also called purchasing power risk, is the danger that your money will not keep pace with inflation. As such, your money will be worthless in the future than today.   When investing for the long term, be aware that inflation may diminish your returns. Deflation risk has the opposite effect. The value of an investment will decline in the face of lower overall prices.

Opportunity Risk

Putting financial resources into a bank savings account does not generate much income when interest rates are low—putting money in a low-yielding bank account is saving, not investing. As such, you incur opportunity risk from not pursuing higher growth options. 

Credit Risk

Credit or default risk is the uncertainty associated with not receiving promised periodic interest payments and the principal amount at the time of maturity from the bond issuer.

Liquidity Risk

You cannot easily convert some assets into cash without losing value, which is liquidity risk. An asset quickly convertible into cash with minimal loss is liquid. Treasury securities are notable for having strong liquidity characteristics. However, other investments such as real estate or collectibles have greater liquidity risk.

Time Risk

Time or duration risk refers to assets like debt securities that mature at different times. Typically, the longer the term to maturity, all other things being equal, the greater the risk. For example, a two-year Treasury note should provide a lower return than a 30 year Treasury bond.

Volatility Risk

Market volatility risk varies between securities and even within an asset class. Typically, high-growth tech stocks are likely to be more volatile than utility stocks.

Reinvestment Risk

Reinvestment risk is the risk that the return on a future investment may not be the same as the return current on the same asset. If you rolled over a CD this year that you owned in 2019, chances are you would be doing it at lower returns.

Where To Find Yield In A Low-Environment

Seeking income in the current environment is a matter of considering your risk-reward profile when putting together an investment portfolio. Sitting down with a financial advisor can be hugely beneficial. They likely have years of experience and talk to many investors facing the same predicament as you.

To help your understanding of the possible investments available and the relative risk, from the low to high risk, here are choices:

High Yield Saving Account

Keeping your money in a traditional savings account will not provide you much interest based on an annual percentage yield (APY). However,  it is a better alternative to keeping your money in your checking account. That is just a recipe for spending more.

High yield savings accounts are preferred over traditional savings accounts as they are known for rewarding with higher yields. Bank accounts are FDIC-insured up to $250,000 per account, so there is no risk. Restrictions like monthly fees, minimum balance requirements, and withdrawals offset offers of higher yields. During the pandemic, banks may have relaxed limits. Shop around as there is plenty of competition where you can get 0.80-1.00% APY.

Certificate of Deposits or CDs

A CD is an interest-bearing saving instrument purchased for a fixed period from three months to eight years. Minimum deposits may range from small amounts up to $100,000. CDs are FDIC insured, like bank accounts. CDs have slightly higher yields than high-yielding bank accounts. For the best rates, check Bankrate for their best and latest rates.

The longer the period, the higher the rate on the CD. You probably don’t want to subject yourself to a more extended period if you expect higher inflation in the future.

Banks often have minimums of $1,000 with fixed rates are fixed through expiration. If you withdraw your money, you will likely pay a penalty charge. There are variable CDs where rates fluctuate.

Money Market Securities

Money market securities are a mix of short-term debt securities and are also known as cash-equivalents. Like high yield bank accounts, they are liquid as they can be quickly convertible into cash with little or no loss of value. These instruments are issued at a discount to par value by various issuers, borrowing for their short-term needs. These money markets generally mature in one year or less and trade in the secondary market.

Money market securities differ by the issuer. The US Treasury issues Treasury bills; corporations raise short-term capital through commercial paper (CP). Banks issue negotiable certificates of deposits or CDs). A banker’s acceptance security is created by a company’s transaction with another and guaranteed by a commercial bank should the firm fail to pay the amount.

MMDAs And Money Market Funds

Money market deposit accounts (MMDAs) are government-insured from a depository institution. They vary on the size of account balance, the number of transactions each month, minimum deposits to open and maintain. Alternatively, investment advisers offer money market mutual funds. Money market funds are uninsured like the MMDA, but they may be more flexible in their terms.

Keep in mind, the income from money market securities is historically low. For example, a six-month T-bill currently yields just  0.12% today, tracking our very low-interest-rate environment. Indeed, it is virtually risk-free that short-term T-bills have been traditionally more attractive to hold in a higher interest environment. While it is better than keeping your money in zero-interest savings accounts, it is not much in our low-yield world. Historically, T-bills return 3.5% per year. The other cash-equivalent securities tend to trade at slightly higher yields than T-bills in a relatively narrow range.

Besides low risk, money market securities are for those that prefer liquidity and easy accessibility to money, particularly great for your emergency fund.

In the early 1980s, these cash-equivalent securities were very attractive, providing double-digit high yields in the face of a tough economy with high inflation. Keeping at least a small amount of your savings in money market securities makes sense for low-risk low return investors significantly when interest rates rise.

Government Savings Bonds

Series EE and Series I government savings bonds are promissory notes issued and backed by the US Treasury. You don’t pay state and local taxes on the income you receive. These are low-risk investments with low rates. The Series is available online through Treasury Direct. They can be bought in denominations as little as $25 and often are as gifts. Series EE provides a market-based fixed interest rate, and Series I adjusts for inflation.

Savings bonds have a 30-year maturity and can be redeemed any time after 12 months (if issued after February 2003). However, holders will lose the last three months of interest. Investors can report the accumulated interest or defer until maturity.

Bonds of Varying Risk And Return

Like money market instruments, bonds are debt securities issued by the borrower at below par for a fixed face amount with a specific interest rate (called the coupon). The issuer pays the principal on maturity.

To calculate your annual income streams from the coupon, you would receive an annual interest income of $40 on a $1,000 corporate bond with a 4% interest rate, paid semiannually. 

Bonds provide predictable fixed income streams. Bonds vary in credit risk from the Treasury securities rated AAA to municipal and investment-grade corporate bonds rated BBB or better. There are also corporate bonds that provide higher yields than investment-grade corporate bonds. The high yield bonds are often called “junk bonds” because of their more risky nature.

When you invest in a bond, you effectively lend money to the issuer instead of owning part of a company’s equity when you invest in a stock. In the event of a default, a bondholder has a priority claim as one of the company’s creditors.

Bond prices and their yields have an inverse relationship, moving in opposite directions. When there is a high demand for bonds, bond prices rise, yield declines, and vice versa.

All money market securities and bonds have interest rate risk. As interest rates rise, the market value of existing debt securities tends to drop because newer issue bonds are at higher yields.

Treasury Bonds Are Safe and High Quality

In addition to the short-term T-bills, the US Treasury issues Treasury notes (intermediate-term) and treasury bonds (up to 30 years). With these bonds, the Treasury is borrowing for long-term needs as well as retiring debt. Longer-term maturities carry more yield based on more risk than short-term securities. Like money markets, Treasury yields are historically low given the Fed actions that brought down interest rates when the pandemic impacted our economy.

Treasuries are considered virtually risk-free versus the other debt securities because of their triple AAA rating. Treasury investors have confidence in the full faith and credit of the US Government,

Historically, T-bonds returned 5.5% per year, but today it yields about 1.67%. Treasuries represent quality, safety, excellent liquidity and are modestly tax-exempt (holders do not pay state or local taxes). The primary risk in Treasuries is that they are subject to interest rate and inflation risk. To counter inflation risk, TIPs or Treasury Inflation-Protected securities adjust rates with the inflation-indexed CPI. Variable bonds that adjust inflation rates are also available in most fixed securities, particularly munis and corporate bonds.

Treasuries are desirable for many investors, especially those seeking quality, safety, and capital preservation. Without inflation protection, a bondholder with a 4% interest rate is fine if inflation is 2% or below. However, at that same 4% rate, the investor will be losing ground on your returns if inflation increases to 5% or more.

Municipal Bonds Have A Unique Tax Benefit

 State and local governments or municipalities issue general obligation bonds or revenue bonds for general long-term needs, debt paydown, or infrastructure projects based on shifting population growth and regional employment. Minimum denominations are $5,000, so they are attractive for individuals and households. Muni yields at 1.52% on a 30 year AAA bond is close to the 30 year T- Bonds. Municipal bonds have better tax benefits than Treasuries.

Tax Exemption A Big Plus

Owning a municipal bond has outstanding tax benefits. Muni holders have federal income tax exemption, and sometimes even state and local taxes are exempt. As a result, your aftertax returns on these muni securities will be higher than treasuries and may exceed the returns of riskier corporate bonds.

These securities are attractive, especially if your marginal tax rate is above 25%.

While rare, there have been some notable defaults, such as in housing. The default risk is historically low, below 1%. Muni bonds are generally safe, second to Treasuries in safety. An excellent way to minimize risk is to buy a municipal bond mutual fund bundled with diverse muni securities.

Corporate Bonds: High Grade Or High Yield

Corporations issue debt instruments vary by their credit risk, growth prospects, and potential restructuring. The higher-quality corporate bonds are investment-grade bonds, rated triple BBB or better. They generate low-to-moderate returns historically. Moody’s current yield for the highest quality (Aaa) corporate bond is 2.36% versus 3.02% a year ago.

Disappearing AAA Corporate Bonds

There are only two corporate bonds with the coveted AAA ratings left: Johnson & Johnson and Microsoft. In 1992, there were 98 companies with the highest credit rating. Companies started increasing debt levels associated with merger & acquisition deals, leveraged buyouts, restructuring, damaging lawsuits, and the Great Recession.

High Yield Corporate Bonds

For risk-oriented investors seeking higher returns, high-yielding corporate bonds could provide attractive returns. These are corporate bonds below investment grade and vary significantly. However, you need to do your homework as you would when buying individual stocks. I would recommend buying a high yield bond mutual fund readily available through Vanguard or Fidelity. Being diversified is your best path to exposure to these risky instruments.

The riskier, higher-yield “junk” bonds have higher yields than high-grade corporate bonds. Historically, junk bond yields are 3%-7% higher yields than investment-grade corporate bonds. Default rates are higher for junk bonds, rising to the mid-teens rate during the Great Recession. Typically, debt-heavy companies that are restructuring issue junk bonds. Today, investors seeking higher yields may want to consider high-yield bonds in the 4+% range, but remember, these bonds carry higher risk.

Holders of corporate bonds do not have any tax benefits like treasury and municipal bonds. These bonds tend to have pretax yields higher than their brethren. Historical corporate bond returns average about 6% per year, below the 9%-10% return of the common stock. As creditors, these bondholders have priority claims in the event of a default, which stockholders do not have.

Preferred Stock

Preferred stock is considered equity but shares characteristics with bonds and common stock. This security is a type of fixed income ownership security in a corporation. Like a bond, preferred stock may have call provisions and rarely provide voting privileges held by stockholders. Preferred stockholders receive fixed dividends per share and have priority claims after bondholders but before common stockholders receive dividends. The market price of preferred stock is sensitive to interest rates, like bonds.

The attraction to income investors is the regular dividend payments. Investors can rely on dividends. Sometimes companies skip payments, due to poor results, for example, but are eventually paid to the holders of cumulative preferred stock provisions. Preferred stockholders have priority claims over the common stockholders. The preferred stock carries a higher risk than traditional high-grade corporate bonds but less so high yield bonds or growth stocks. For income investors, preferred stock may be a good alternative.

Not every corporation issues preferred stock. Specific industries are known to issue preferred stock, such as financial institutions, telecom, energy, and utility companies. You can buy them individually though, for diversification purposes, buying ETFs like iShares US Preferred Stock ( 4.93% yield) or Invesco Preferred (5.49% yield) may be more desirable.

 Common Stocks With Strong Dividend Track Records

With the highest historical  S& P 500 annual returns of 9-10% relative to money markets and bonds, stocks (“equities”) are attractive instruments to own in your portfolio. However, they are too risky for most income investors.

Income Stocks

This group of stocks is classified as income stocks (instead of growth stocks) because they tend to grow less quickly but are relied on for above-average dividends consistently paid. These stocks tend to be less volatile because of the higher dividend yield, which provides an anchor.

Dividends from REITs, or Real Estate Investment Trusts, are substantial because they are required to distribute at least 90% of their taxable income to their shareholders annually. The average dividend yield for equity yields is above 4%, making REITs an attractive investment. Companies or stock groups with above-average dividend yields are  ATT, Verizon, Kraft Heinz, energy stocks, utility stocks, and REITs.

They are presumed to be safer, defensive, and slower-growing companies. One concern is whether that high yield is vulnerable to a cut in its dividend. Look for high-quality companies that have a history of paying above-average dividends.

Blue-chip stocks that pay dividends may be an excellent place to go for companies that have been around a long time and have track records. Not all blue-chip stocks pay dividends.

Dividend Aristocrats

Income investors may want to look at Dividend Aristocrat stocks. These stocks are an elite group of companies in the S&P 500 that paid and raised their dividend every year for at least 25 consecutive years. There are more than 60 companies on this list in 2020.

This subsector of above-average dividend-paying stocks is attractive for income investors. Coca Cola, Johnson & Johnson, Dover, Chevron 3M are in this elite group for more than 50 years.

Final Thoughts

Income investing is known for its predictable income streams and preservation of capital. Finding income in a low-yield environment may be difficult these days. Remember to remain diversified in your assets. Adding some risk to a basket of government and corporate securities and income-oriented may be a good strategy.

Thank you for reading! Please consider subscribing to The Cents of Money blog and receive our weekly free newsletter. Stay safe!



10 Tips To Diversify Your Investment Portfolio

10 Tips To Diversify Your Investment Portfolio

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”  Robert G. Allen

When you have some savings, it is good to invest and allocate your money to work.

Keeping too much of your money in your checking account is too tempting to spend and counterproductive.

The best time to begin investing is now—the earlier in your life, the better your wealth accumulation.

As you grow your savings, you want to consider your investment goals, risk tolerance, time horizon, and where to invest.

Investment Goals

How to invest and allocate may differ on a range of factors. You may adopt different strategies based on age, income, family responsibilities, lifestyle, financial resources, risk tolerance, and desires. 

 You are diversifying your portfolio by considering various asset classes: stocks, bonds, money markets, and real estate. We have some guidance for new and experienced investors: Investing Rules For Success-It’s Not Rocket Science!

At different points in your life, your priorities may be to realize one or more of the following objectives:

  • Buy your own home, finance your children’s education, take vacations, buy a car, or start a business.
  • Gain wealth and financial freedom.
  • Increase your current income or add some financial flexibility.
  • Meet your retirement needs.
  • Preserve your capital.
  • Set risk tolerance

There are degrees of risks for all types of investments. The exception is when you keep all your money in savings accounts in the bank where they are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per person and per bank account. However, you will earn little to no money.

Risk and reward, sometimes referred to as your return, are positively correlated. The risk/return relationship means that higher returns come with greater risk, while low-return investments come with low risk.

Investment Horizon

If your time frame is short given your age or needs, you may want to opt for low-risk securities versus someone who can invest for a 20-30 year horizon. They can better absorb risk and volatility.

 10 Tips For Diversifying Your Investment Portfolio:

#1 Asset Allocation

You should distribute your money among different assets based on your age and lifestyle. You can afford more risk in your portfolio at a younger age and be aggressive with more growth, such as stocks, than someone closer to retirement age. A good rule of thumb for allocation is to subtract your age from 100, and that would be the percentage of stocks in your portfolio.

For example, a 30-year-old could keep 70% in stocks (100-30) in the portfolio with 30% in bonds. On the other hand, a 60-year-old should reduce risk exposure and have 40% in stocks and 60% in bonds.

#2 Diversification Is A Must

Don’t put all of your eggs in one basket. Instead, you should be distributing your money among various classes of securities using an appropriate allocation. You should diversify within each security class. Investing in 10 energy stocks is not diverse. Branch out into multiple industries with different characteristics (e.g., high growth and strong dividend history).

# 3 Growth Stocks

Stocks provide more growth, appreciating faster than other financial instruments over the longer term. However, the stock market can be volatile, as witnessed by the 57% decline during the Great Recession. It is a good idea to buy mutual funds or ETFs when you are first investing to achieve a diverse stock portfolio.

#4 Money Market Securities for Cash

Investors can easily convert money market securities into cash without loss of value. They are low risk/ low return instruments with liquidity, stability and provide access to money. The Treasury bills rated AAA are the closest to risk-free securities. They can be bought individually or as part of a MM mutual fund, including other short-term securities.

While these securities are known for safety, they do not provide much income. The Fed has battled the COVID-impacted recession in 2020.  They reduced the fed funds rate to virtually zero and used aggressive measures. As a result, its needed actions have extended the low yield environment, challenging investors to find income from low-risk securities.

#5 Bonds With Different Characteristics

Investing in bonds is desirable for more predictable income streams. It is desirable to invest in various bonds: treasury bonds, municipal bonds, and corporate bonds. These all differ in terms of credit risk, liquidity, and tax benefits.

#6 Buy-Hold Strategy and Don’t Be Greedy

It is a prudent idea when building an investment portfolio to use a buy-hold strategy rather than trading securities. That said, don’t be afraid to pare down a holding that has appreciated too fast or begins to occupy a more significant proportion than you prefer. An old Wall Street saying is: “Bulls make money, bears make money, pigs get slaughtered.” I mean, don’t be greedy.

# 7 Understand factors that impact the financial markets

You should know the role of interest rates, their connection to inflation, and how the Federal Reserve’s monetary policy can significantly impact the financial markets. To calm the markets, the Fed stepped in with substantial liquidity to combat the economic downturn caused by the pandemic in 2020. The Fed reduced already low-interest rates, making it hard to find income for savers and risk-averse investors.

#8 Have Some Exposure to Global Markets

Investors seek potentially higher returns and exposure to faster-growing global markets, especially when the US markets are experiencing weakness. The best way to do that is to find an ETF or mutual fund representing the exposure you want.

# 9 Start Early To Benefit From Compound Interest

The earlier you begin to save and invest for retirement and investment accounts, the longer the time to take advantage of the power of compound interest.  Start in your 20s. Find a compound interest calculator, plug in some numbers, using what you can set aside monthly for investing.

Use a reasonable return (don’t use 12%, which I have seen and find it challenging to achieve. Instead, try 7%) and provide the number of years you have until your retirement.

# 10 Rebalance Your Portfolio Periodically

It is essential to periodically review your investment portfolio and consider rebalancing the various assets. Review it annually and make changes based on significant life milestones. Meeting with your financial advisor or accountant is an excellent way to review where your investments stand relative to you and your lifestyle.

Different Asset Classes

Common Stocks

With the highest historical  S& P 500 annual returns of 10% relative to money markets and bonds, stocks (“equities”) are attractive instruments to own in your portfolio. Investing in stocks is among the best ways to build wealth.

Common stocks represent equity ownership in a publicly-traded company or business enterprise. Your holdings reflect the number of shares you have. As common stockholders, you have voting rights on major company issues determined by your fractional share amount.

These equity shares are different than money market and bond securities, commonly referred to as debt securities. Owners of these instruments have creditor rights and do not vote like equity owners.

The Wealthy Get Wealthier, But You Can Get Rich Too

A recent study by the Federal Reserve in 2016 found  51.9% of families owned stocks either directly or as part of a mutual fund for investment and retirement accounts. However, the distribution of stock ownership by wealth percentile shows that the top 10% hold 84%, the next 10% have 9.3%, and the bottom 80% save 6.7%, according to a 2017 paper published by NYU Professor Edward N. Wolff.

Asset Allocation And Diversification

Recognize the challenges of investing. I have been an investor, an equity analyst, and I teach finance courses in college. As part of their requirements, students develop diverse stock portfolios using the stock market game. To a great extent, I share my experiences and mistakes during the bull and bear markets. Nothing prepares you for the next great crash as we had in March 2020. The unexpected pandemic of 2020 caused substantial market volatility.

Many factors impact the stock market. Investors should have a basic understanding of the economy, differences between industries, and company fundamentals. You need to understand the basics when investing on your own instead of having a financial advisor or buying mutual funds.

Learn about the differences between stocks, bonds, money market securities, and other asset classes. Be aware of what you own, whether it is individual stocks, or through mutual funds in your portfolio, setting up a  529 Savings Plan, or as part of your retirement accounts. Stocks tend to generate high returns but naturally carry higher risks and volatility than money markets and most bonds.

How To Determine Your Allocation

You need to manage the risk with a balanced portfolio with assets distributed among stocks, cash-equivalent securities, bonds, and real estate.

Generally, a stock allotment guideline in your total portfolio considers your age deducted from 100. So if you are 30 years old, you should invest 70% of your portfolio in stocks with the rest in a mix of money markets and bonds. The 70% percentage is conservative and can go higher to 80% allocated to stocks.

However, a typical 60 years old’s portfolio should divide their ownership more conservatively: 40% in stocks with 60% in bonds and money markets.

Diversification is essential and your best means for reducing risk.

Holding a broad stock portfolio, along with a variety of bonds and money market securities, smooths out the bumps you encounter. Investing at an early age helps to weather the ups and downs in the financial markets and benefit from the compounding of returns long term.

Once the shares are publicly issued, they typically trade on the New York Stock Exchange or the NASDAQ. The stakes are accessible for all investors to buy and sell. If they are privately issued, they are closely-held, usually by a small group of individuals who may be founders or families owning a substantial part of the business.

Stocks tend to be the most common investment vehicle for households, either through tax-advantaged retirement accounts or taxable investment accounts.

Active Versus  Passive Investors

Individuals and households can be active investors by buying the shares outright through brokerage accounts or Robo-advisors, thus becoming direct owners. Alternatively, as passive investors, they can buy mutual funds and exchange-traded funds (ETFs) representing indirect ownership of publicly traded shares.

If you are just beginning to invest and have limited resources and research time, consider buying a mutual fund or ETF.  Exposure to only one or two individual stocks is too risky.  I have different types of funds you can search for just below. Funds or ETFs will provide you with a more diversified basket of securities from the get-go. Later on, if you want to become more active, you can do your stock picking.

Those with more assets often have access to private money managers and hedge funds. Their fees are often higher than low index mutual funds and ETFs without necessarily providing higher returns.

Dividend income, dividend growth, and stock price appreciation determine stock returns. Related Post: How To Start Investing: A Guide For Investors

Choose from the different types of funds (or ETFs) that might fit your needs:

#1 Company market capitalization.

From large-cap company stocks with a capitalization of $10 billion to midcap stocks from $2 billion up to $10 billion range; and small caps of less $ 2 billion.

#2 Industry Sector.

You may be seeking one or more industries with different characteristics to counterbalance your portfolio. Adding tech, consumer discretionary, industrial, and finance companies would diversify risk.

# 3 Value stocks

Value stocks are stocks trading below their intrinsic value compared to their fundamentals. Benjamin Graham is the founder of this type of investing. Warren Buffett and Charlie Munger favor these strategies for their Berkshire Hathaway portfolio. Examples of value stocks are General Motors, GE, and Philip Morris.

# 4 Growth-oriented

Above-average growth comes with higher risk. These stocks appreciate at higher rates above the average for the market but don’t always pay dividends. Growth companies tend to plow their cash flow back into their business rather than pay dividends. A few examples of growth stocks are Amazon, Tesla, cloud companies like Salesforce, biotech stocks.

#5 Blended funds

A combination of value and growth stocks can offset some of the risks in # 4. 

#6  Dividend Growth Stocks

This group contains companies that have above-average dividend yields like ATT, British Petroleum, REITs. They are presumed to be safer, defensive, and slower-growing companies. Look for high-quality companies that have a history of paying above-average dividends. These names provide less risk but provide exposure to stocks.

# 7 Dividend Aristocrats

An elite subsector of above-average dividend-paying stocks not only provides above yields but are known for 25+ years of dividend increases. Chevron and PPG Industries are in this select group.

#8 Balanced

An investment portfolio should have a mix of different asset classes with fixed income and equity to help you achieve asset allocation.

#9 Index To A Specific Market Benchmark

It is difficult for the best portfolio managers with the expertise to “beat the market.” These funds track market indexes’ performances like that of the S& P 500 or the Russell 2000 for smaller cap stocks. These are prevalent ways to participate in the stock market.

# 10 Target Date Funds

These mutual funds adjust the asset mix based on your age and retirement plans. Vanguard has many funds labeled by decade eg. “2040.” They are appropriate for 529 Savings Plans and 401K retirement plans and a taxable investment portfolio.

# 11 Domestic or Global Markets

Suppose you may want to add international exposure to a mostly domestic-only portfolio for higher growth, especially if the USS is experiencing weak or recessionary growth. Several funds provide equity or mixed (including bonds) basket of companies in many countries, regionally oriented like Asia, or specific markets like China or India.

#12 Specialty funds

Gaining in popularity are specialty funds that contain stocks that represent companies with strong social responsibility or sustainability. ESG funds are portfolios of equities or bonds which address environmental, social, and governance factors into the investment process.

Money Market Securities

Money market securities are debt securities and are also known as cash-equivalents because investors can quickly convert them into cash with little or no loss. These instruments are issued at a discount to par value by various issuers, borrowing for their short term needs. These generally mature in one year or less and trade in the secondary market.

The US Treasury issues Treasury bills; corporations raise short term capital through commercial paper (CP), banks issue negotiable certificates of deposits or CDs). A banker’s acceptance security is created by a company’s transaction with another and guaranteed by a commercial bank should the firm fail to pay the amount.

T Bills or Money Markets Account

Individuals and households would largely buy the more popular T-bills with minimum denominations of $1,000. Individuals can buy a pool of money markets as an FDIC-insured money market denominated account (MMDA) or money market mutual funds. The investor would be holding a bundle of different money market securities, including Euro CDs issued in US dollars by European banks at higher yields is often in the funds.

On their own, the other money markets have higher denominations ($100,000) and are out of reach for the average household. Institutional investors often own or trade these securities.

For example, a six month T-bill currently yields just  0.12% today, tracking our very low-interest-rate environment. Indeed, it is virtually risk-free security but has been more attractive to hold in a higher interest environment. While it is better than keeping your money in zero-interest savings accounts, it is not much in our pandemic-world of 2020. Historically, T-bills return 3.5% per year. The other cash-equivalent securities tend to trade at slightly higher yields than T-bills in a relatively narrow range and low yields.

Besides low risk, money market securities are for those that prefer liquidity and easy accessibility to money, particularly for your emergency fund. Today’s yields are significantly lower than historically based on the Fed’s actions to combat the pandemic’s effects on our economy. 

In the early 1980s, these cash-equivalent securities were very attractive, providing double-digit high yields in the face of a tough economy with high inflation. Keeping at least a small amount of your savings in money market securities makes sense for low-risk low return investors, significantly when interest rates rise.

Older investors should be reducing their exposure to risky stocks and placing more of their portfolio in these securities and bonds

A Variety of Bonds

Like money market instruments, bonds are debt securities issued by the borrower at below par for a fixed face amount with a specific interest rate (called the coupon) and a specific maturity date when the issuer pays the principal.

To calculate your annual income streams from the coupon, you would receive an annual interest income of $40 on a $1,000 corporate bond with a 4% interest rate. The payment is paid semiannually or $20 every six months.

Bonds provide these predictable fixed income streams. Bonds vary in credit risk from the Treasury Bonds rated AAA to munis and corporate bonds with varying debt levels. There are also corporate bonds with high yields, so-called “junk bonds” because of their risky nature.

When you invest in a bond, you are effectively lending money to the issuer instead of owning part of the equity of a company when you invest in a stock. In the event of a default, a bondholder has a priority claim as one of the company’s creditors over stock ownership.

Relationship between bond prices, interest rates, and inflation

Bond prices and their yields have an inverse relationship, moving in opposite directions. When there is a high demand for bonds, bond prices rise, yield declines, and vice versa.

All money market securities and bonds have interest rate risk. As interest rates rise, the market value of existing debt securities tends to drop because newer issued bonds hav higher yields.

Warning: A Mini Macroeconomic Lesson For You

These securities also have inflation risk. There is a close connection between interest rates and inflation. Inflation refers to the rate at which prices for goods and services increase, reducing our purchasing power.

As inflation increases, so do interest rates. Interest rates, of course, are the amount charged by a lender to a borrower. The federal funds (“fed funds”) rate set by the Federal Reserve influences interest rates.

The fed funds are the interest rate at which depository institutions borrow and lend each other from their reserve balances overnight. That rate influences different interest rates, such as the prime rate, mortgages, and auto loan rates.

When inflation rises above the targeted 2% rate, the Fed, through its monetary policy, will raise the fed funds rate to stem inflation from going higher.

Related post: 11 Reasons Why Investors Need To Understand The Fed

As a bond investor, you don’t want your bonds to erode in value because of other bonds’ availability sporting higher yields. Issuers of Treasuries, municipal and corporate bonds know this so that they will offer inflation-indexed or protected securities. The yields on these bonds will adjust according to a formula linked to an inflation indicator like the Consumer Price Index (CPI).

Without that protection, a bondholder with a 4% interest rate is doing fine if inflation is 2% or below. However, at that same 4% rate, the investor will be losing ground on your returns if inflation increases to 5% or more.

Minimum denominations range from $1,000 for Treasuries, $5,000 for municipal bonds, and $1,000 or $5,000 for corporate bonds.

There are several different types of bonds with notable risk differences.

Treasury Bonds Are Safe and High Quality

In addition to the short term T-bills, the US Treasury issues Treasury notes (intermediate-term) and treasury bonds (up to 30 years). With these bonds, the Treasury is borrowing for long term needs as well as retiring debt. Longer-term maturities carry more yield based on more risk than short term securities.  Like money markets,  Treasury yields are historically low given the Fed actions that brought down interest rates when the pandemic impacted our economy.

Treasuries are considered virtually risk-free versus the other debt securities because of their triple AAA rating. Treasury investors have confidence in the full faith and credit of the US Government,

Historically, T-bonds returned 5.5% per year though they too are lower these days. Treasuries represent quality, safety, excellent liquidity and are modestly tax-exempt (holders do not pay state or local taxes). The primary risk in Treasuries is subject to interest rate and inflation risk. TIPs or Treasury Inflation-Protected securities are in demand as they adjust rates with the inflation-indexed CPI.

Treasuries are desirable for many investors, especially those seeking quality, safety, and capital preservation.

A True Story

I recall a story early in my Wall Street career when a friend of mine, a trader, had received an eight-figure bonus at the end of the year.

Curious, I asked what he was going to invest in with his bonus? With little hesitation, he practically yelled out, “Treasuries, of course!”

I was a stock analyst, and being surprised at his choice, I asked him why and he said, “Treasuries are safe, I have young children, I have all that I need, and I spend modestly, save abundantly, I donate generously, and I am risk-averse.”  That made more than a modest impression on me.

Municipal Bonds Have A Unique Tax Benefit

State and local governments or municipalities issue general obligation bonds or revenue bonds for general long term needs, debt paydown, or infrastructure projects based on shifting population growth and regional employment. Minimum denominations are $5,000, so they are attractive for individuals and households.

Tax Exemption A Big Plus

One of the outstanding benefits of owning a municipal bond is favorable tax treatment. Muni bondholders have federal income tax-exemption, and sometimes even state and local taxes are exempt. As a result, your aftertax returns on these muni securities will be higher than treasuries and may exceed the riskier corporate bonds.

These securities are attractive, especially if your marginal tax rate is above 25%.

While rare, there have been some notable defaults, such as in housing. The default risk is historically low, below 1%. Muni bonds are generally safe, second to Treasuries in safety. An excellent way to minimize risk is to buy a municipal bond mutual fund bundled with various muni securities.

Corporate Bonds: High Grade Or High Yield

These debt instruments issued by corporations vary by their credit risk, growth prospects, and potential restructuring. The higher-quality corporate bonds are investment-grade bonds, rated triple BBB, or better. They generate low-to-moderate returns historically. Yield is impaired in these securities as well in 2020. Moody’s current yield for the highest quality (Aaa) corporate bond is 2.32% versus 3.02% a year ago.

Disappearing AAA Corporate Bonds

There are only two corporate bonds with the coveted AAA ratings left: Johnson & Johnson and Microsoft. In 1992, there were 98 companies with the highest credit rating. Companies started increasing debt levels associated with mergers & acquisition deals, leveraged buyouts, restructuring, damaging lawsuits, and the great recession.

High Yield AKA Junk Bonds

For risk-oriented investors seeking higher returns, high yielding corporate bonds could provide attractive returns. These are corporate bonds below investment grade and vary significantly. However, you need to do your homework as you would when buying individual stocks. I would recommend buying a high yield bond mutual fund readily available through Vanguard or Fidelity. Diversity is your best path to exposure to these risky instruments.

The riskier, higher-yield bonds may be called “junk” bonds. Historically, junk bond yields are 3%-7% higher yields than high-grade corporate bonds. Default rates are higher for junk bonds, rising to the mid-teens rate during the Great Recession. Debt-heavy companies or those restructuring often issue junk bonds. Today, investors seeking higher yields may want to consider high yield bonds in the 3%-4% range but carry higher risk.

Drexel Burnham And Michael Milken

The earliest part of my career began at Drexel Burnham, known for developing high yield bonds by Michael Milken and his role in that market. That high yield market ultimately forced the company into bankruptcy. Mixed thoughts aside, many companies I covered as analyst survived and prospered due to those high yield bonds.

Holders of corporate bonds do not have any tax benefits like treasury and municipal bonds. These bonds tend to have pretax yields higher than their brethren. Historical corporate bond returns average about 6% per year, below the 9%-10% return of the common stock.  Bondholders are creditors who have priority claims in the event of a default, which stockholders do not have.

Rebalance Your Portfolio Periodically

It is essential to review your portfolio periodically and make sure it is balanced for your life. When you are young, you should take some risk given your longer investment horizon. As you grow older, you want to reduce risk by shifting more into predictable income streams.

Thank you for reading!

Have you reviewed your portfolio? Is it diversified enough? It is a good idea to work with a financial advisor or professional when considering changes. What strategies have worked for you? Please share your comments as we love to hear from you!


Scary Financial Statistics You Should Know (And Learn From)

Scary Financial Statistics You Should Know (And Learn From)

“Do not save what is left after spending; instead spend what is left after saving.”

Warren Buffett

Financial literacy is the ability to understand how money works. It is a challenge for many people to make, manage, spend, and invest it for the benefit of having financial flexibility and a good life.

Growing up in a home that often struggled with money, I have had some financial success but not without self-made challenges and forced errors. The smartest people I know in the world, my husband and I included, have blind spots when handling money. Being a lifelong learner, I find no shortage of things I would like to learn.

The Importance of Financial Literacy Skills

I have either worked in the financial field on Wall Street or teaching finance to college students virtually all my career. My goal is to teach financial literacy skills to all who want to learn more through this blog. It is surprising how few financial literacy courses are in high school or even college. Yet, financial literacy is a skill we all need to learn. I always find this statistic scary: 63% of Americans got three or fewer answers (out of a five-question exam) correct on a basic financial literacy test given by FINRA Investor Education Foundation.

In writing this article, I found interesting and scary financial statistics in 8 significant areas. However, we had a dreadful year in 2020 due to coronavirus. We have had to be on zoom because of continued social distancing needs in 2021, and that maybe is the scariest fact of all.

Financial Statistics You  Should Know And Learn From In 8 Areas


1. Savings Should Be A Priority Starting With An Ample Emergency Fund

COVID’s impact has been devastating to many, and it has not yet disappeared. One financial lesson is clear: the need for an ample emergency fund for unexpected costs. However, saving for one is not always easy. Based on a 2018 survey by the Federal Reserve, 61% of adults would handle an unexpected expense of $400 using cash, savings, or a credit card. By paying the credit card bill in full, you won’t have interest payments.  Another 27% would only be able to cover $400 by borrowing or selling something, and 12% would not cover it.

Related Post: Why You Need An Emergency Fund And How To Invest It

The reality is that many Americans often face more significant financial difficulties than $400 when having to pay for a car repair or a medical bill.  Just 40% of adults would be able to cover the unexpected amount through savings if the cost rose to $1,000, according to Bankrate’s 2020 survey.

How Much Should You Save for Unexpected Costs?

To combat these pressures, an ample emergency fund is a “must-have” tool for households. How much should it be? It is common to believe six months of savings to pay for living expenses is a good start.  During financial crises, people may need more savings. The median duration of unemployment increased from 8.6 weeks in November 2007 to 25.2 weeks in November 2010. However, 45% of people were still unemployed 52 weeks or more in 2011 (Bureau of Labor Statistics report).

Many have been out of jobs during the pandemic through layoffs and furloughs with still high unemployment levels months later. While unemployment checks help to an extent, dependency on government resources is often folly given the politics we have seen in the latest stimulus talks.

$2,467 May Be The Magic Amount

Researchers found $2,467 in emergency savings is needed to offset a financial disaster. A study of lower-income households by the Federal Reserve Bank of St. Louis and a Chilean professor determined the amount. About 70,000 households participated with income below 200% of the poverty level.

The median household savings was $70, while a quarter of the participants had zero savings. $2,467 was out of reach for many respondents. Like skipping medical appointments, hardships rose for those who were unable to come with that amount compared to those who could. While the $2,467 sounds like a big number, it is not out of line with the need to have savings of at least six months of your living expenses covered. Savings rates tend to rise by income.

Living Paycheck-To-Paycheck

A recent survey by First National Bank of Omaha found 49% of respondents expected to be living paycheck-to-paycheck. That percentage is high as the bank completed the study in early 2020 before the pandemic impact.  Living paycheck-to-check means that your monthly expenses devour your monthly income with little to no money left for savings or otherwise.  Budgeting is a must, and 83% of the respondents expected to stick to their budget this year.

Separately, Willis Towers Watson, a leading global advisory firm, reported 18% of employees making more than $100,000 per year live paycheck-to-paycheck. Keep in mind that certain parts of the US have significantly higher living costs. Higher annual incomes don’t always stretch as much as you would think.

2. Spending Less Than You Earn

To be financially comfortable, you should spend less than you earn, not borrow to pay your debt. In 2019, annual household income was $68,703 and compared favorably to $64,036 in consumer expenditures. (US Census, Bureau of Labor Statistics)

However, overspending does exist in our consumptive society as borne by these statistics by The Credit  Examiner and multiple sources:

52% of Americans spend more than they earn.

The average American spends $1.33 for every dollar earned.

21% regularly have expenses above income.

13.5% of Americans adjust their spending the following month to get back on track.

1 in 4 has more debt than savings.

Avoid Impulse Buying

Impulse buying has been a  culprit in overspending. The average consumer spent $5,400 annually on impulse shopping pre-pandemic, often on food and dining. Valassis research found 35% of consumers consider themselves predominantly impulse spenders. As such, they tend to treat themselves to buy something unexpected as part of the experience. That tendency to impulse shop continued mostly online as spending increased by 18%  in April 2020 compared to earlier in the year (Slickdeals, Valassis).

Overspending Can Lead To Borrowing More Than You Should

To avoid overspending, understand your needs, and wants. Needs are your basic living needs such as food, shelter, medical, and education requirements. Wants are desires shaped by your personality and culture. Consider these purchases more carefully if you are overspending. Go shopping with a list and stick to it. When making purchases online, put your buys in a cart and wait hours or the next day to see if you still must have it.

Related Post 10 Ways To Better Manage Your Spending

3. Retirement Savings

The average 401K retirement plan balance rose to $112,300 in 4Q 2019, while the average IRA  amounts to $115,400. Fidelity, which has more than 30 million retirement accounts, reported some positive trends for retirement plans:

Record numbers of workplaces offered managed 401K and 403(b) tax-exempt plans, which grew to 32% of the total percentage of plans.

35% of employers are automatically enrolling new employees and at a higher default contribution savings rate of 5% or higher. They reported that employees’ contribution rate has more than doubled over the last ten years, from 9% in 4Q 2009 to 19% in 4Q 2019.

The average 401K balance and contributions vary by age group. Twentysomethings (20-29 years) have a balance of $10,500 and a 7% contribution rate, while Sixtysomethings (60-69 years) have balances of $171,400 and 11% contribution. Early in 2020, Congress removed age limits so that individuals 70.5 years or older could continue to make contributions to their traditional IRAs. (Fidelity)

Many of Fidelity’s accounts tend to be high net worth holders and may not accurately represent US households.

A More Realistic View of The Retirement Savings Landscape

The Federal Reserve Report on the Economic Well-Being of US households in 2019 tells a different story.

The median retirement savings in the US was $60,000 in 2019. While 75% of non-retirees have some money in savings, 25% of that group does not. Of those who do save for retirement, 55% had balances in an employer-sponsored 401K plan. The Fed’s survey found fewer than 4 out of 10 respondents felt that their retirement savings were on track.

Related Post: Saving For Retirement In Your 20s

4. Net Worth

US families’ median net worth in 2019 was $121,700, a better representative amount than the average net worth of $748,800. Median is the middle point where half of the families have more, and the other half have less. Average net worth is a far rosier number because it skews higher by including the wealthy top 1% as part of the group averaged into one.

The top 1% hold 34.23% of US wealth in 2Q2020, which compares to 19.46% at the end of 2007, ahead of the Great Recession. (Federal Reserve)

The net worth varies for families by income, age, race, and asset and liability composition. Having a higher income affords families financial flexibility to have better assets, notably retirement savings, investment accounts, owning a home, net of a mortgage liability. The unemployed and underemployed have trouble paying bills and borrow more, resulting in lower net worth. 

Although net worth is a commonly used benchmark, liquid net worth is a more accurate measure of what you have for big emergencies or even a business opportunity. The calculation strips out assets that may take time to monetize quickly for liquidity purposes but keeps the same amount of your liabilities.

5. Consumer Debt

Total consumer debt held by US households in 2Q 2020 was $14.23 trillion, including $9.78 trillion in mortgage debt. (The Federal Reserve) The CARES Act benefited those holders of debt–mortgages and students, allowing for delays in payments.

Car Loan Debt

Total car loans were 1.2 trillion at the end of 2019, or 9.5% of American consumer debt.

Americans borrowed $32,480 for new cars and $20,446 for used vehicles.

Average monthly car payments vary by plan, with $550 for new vehicles, $393 for used cars, and $452 for leased vehicles.

The average APR was 8.06%. The rate often differs by the length of term and credit scores. For those with the highest credit rating, the borrowing was 5.66% compared to 21.54% for borrowers with poor credit.

Late payments of 90 days amount to 4.5% of outstanding debt.

The average loan length of term for new cars was 69 months, 35 months for used vehicles, and 37 months for leased vehicles. The longer the length of time, the greater the amount of interest paid on your purchase.

The Length of Your Loan Matters

Typically, the longer the term of your car loan or mortgage, the higher the amount of interest you will be adding to your purchase. The most extended car loan you used to be able to get was 60 months. Length creep has been pushing upwards as some lenders have offered 84 months or more. That’s just nuts. Buy a used car or a small car if the monthly payment is too much to handle. We recently bought two used certified pre-owned late-model cars to avoid taking on new debt.

Longer mortgages of 30 years remain more common than 15-year loans. The buyer should not ignore the substantially higher interest you are paying for the purchase of the home. Increasingly there are term lengths of 20 years and ten years that lenders may attract homeowners. Here is an example of the financial implications of a 30-year mortgage versus a 15-year mortgage.

Financial Implications For 30 Year Mortgage versus 15 Year Mortgage

When comparing the different loan maturities on a $300,000 loan:

  • The APR will be higher for the 30-year mortgage than a 15 year one, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15-year mortgage, given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you pay less in total interest.
  •  Assuming you have a 720 credit score, the total home price, including total interest paid and down payment, will be lower with a 15-year mortgage loan.
  • The 30-year mortgage is much higher because you are paying interest on your loan longer, so the total home price or principal is $375,000 plus $189,622 equals $564,620.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $76,012 in total interest equals $451,012 for principal and interest.

Housing and Mortgage Debt

The housing market has been a good story despite coronavirus. It has been a significant beneficiary of our economic recovery since the Great Recession. Recent mortgage statistics reflect a still strong recovery despite the remaining high unemployment levels impacted by the pandemic this year. Housing purchases are at strong levels as consumers are attracted to historically low mortgage rates. However, the longer the economic downturn from COVID, the more vulnerable these statistics are.

Total outstanding mortgage debt was $9.78 trillion at the end of 2Q 2020, accounting for the largest household expenditure at  68.7% of total consumer debt. That makes sense, as owning a home is often our largest asset.

The average mortgage loan rate was 3.84% (Federal Reserve Bank of St. Louis). That rate is historically low.

78% of homes sold have a mortgage, with the remaining 22% in cash. This result was due to more cash sales than in the past.

2.63% of homeowners in the US have mortgages.

The new mortgage loan balance is $260,386.


An average down payment is 6%, which is below the traditional down payment of 20%. (Smart Asset) I found this statistic particularly disturbing. Apparently, bankers have been accepting down payments as low as 1%. “History doesn’t repeat itself, but often rhymes” is appropriate whether it was Mark Twain or not.

Could It Happen Again?

Small down payments are too reminiscent of the housing debacle that caused the Great Recession of 2008-2009. Then, bankers made mortgage loans, including the toxic sub-prime mortgages, relaxing requirements on credit histories, and down payments. They justified the lower down payment requirements based on the rising housing prices. We all know what happens when housing prices stopped rising and housing values crashed in 2008-2009? BOOM!  Today, housing is healthy. But, we have high unemployment and a mixed economic outlook so that a healthy housing market can change the longer the recovery takes.

The share of homeowners with a mortgage at 62.9% in 2019 is among the lowest in recent years. (

Mortgage debt-to-home value for residential real estate peaked at 63.3% in 2009 to 1Q19. This improvement was due to an aging population, tighter credits by the banks, and more cash sales. (

A survey by MBA found that the delinquency rate for mortgage loans on one-to-four family unit residential properties increased to a seasonally adjusted rate of 8.22% of all outstanding loans at the end of 2Q 2020. This rate is a nearly four percentage point jump in delinquency, the most significant quarterly rise in the survey’s history.  The COVID-19 pandemic is hampering some homeowners’ ability to make their payments.

Barriers Remain For Many Potential Homeowners

Although mortgages are low, there are three main barriers to owning a home for first-time homeowners:

68% of renters cited saving for a down payment as a significant obstacle. Many renters are unaware of low down payment programs. (

Access to credit, while looser now since 2008, remains tight. The median score for originating mortgages is 759 as of 1Q2019. That is well above the 696 scores in 2005 (Federal Reserve Bank of New York). That doesn’t mean that you couldn’t get a loan if you have a credit score below 700. However, it may be at a higher borrowing rate putting it out of range for many.

Affordability of homes is a factor as home prices rose in 2020. The landscape during COVID has changed with more people leaving urban environments, so it would not be surprising to see less inventory and higher down payment requirements.

Student Loans

Recent outstanding student debt was  $1.67 trillion in federal and private debt with about 45 million borrowers. Private loans account for 7.87% of the total student loans (NerdWallet).

69% of college students took out student loans, graduating in 2019 with an average of $29,900 of private and federal debt.

The average student loan debt is $32,731, with a $393 monthly payment.

The median student loan debt is $17,000, with a $222 monthly payment.

11.1% of student loans are 90 days or more delinquent or are in default.  (Student Loan Hero).

Seniors With Student Debt

Over 3 million people age 60+ still have student debt. Of those, 40,000 seniors owe an average debt of $33,800, up 44% since 2010. Those with student debt will be unable to college tax refunds, social security benefits, and other government payments. The government will garnish these amounts. Potentially losing these benefits is a harsh result for those who are at or nearing retirement. Perhaps it is time to forgive these loans. Roughly 1 in 7 people who file for bankruptcy are 65+ years old, an almost 5-fold increase since 1991 (The Consumer Bankruptcy Project).

Credit Card Debt Can Be Toxic

Credit card debt at $0.82 trillion of total consumer debt in 2Q2020 reflects a steep decline from borrowers owing more than $1 trillion at the end of 2019. This drop is likely due to COVID-related factors, which resulted in lockdowns, high unemployment, and more savings.

The US personal savings rate–personal saving as a percentage of disposable personal income–peaked at a historical rate of 33.7% in April 2020, up from 7.6% in 2019. As job losses remain high after peaking in March and April, the personal savings rate was still above previous rates at 14.1% in August 2020. (US Bureau of Economic Analysis)

Credit card debt is a relatively small part of total consumer debt. However, credit cards, if misused by users, can be far more financially lethal.

Credit Card Statistics:

If used properly, credit cards can be a useful tool for its convenience and ability to not pay for things with cash during COVID. Paying your monthly card bills in full enhances the cards’ benefits without the downside. See our related post on the Pros and Cons of Credit Cards.

6. Credit reports and Credit Scores

It is essential to review your credit report at least annually. The Federal Trade Commission did a study and found one in five people have an error on at least one of their credit reports. Related Post: 6 Ways To Raise Your Credit Scores

1 in 5 Americans aged 20-29 don’t know their credit scores.

More than 29.8% of Americans have a credit score of 680 or better.

Nearly one in two people don’t pay off their credit balances each month.

51.2% of Americans renting property do not know they can report utility and rent payments to improve their credit scores.


7. Investing As A Means To Wealth

Investing early and even in small amounts will be beneficial for you in the long term. Yet, many people have remained on the sidelines. There are a variety of reasons for not investing in the stock market. When stocks dropped significantly in March 2020 due to the coronavirus, it ended the longest bull market, replaced by the bear market, which proved short-lived as stocks bounced back.

Although the stock market is subject to volatility, I remain steadfast in my belief that if you have savings, can pay your living expenses, and have a long-term investment horizon, investing is where you should be. That said, you should learn as much as you about the market and be financially disciplined.

Related Post: 10 Tips To Diversify Your Portfolio

According to CNBC, 61% of adults say they find investing in the stock market to be “scary or intimidating.” Millennials feel more intimidated than either Baby Boomers or Generation X. That is probably why only 1 in 3 Millennials invest in stocks.

However, over 66% of Millennials are interested in learning how to invest. 61% of this generation believes that this is a good time to invest based on a survey by Money Under 30.

The share of adults investing in the stock market has declined from 65% in 2007 to 55% in 2020. (Statista)

In a March 2020 survey, over one-third of adults reported they were less likely to invest based on what they knew of the coronavirus. Only 12% of respondents said they were more likely to invest. (Statista)

Robinhood’s Accounts Grew During COVID

Countering some of this decline in interest in investing is Robinhood’s growth to over 13 million accounts in May 2020, in part due to COVID. Robinhood is a popular app and website for investing and trading, particularly for individuals in their 20s and 30s. They are known for zero-based commissions except for purchases on margin. Customers have to pay $5 per month for the opportunity to borrow money from Robinhood. Their platform is designed for simplicity for users to get up and running quickly. Criticisms of Robinhood are associated with outages and security, both of which the company has been fixing.

A Fun Fact

More Americans own cats than stocks. Really. While 13.8% of American families own stocks directly (as opposed to mutual funds, for example), 25.4% own at least one cat. (Federal Reserve, American Veterinarian Medical Association).

8. Estate  Planning

In a 2020 survey, 30.4% of respondents say they don’t have a will because they don’t have assets to leave anyone.

24% fewer people have a will than in 2017.

Many beneficiary designations are out of date, a common and costly mistake. IRS statistics show that beneficiaries cash out six months after the death of the person who designated that money. Many beneficiaries are losing the compound benefits by cashing money out rather than rolling over the asset and perhaps paying taxes and penalties. We address tips on how to handle designated beneficiaries better here.

Other Financial Facts To Know

85% of people don’t like their jobs, according to a Gallup global poll pre-COVID. Only 15% of people are engaged in their careers.

Do You Want To Be A Millionaire?

7% of households in America are considered millionaires.

The average millionaire filed for bankruptcy 3.5 times. President Trump is in good company. Although he hasn’t filed for bankruptcy personally, his businesses have six times.

Only 20% of millionaires inherited their wealth. The other 80% earned their money on their own. (The Millionaire Next Door)

Final Thoughts

In this post, we reviewed many key areas of financial literacy backed by financial statistics. We tried to make relevant points on how we may improve our money management skills by learning. The coronavirus has certainly added to the many financial challenges people face. Taking one step at a time, we can improve our financial discipline by saving more, spending less, participating in retirement plans at work or on our own, and have an estate plan. With more savings, we should have an emergency fund and start investing in the stock market if you haven’t already.

Thank you for reading!! If you found this of value, feel free to share and subscribe to The Cents of Money.


12 Ways To Improve Your Time Management Skills

12 Ways To Improve Your Time Management Skills

“Time keeps slippin’, slippin’, slippin’, into the future.”

 Fly Like An Eagle – Lyrics by Steve Miller


Have you ever felt overwhelmed and stressed with too much to do and not enough time? It’s a familiar feeling.

Having good time management skills at an early age prepares you to achieve success at your school, workplace, and life. It is not easy to manage our time when we have so many distractions competing for our attention with immense data growth, social media, biases, and those bad habits like procrastination. Yet, with strong motivation and hard work, we can do better. We have time management tips below.

What Are Time Management Skills?

Time management is the process of planning, arranging, and controlling how much time to spend on tasks and activities to maximize effectiveness. Most of us are not good at managing our time well. According to a survey, only 10% of people say they feel “in control” of how they spend their day. Developing a good habit of managing our time will give us more control over our lives. Learning how to allocate our time and energy is beneficial. 

Time management skills are as precious as our time. Here are some essential skills to muster:

  • Goal-setting.
  • Set a routine for daily tasks. 
  • Organization.
  • Track your time so you don’t waste it. 
  • Prioritize tasks strategically.
  • Avoid procrastination.
  • Delegation.
  • Problem-solving.
  • Avoid multi-tasking.

Benefits Of Time Management  Skills Are Huge

  • Become more productive, effective, and efficient.
  • Have an awareness of wasting time and able to make adjustments.
  • Have a better focus, less stress, and be healthy.
  • Improve work/life balance.

By saving more time, we can have more opportunities to achieve meaningful career and life goals.

How Time Relates To Money

We often talk about the relationship between time and money and their importance as resources. Time is money, as said by Benjamin Franklin and many others. But is it?

Time is a finite resource that, when it has passed, is permanently gone. On the other hand, the time spent is gone forever. Although money may be hard to find when you are out of a job, you have an opportunity to replace it even when times are hard, as they are now. You can file for unemployment benefits, turn to money saved for an emergency, borrow money, search for a job, or start a side hustle. While not optimum, we at least have the possibility of replacing money.

Many of the tips for improving time management skills are akin to better money management habits. Having time management strategies is essential when you are in college, in the workplace, and in life. 

How To Better Manage Time And Money

Tracking time spent is similar to tracking your spending. By doing so, you may better see how wasteful you are and can make changes.

Budget your time wisely for what you need to do first before acting. When budgeting your money for essential needs such as living costs, you can better assess what you have for discretionary spending for your wants.

When you spend time foolishly, you may be late on deadlines, do a poor job, and need outside help to complete your job. Overspending leads to ramping up debt that may be difficult to pay off.

Being frugal with your time is a way to acknowledge you wish to spend it more prudently. The same goes for money when we are cheap with how we spend money.

For college students, having time management skills are a must to achieve their goals. Avoid procrastination by taking better control of your schedule. Managing your time will help you to do well and graduate from school and start your career. Time management skills are relevant. You can carry these skills forward into the workplace to be more effective and efficient at your job.

I Wasted Time At College

To be honest, my time management skills were terrible in college. There weren’t any courses to take to help you eliminate time wasters. Intuitively, I knew I was wasting time, and I know when I do so now. The difference between then and now is that I have become more aware and proactively work on being more focused—years of needing to be effective and agile as an equity analyst helped me realize better productivity. If I didn’t control my time better, my competitors would undoubtedly have advantages over me.

Improving My Skills Out Of Necessity

That said, I truly learned to develop time management skills when I went to law school. I went back to school at an older age and had some good habits already. However, I had some bad ones too. Law school made a world of good in the world of time management. As a student, I read the legal cases ahead of time, then compiled the relevant concepts into big study guides. Then I cut the principles down into an index card for each class. I had daily “to-do” lists with detailed schedules for the rest of the term. I was focused, organized, and strategic about my priorities.

Think of time management as a means to an end. Mastering your time well in school and at your job often leads to handing in your assignments on time with outstanding quality, less stress, have free time to enjoy family, friends, and yourself. By saving time, you can accomplish more of your goals in your life.

My sixteen-year-old daughter, Alex, has a system for managing her priorities with stickers for as long as I can recall. My son, Tyler, not so much. As a result, he has often been unnecessarily late with assignments. However, he has taken a page out of Alex’s book and has dramatically improved.

Merely having goals without good habits is not enough to reach them. Having a desire to lose 20 pounds, handing in assignments on time, or saving $10,000 within a year is an empty promise without a plan and good habits. We can improve them with hard work, persistence, and perseverance.

12 Ways To To Improve Your Time Management Skills


 1. Be Goal-Oriented With A SMART Approach

To achieve success, you need to know what your short and long-term goals are. Most of us are more focused on the near term, but these targets should fit our life goals. That doesn’t mean you can’t adjust your long-term plan along the way. However, having some idea of the lifestyle you’d desire motivates in the short term. For example, when you see a house near a lake, it may produce an image for your memory bank that you may want to pursue someday.

To better reach goals, a SMART approach can bridge the gap to better habits. George T Doran first introduced the acronym in Management Review in November 1981. College students and employees can use this approach to adapt to money and time management: 

  • Specific
  • Measurable
  • Achievable
  • Realistic (or Relevant, Reasonable)
  • Time

A SMART Example For Students: Improve My Academics

You are a sophomore, and your GPA is just under 3.0. You have been floundering a bit but recently have decided to pursue a career in business. So it is time to work on your grades to boost your GPA to the 3.5 level by graduation.


This semester, you registered for business courses you are interested in, such as Consumer Behavior, Business Law, and Finance. You also have to take Statistics, which you are worried about because it has a lot of math. You need to get your overall GPA to B/B+, including Statistics, by the end of the semester, a 6-month target. (SPECIFIC)


Keep in mind that your grades matter. If you can improve your scores to a solid B or higher this term, with better planning, you should lift your GPA to over 3.0.  (MEASURABLE)

Achievable And Reasonable

Ask yourself: Can I get at least a B or better in each course I am taking? It will require more organization of due dates for homework assignments and required papers. I will be scheduling a lot more study time ahead of the midterm and final exams and ask for help when needed.

As math is sometimes an issue in Statistics, go to the Tutoring Center and schedule a few sessions ahead of exam time. Spend more time on the Statistics classwork. (ACHIEVABLE, REASONABLE)


Your goal at college is to have a 3.5 GPA by the time you graduate. After graduation, you plan to get a job in business, potentially in finance, where it is competitive. With a better focus on your academics, you hope to improve your GPA each semester, picking up a few A’s.  (TIME)

2. Plan Your Work Daily

Being strategic about handling your work day-to-day is essential. You can use a daily planner or calendar app that works best for you. You should complete specific tasks in a certain timeframe.

Make a daily to-do list that is as specific as possible. This list should identify what you need to do that day. It should anticipate critical due dates to help you tackle reports, papers, meetings, exams, and projects. If you are working collaboratively with others, make sure to integrate those meetings into your planner or app.

For example, you are working with three students to make a study guide for an upcoming exam on global history. Split up the topics, and each should have respective deadlines for turning in their piece to the person coordinating the whole study guide.

Organizing time in the workplace may require more effort when working when people are working in teams collaboratively rather than individually. However, planning upfront by allocating different activities to individuals in the group with respective deadlines provides accountability. No one wants to be the deadweight person in a team or department who will not be part of the group’s next project.

3. Get An Early Jump On Your Tasks

When possible, get a jump on assigned work, especially if it is not part of your routine. If you are unfamiliar with the task, there may be a more significant learning curve. Give yourself extra time by reviewing the assignment, do some research, and sketch out an outline that will help you get started. Then you can plan and prepare in advance to help spur your motivation.

Look at the big picture first and break down the assignment into smaller steps. Ask for help early if you are unsure about the work. I have sometimes wasted a lot of time fearful of admitting to others that I didn’t know something. When working on a particular company when I was an associate to a senior analyst, I was unfamiliar with a specific regulatory requirement that would impact the business. When I finally got up the nerve to ask the senior analyst, she hadn’t heard of the provision, which was unique.

4. Set A Routine

Be strategic about recurring daily tasks. Eliminate or change how you go about doing things that may have the potential to be timewasters. Reading and answering emails are essential but decide how you will address this task. Should you tackle emails first thing in the morning or later in the day? Make choices about emails and stick to that routine. If you have daily or weekly meetings with your group, stick to a specific amount of time allotted to certain topics. Avoid unnecessary meetings. A good routine is a good habit.

Determine when you are most productive. That is usually the best time to tackle demanding tasks rather than the easiest ones. Have a plan for handling those most critical and urgent, then devote time to the challenging projects. In my experience, if you have too many pressing demands on your time, it may be from procrastinating over the tasks. The due date is fast approaching. You realize you are behind schedule. Plan better to avoid unnecessary stress.

There Still May Be Contingencies

Recognize that as great as your daily routine may be, there may be surprises to your plan. Deadlines may be moved up or, later on, a potential opportunity to do an extra project or picking up a new client who needs a lot more attention upfront. Leave room to be flexible when you need to go a contingency plan.

I recall vigorously working on a significant report, happy to be getting some quiet time to do it. Suddenly, a merger in my industry was about to be announced that evening. Switching gears on a dime, I set aside the report I was doing to focus on the potential merger. As such, I prepped an outline of the consolidation’s pros/cons and made some calculations for the possible event. The merger announcement happened after the close of the stock market. Being ready is always a good discipline to have.

5. Consider ROTI or Return on Time Invested

Return on time invested or ROTI is a similar concept to ROI or return on investment. ROI is a well-known financial ratio calculated as net income divided by the cost of investment. Using ROI, we can evaluate the investment’s cost-efficiency, whether it is a return on stocks, bonds, or a business project. ROTI, on the other hand, can help you measure how time-efficient you or your team are.

For example, how many minutes or hours did you spend at the department’s morning meeting versus what you learned? Colleagues can take a survey sharing their thoughts about how much time spent out of the total was valuable. If 75% was valid out of the 90 minutes meeting, why not cut meeting times by 20-25 minutes unless there is more on the agenda? Many people found that zoom meetings have been shorter, effective, and more efficient during the pandemic. See if you are spending too much time on non-essential topics.

Related Post: 18 Financial Ratios You Should Know

 6. Track Time And Avoid Distractions

Like tracking your spending, track how you spend your time. Review how you spend your time over 30 days. You may find surprises at how efficient you are in some things, wasteful in others.

What are the most common time wasters you may find? Any of these look familiar?

Are you continually checking messages?

Long meetings that drag on. (Zoom communications were more effective. However, I noticed they are getting longer too.)

You were mulling a decision too long.

You are socializing when you have work to do.

Saying “Yes” to a task, you should have said “No.” Learn how to say No when it matters most simply. 

You are delaying more demanding tasks by spending too long on more manageable tasks.

Make changes when you become aware of how much time you wasted. Budget your time wisely so you have ample time and resources to do a quality job. This list and many more such timewasters serve as distractions from doing our work. They are bad habits we need to eliminate strategically. We will find a lot more time to focus on other activities that will enhance our grades, careers, and lives.

7. Make Good Habits Which Allow You To Be Effective

Once formed, habits allow us to do things automatically in everyday life. Our practices start through repeated actions that may come with rewards.

Studies say it takes 21 days to 66 days to break a bad habit like scrolling aimlessly through email or social media rather than using your time more productively.

The 21-day time frame dates back nearly 70 years. Dr. Maxwell Maltz, a 1950s plastic surgeon, found that it would take his patients about 21 days to get used to seeing their new face, or post-amputation, they would sense a phantom limb. Dr. Maltz wrote about his adjustment period to changes and new behaviors to form a new habit….” it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell.”

There is more research that indicates that it takes 66 days to form a new habit. A 2009 study published in the European Journal of Social Psychology by Phillipa Lally, a health psychology researcher at University College London, indicated it took 66 days on average (in a range of 18 days to 254 days) to form a new habit.

Whether 21 days or 66 days, it takes significant time, effort, and determination to create a new habit.

Habit Stacking

James Clear has studied and written extensively on habit stacking, including in his book, Atomic Habits. Clear says the quickest way to build a new habit into your life is to stack it on top of current practice. This method is called habit stacking. First, Clear explains how a study of synaptic pruning may lead to building new and presumably better habits.

In a 2007 study from Oxford University, researchers compared newborn baby brains with those of adults. They found that the average adult had 41% fewer neurons than the average newborn.

The fewer neurons was a surprising result considering that babies are born with blank slates. They don’t have the strong connections adults have. However, adult brains prune away connections between neurons that don’t get used and build up relationships often. It is a biological change that leads to skill development.

Are you with me? Synaptic pruning could lead to building new habits.

Habit stacking is related to implementation intention, created by BJ Fogg. It is pairing a new habit (you desire) with current practice (you have). You are using routines that already exist and adding new behavior. Using this method increases the likelihood you’ll stick with practice by stacking new behavior on an existing one.

Habit Stacking: Time Examples

Think in terms of your morning routine. A typical start to my day:

Get up, go to the bathroom, shower, brush teeth, get dressed. (Too much information?)

Go downstairs, let Kelly, our dog, out. Make coffee, say hi to Teddy, our puppy, and my husband, Craig (usually in that order).

Turn on CNBC for financial news, have coffee, and a bite. I review the “to do” list, which I wrote the night before, adding tasks I hadn’t been able to finish. I may do a quick small activity like review homework from students. On days I teach, I go online to set up my lesson.

I found that I flounder after my classes end in the mid-afternoon. The habit of whittling down my list is a good habit and replaces my idleness. To remain productive until dinnertime, I realize I need to grade papers, a task I sometimes delay. Pairing a good practice with a desired habit helps me to take care of this responsibility.

Later in the day, I read emails and answer them. Make phone calls. Dinnertime is family time though, in recent years, my teen kids rush off. After work, I outline and research an article I plan to work on the next day.

Finish work for the day. Go walking on a treadmill or outdoors.

8. Avoid Multitasking By Doing One Activity At A Time

Multitasking is when you are juggling a lot of tasks simultaneously. It may seem like a great way to gets it done, but we are not doing it so well. There has been a lot of research that proves multitasking takes its toll on our productivity, especially if the tasks are involved.

There are costs in switching between the tasks. Psychologists have conducted task-switching experiments. In the mid-1990s, Dr. Robert Rogers and his team found that even when people change completely and predictably between two jobs every two to four trials, they were slower on the task-switch.

In a 2001 study, Joshua Rubinstein, Ph.D., Jeffrey Evans, Ph.D., and David Meyer, Ph.D., conducted four experiments in which young adults switched between different tasks, such as solving math problems or classifying geometric objects. The researchers found that the participants lost time when they had to switch from one task to another. As assignments got more complex, participants lost more time. As a result, people took significantly longer to switch between more complex tasks. Time costs were also higher when the participants changed to relatively unfamiliar tasks. They got up to speed faster when they changed to jobs they knew better.

More recently, a 2018 study done by Anthony Wagner, a psychologist at Stanford University, and his colleague, Melina R. Uncapher, found that heavy multitaskers have reduced memory. Specifically, people who use many media types at once, doing heavy media multitasking performed significantly worse on simple memory tasks.

To do quality work, focus on one task at a time and do it well. Multitasking may be a great concept but difficult to implement with possible downsides.

9. Prioritize Tasks

It is easy to lose focus when you have a lot of work in front of you to vary in priority. Some work may be necessary, urgent, challenging, or easy, required for you to do yourself or with others. Some tasks are similar, so you may be able to bunch them together in one fell swoop. Your work may be academic, rote, require technology, problem-solving, or critical thinking skills.

Prioritizing your tasks in the right way is essential for productivity. Academic and workplace settings use the following three standard methods. 

Pareto Principle aka the 80/20 Rule

The Pareto principle is an oldie but goodie, also known as the 80/20 rule. This rule signifies the law of the vital few. It takes its name after an Italian economist, Vilfredo Pareto, for his work in 1896.

In practice, the premise often means that 20% of customers account for 80% of its revenues. Therefore, a greater focus on those customers is essential. From a salesperson’s or student’s perspective, 20% of their work may account for 80% of their commissions or grade, respectively. The 80/20 rule is among the most valuable concepts for time and life management. For example, 20% of activities are critical as it contributes to 80% of your success. Be strategic about spending your time on these tasks to maximize your goals, be it revenues, subscribers, homework, or term assignments for class.

ABC Method

The ABC Method, developed by Alan Lakein, helps you to prioritize tasks by assigning letters and numbers to the items on your to-do list. The highest priority, which is essential and urgent on your list is “A.” As such, it would get a number “1” for A1, A2, A3. Then you move to B and C.

Students use this method at colleges and businesses. It calls greater attention to what is most urgent and what “must-do” using due dates on your timetable. After completing A priorities, B priorities are those B tasks you “should do.” Then C has lower priority tasks, which would be “nice to do.”

Eisenhower Method

Yes, the Eisenhower method is attributed to a quote by the 34th President, Dwight D. Eisenhower. He said, “I have two kinds of problems, the urgent and the important. The urgent are not important, and important are never urgent.”

Group daily tasks into four categories:

Category 1 is urgent and vital and requires the most substantial attention paid to those activities in that they are both critical and essential. For example, a due date is fast approaching for a term project worth 50% of your grade.

Next, Category 2 refers to essential but not necessarily urgent tasks. For example, you need to plan and organize activities for such a vital conference for your company requiring speakers on specific topics in a relatively short time frame.

Category 3 tasks that are urgent but someone can delegate jobs to others, freeing time up for you. Workers must undertake delegation of functions, but people are often reluctant to do so to their detriment. Learn how to do this better.

The final group is Category 4, the lowest priority. These tasks are neither urgent nor essential and are often timewasters. As such, they seriously should be considered for being dropped.

There are other methods people can use to identify what is most critical and least critical in their to-do list. The point is that they deserve varying amounts of attention determined by their importance and urgency. Don’t make a task “urgent” just because you avoided doing it for so long. That is just procrastination.

11. Avoid Procrastination

Procrastination is the enemy of good planning, whether for financial or time management.

For those who procrastinate, tomorrow is always a better day to make better decisions or tackle tasks we don’t want to do. Procrastinators voluntarily delay doing something like paying their bills or doing their work, despite knowing they will be worse off due to the delay. Avoiding procrastination is a way to get back on track.

When planning your daily, weekly, or monthly calendars, you schedule dates when essential tasks like reporting for school or work and paying bills. With fair scheduling and using a calendar, you will take care of what’s necessary on time before it becomes urgent.

College students are big procrastinators.

Procrastination tends to be particularly prevalent among college students. An estimated 25%-75% procrastinate on academic work. As a professor, I can attest to grappling with students handing in assignments well after deadlines despite knowing the due dates at the start of the term, and amplified by me in the classroom or online.

In a classic 1995 study, Joseph R. Ferrari, Judith I. Johnson, and William G. McGown have written academic research on students and their tendencies to:

  • appropriate too little time to perform tasks;
  • overestimate how motivated they will be in the future, and
  • mistakenly assume that they need to be in the right mind to do the project.

It’s not just college students who procrastinate. According to Ferrari, 20% of US adults are chronic procrastinators. Delaying is part of their lifestyle.

Surveys show many employees don’t opt-in for an employer-sponsored retirement plan because they are confused by their choices. Yet, language in the retirement plan tells employees that they can make future changes to allocations. Fortunately, more employers provide opt-out clauses that automatically enroll all employees into their 401K plan. 

  1. Biases Cause To Be Less Rational

Biases tend to get in the way of working rationally, whether we manage our finances or time. We have written a lot about biases.

Related Post: How Our Emotions Lead To Irrational Money Decisions

Present Bias

Behavioral economists refer to procrastinators as having “present bias” tendencies. They frequently are overweighting today with instant gratification and underweighting tomorrow, resulting in pain and losses in the future.

Academic research is plentiful in confirming that procrastination is a significant predictor of impulsive financial behavior and inadequate financial and time management planning.

Sunk Cost Fallacy

Sunk cost fallacy is another significant bias. You cannot recover these sunk costs. Let’s apply it to money or time. Imagine paying $50 for a ticket to a concert. On the day of the show, there is a blizzard. Despite the worsening weather, you drive hours to get to the concert because of your initial investment even though you are less interested in going to the event.

Sometimes you may be spending a lot of time researching and writing a paper. You have been writing pages and realize the topic is not that interesting, and you are spinning your wheels and wasting time. Still, you don’t want to abort your paper, and you keep going.

Both of these examples are casualties of this bias. When you think you are spending too much time on an activity you no longer are interested, you are bound to do poorly. 

You are better off walking away than spinning your wheels. Take a step back and evaluate if you can do a better job by focusing on another topic or activity. Don’t worry about the time spent if you still need to complete the task. Reversing course can be painful, but I often have regretted not doing so in the past. Start by sketching an outline of your report and begin to research your topic.

Plan For Downtime

I hate wasting time and other people’s time. As a result, I often carry a notebook, a book, and a small calendar with me when I find some downtime outside of my office or home. When I meet someone in a restaurant, Starbucks, or the park, I enjoy working on some small tasks as a precursor for doing an article or a report if I am early. Alternatively, if I don’t feel like working, I may just read.

Reading during downtime has been a reasonably typical habit going back to law school when I had limited time. It was always difficult to carry those heavy legal textbooks to use my class notes to summarize on index cards for studying.

Sometimes, we just need downtime to stretch, yoga, walk, run, sit, and just enjoy our lives. For some, the pandemic has allowed us to have time to be at home with our families if we were fortunate enough to work remotely. That means reducing your commute and being home more. Saving time may have resulted in some achieving a work/life balance that didn’t exist before.

Final Thoughts

We have precious time to do what we need and want to do at school and work. By improving our time management skills, we can more control over our lives while being more productive. Although multitasking doesn’t work well, there are many ways we can improve our effectiveness and efficiency.

Thank you for reading! If you found value in this article, you can find other articles on topics that may be of interest to you on The Cents of Money. Consider subscribing for free, get our weekly newsletter, and more.











Our Guide To Employee Equity Compensation Plans

Our Guide To Employee Equity Compensation Plans

Your equity compensation plan may be the best part of your benefits package.

Getting a competitive salary is important, but prospective employees should look at their employer’s benefits package as part of their compensation. Equity (or stock) compensation plans, if provided, are potentially among the most valuable features of your package.  Several different plans can be meaningfully additive to your compensation and net worth while boosting your motivation and confidence at work. We will explain the four most common equity compensation plans.

If Offered, Consider Yourself Fortunate

Most plans come with lots of letters–ESOPs, ESPPs, ESOs, and RSUs– and it’s easy to get confused about them. That is not a good reason to avoid participating in them. There is often low enrollment when given a choice, like for a company’s employee stock purchase plan (ESPP). Studies show that when more employees participate rather than opt-out, they enroll automatically in a 401K plan. With that in mind, we will explain what these plans are, how they differ, benefits and drawbacks. If you are working at a place that offers such programs, consider yourself fortunate. Learn about these plans and what it means for you. All of these plans contemplate stock ownership in your company. 

Two Recommendations Upfront


1. Consult A Tax Expert For Strategic Efficiencies

Taxation may occur upon granting the option or the stock and selling the option and stock. You should consult a tax specialist to understand potential tax consequences.

2. Diversification Is Essential

Concentration in any one stock is risky. However, it is hazardous if it is company stock where you are employed. Reduce your exposure to a comfortable level by fully diversifying your portfolio, primarily if your ownership represents retirement assets. You should not have more than 10% of your retirement or investment assets in your employer’s stock. Diversification of your equity and all your assets is a prudent strategy.

How the employee equity compensation plan varies:

  • Who is a closely-held private company or a public company represented by the shares?
  • What: stocks, options, cash, or a combination.
  • Understand the specifics: grant dates, prices, expiration dates, and vesting periods.
  • Taxation: Tax consequences may be tricky, requiring you to consult with a tax expert.


1. Employee Stock Ownership Plan or ESOP

An ESOP is a stock benefit plan and is among the most common forms of employee ownership. This plan covers 14.2 million people working predominantly for privately held companies. Departing owners of a closely-held company often create ESOPs. ESOPS motivate and reward employees and allow employees to borrow money for acquiring new assets.

How ESOPs Work

Your employer makes tax-deductible gifts of company stock, not options, into a trust allocated into individual employee accounts. Typically, there is no public market for these shares. Upon leaving or retiring from the company, an employee gets their stock and then sells them back to the company for cash. From the employee’s perspective, they are not purchasing the shares. They receive a cash contribution from the company, which is part of their compensation. This compensation is like a retirement fund since they don’t receive the proceeds until they leave. 

 Who Participates? All Employees

Generally, all full-time employees over the age of 21 participate in the plan. Employees receive allocations based on relative pay or some other equal basis. 

Vesting Period

ESOPs are regulated more than some other plans, particularly when it comes to vesting. Vesting refers to the amount of time an employee must work at the company before earning the stock benefit. As such, an ESOP must comply with one of two minimum schedules. There is no vesting until the employee has worked for three years and becomes fully vested or staggered vesting beginning in the second year of service with 20% vesting each year until reaching 100% vested in the sixth year.

Distributions If You Are Still Working

There may be certain times when participants may receive benefits from the ESOP while still working at the company. Your employer may choose to pay dividends directly to participants. Separately, if the employee is an owner of 5% of the company stock and is 70.5 years, the plan must distribute benefits, even the employee is still working there.

Essentially A Retirement Fund

Earlier, we mentioned that employees don’t receive their ESOP shares until they leave. If you stay at an ESOP-based company for a long time, you will essentially be going with retirement assets.

The average worker at a US company with an ESOP has accumulated $134,000 in wealth for their account. A study by Joseph Blasi and Douglas Kruse of the Institute for the study of Employee Ownership and Profit Sharing at the Rutgers School of Management and Labor Relations researched employees who accumulated wealth from ESOPs. These employees may have additional retirement assets from other accounts they set up separate from the company. According to the Economic Policy Institute, employees of ESOP-based companies have more retirement assets than the average amount of working families have in retirement savings of $95,776.30.

Tax Treatment Is Favorable

Employees don’t pay taxes at the time stocks are put into their accounts. Instead, taxes are due when distributions to departing employees are made and at potentially capital gain rates. Employees can roll over cash distributions into an IRA or another retirement account or pay current tax at the capital gains rate. However, if employees receive distributions below 59.5 years, they may be subject to a 10% penalty similar to the early withdrawal in a typical 401K plan.

From the company’s perspective, contributions of stock, cash, or dividends are tax-deductible.

A Major Drawback Is Concentration Risk So Diversify When You Are Eligible

With ESOPs, the concentration of owning a stock of the company where you work is a significant drawback. Therefore, you should seek to diversify when you are eligible. Participants have the right to diversify up to 25% of company stock during the next five years after reaching age 55 and are on the plan for ten years. The ESOP must offer at least three alternatives. Although well-regarded, ESOPs’ concentration risk is high. Therefore, participants need to diversify their portfolios outside of this ownership to avoid this risk.


2. Employee Stock Purchase Plan or ESPPs

An ESPP, a relatively common company-run program, is broadly offered as a component of employee benefits. Unlike the ESOPs given by private employers, public companies offer ESPP. With an ESPP, the employees purchase shares usually at a discount based on an offering plan.

Companies Can Boost Low Employee Participation 

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. A 2018 Deloitte Survey of Global Trends reflect a wider disparity between company offering ESPPs (75%) versus employee participation (28%).

Both surveys point to employee participation, which is below the 48% rate targeted by employers. Companies can boost this low rate with increased employee awareness through human resource professionals.

Is The Complexity A Deterrent?

Employee stock purchase plans may seem technical or intimidating to employees. If employees could better understand how ESPPs work, it may raise participation and provide incentives for employees to be involved in the plan. We have been intrigued by ESPPs as an opportunity for employees who may be leaving money on the table. To boost participation, companies can automatically enroll their employees into the program. Companies should explain how ESPPs work so employees can be comfortable with the plan.

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. Employees contribute via their paycheck. Contributions typically are 1-10% of wages. It is a good 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 programs have fewer restrictions but less favorable tax benefits.

To put a qualified ESPP in place before the plan’s implementation, a majority of shareholders must vote to approve.  All employees must have equal access to the program.

A qualified plan allows employees to purchase company stock up to a 15% discount. As such, 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 (the company offers no discount). If so, the company 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).

For tax purposes, the income you generated came from two sources. Treatment for the first source-difference between the employee’s share discount and the market price- is taxed as ordinary income. On the other hand, the income differential between your sale of shares and purchase price is dependent on the shares’ holding period if the shares’ sale price of the shares is higher than the holder realizes appreciation.

A qualifying disposition would get the more favorable capital gains treatment  if you have held the shares:

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

Taxation for qualified plan holders is during the year of the sale of shares. The tax would be at a higher level if you held shares for less time. Satisfying the required time provides the more desirable capital gains rate.

How The Tax Treatment Works

Significantly, taxation of the qualifying disposition depends on when you sold the stock. Income, the discount from market value, is ordinary income if you hold shares short term, your sale-generated income is a regular income, taxed at a higher tax rate. However, if you own shares longer, satisfying the qualifying disposition rules, your income receives the more favorable capital gain.

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 return 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 the shares for 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 are taxed at the ordinary income 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.

Lookback provisions are standard. These provisions mean that the employer will calculate the stock price as the lower between the offering date or the purchase date.


Offering periods are generally six months- twice per year though some companies have shorter periods of 1-3 months up to 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, part-time employees, and those highly compensated for 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%.


If the stock goes down, you can hold on to the shares or do dollar-averaging. Investors use dollar-averaging when they can buy purchases at lower prices, potentially reducing their 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 you have a qualified plan, 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 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, taxation of your income may be at capital gain rates.

All stocks are risky but generally are in an asset class with higher returns than other securities such as money markets or bonds.  Ensure you have a diversified group of stocks besides the company shares to reduce the risk of 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. The magic of compounding is a significant financial concept we explain here.

Better Confidence And Control Over Your Financial Well-being

Fidelity Investments found positive benefits for employees by buying company shares through an ESPP. Among the findings in the two-year 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 boost 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.


While employee participation in an ESPP has many benefits, notably additional 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 can be hazardous. Companies go through downturns due to the economy, increased competition, increased regulation, management changes, and potential fraud. This risk is present in every equity compensation plan. 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 for 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 through ESPPs. As a result of that debacle, Restricted Stock Units or RSUs (discussed below) became more popular as equity compensation for employees.

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.

3. Restricted Stock Units (RSUs)

Restricted Stock Units or RSU’s have been around for decades. Private or public companies may offer this popular form of employee compensation. RSU’s are the most common equity award granted to all employee levels regardless of industry (92%) based on a 2019 Domestic Stock Plan Design Survey by Deloitte. They are also the most common form of time-based full value awards (84%) by companies. Given these statistics, employees may seek these performance-based awards.

How RSUs Work

RSUs are stocks given as an award to you by your employer. Employees do not purchase their shares, and it may take several years before employees see value from its award. They represent a contractual right to receive shares or a cash equivalent amount as an allotment. Essentially, the company is promising to pay you with awarded shares on a vesting schedule. The grant date is the allotment date. As an employee, you are not getting stock transferred to you on the grant date. You are issued shares that you don’t yet own until you meet the vesting conditions.

Typically, vesting of a percentage of shares will occur over the years as you achieve performance benchmarks.  Graded vesting, or awards in equal parts,  are most common.  Once that tranche of shares are vested, they are no longer restricted and will have a fair market value. It is at the employee’s discretion as to when they sell the shares.

While RSU’s are stocks, they do not have dividends or voting rights like common shares. Some companies may pay dividend equivalents on the RSU’s, paid in cash. Unlike stock options, which may remain “underwater” as explained below, vested RSU’s are worth something of value.

Tax Treatment At Vesting And Share Sale

Taxation is at the time of vesting when you receive the shares at ordinary income rates. As such, your taxable income is the market value of the shares at vesting. The most common practice for tax purposes is taking the value of the newly issued shares based on their stock price upon vesting. The calculation of RSU value determines your ordinary income, which will be taxed that year. When you later sell the stock in the market, your taxation is at the capital gains rate on any appreciation.

A Few Drawbacks

While you don’t pay for the RSU’s, you will be liable for taxes at a higher tax rate. If RSU’s were issued when the company is private and remains so, you can’t sell your shares, even if vested, to cover the taxes. RSUs are less liquid if the company remains private. You would need to consult with someone familiar with selling private shares, such as on the NASDAQ Private Market or Yieldstreet. Even so, this avenue is not likely to provide much in the way of liquidity.

Having RSUs from a private company going public will enhance your liquidity, and if vested, you might benefit from the initial public offering. However, if the IPO occurs when your shares are not yet vested, you may not reap the benefit.


4. Employee Stock Options (ESOs)

Many employers grant stock options to attract and retain select employees, particularly in start-ups or fast-growing companies. If you are among those employees at the company’s early formation, you may be in an enviable position to benefit from a potential public offering. A potential windfall may be within your grasp and part of the high risk/ high reward benefit when working for a start-up.

How ESOs Work

An employee stock option is a gift similar to receiving a bonus from the company. The employee is not purchasing the option but may benefit from the appreciation of their employer’s stock. Employers are not giving the employee the stock directly. Instead, employers are offering employees call options. The employee has the right and opportunity to buy the stock at the exercise price for a specified period.

The grant of options will tell you what kind of stock options you get, how many shares it represents, and your exercise or strike price. For terminology’s sake, the exercise or strike price is the price you can buy the underlying stock. If the company’s stock rises above the exercise or strike price. The option is considered “in the money”  and, if exercised, will be profitable.

An Example

Let’s say you had options to buy 1,000 shares of your employer’s stock at the exercise price of $25. If that stock rises to $35 a share, the options are worth $10 a share in the money. If you exercised the option and sold the shares simultaneously at $35, you would realize a pretax income of $10,000 (option for 1,000 X $10 per share). Of course, the stock could fall to $15, meaning the option is “out of the money” or “underwater.” The options would have no intrinsic value and would make no sense to exercise.


There usually is a vesting schedule that tells when you are allowed to exercise your shares and not before that time. Usually, it is at least a year before your options are fully vested and exercised. The company wants to retain you, so the grant is incenting you to stay for a certain amount of time. If you leave before the vesting period, your option is worthless and doesn’t travel with you.

Different Tax Treatment Depending On Type Of Option

There are two main types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs). They are taxed differently. NSOs are considered more advantageous from the company’s perspective and are more common. The option holder usually has to pay taxes when you exercise the option and sell the shares.

On the other hand, ISOs qualify for special tax treatment if you hold onto the shares for the required time. The specified time for favorable tax treatment is at least one year after exercising and two years after your grant date. If you meet that requirement, you may only have to pay taxes when you sell the shares. The tax treatment is a bit complex, and you can read more about it here though consulting a tax expert on options is a good idea.


ESOs are great to receive from your company. However, unlike the other plans, you may not realize value if your strike or exercise price remains above the share price. As such, stock options on their own are difficult to value. Tax treatment is involved and the burden is notably more difficult on the NSOs, which are more common.

Final Thoughts

Increasingly, an equity compensation plan is a valuable part of your company’s benefits. Prospective employees often seek an equity compensation plan as an incentive to work at the company. We examined four of the most common plans–ESOPs, ESPPs, and RSUs–which vary in how they work, how employees can benefit, and respective drawbacks. All are potentially valuable, and if offered, you are fortunate to get this opportunity. You should consult with your professional as taxation, and other provisions are pretty complex.

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