5 Best Performing Stocks And What To Do Now

5 Best Performing Stocks And What To Do Now

2020 was a weird year for the world economy. Even more surprising has been the impact of the economic fallout on the stock market. It was a year when expensive stocks grew even more costly. Given the high unemployment rate and the fall in GDP, everyone expected the stock market to crash. Yet, the markets bounced back and are higher than the pre-pandemic levels. Professionals and amateurs were equally surprised at the stock market performance and the list of best-performing stocks last year.

Why Did The Stock Market Perform Well

Before we dive into the best-performing stocks, let us understand what was so different about the last year. Although the unemployment rate skyrocketed to the highest levels since the great depression, most white-collar jobs were unaffected. The ability to work from home resulted in many jobs being saved. The usage of technology to solve the current crisis also resulted in earnings getting pulled forward several years.

The Federal Reserve, the Treasury, and Congress worked together to provide stimulus packages to various affected communities. While we can debate the speed and effectiveness of these measures, the data clearly showed that the vast majority of Americans could use the funds to augment their net worth. The Personal Saving Rate shot to an all-time high of 33%. As per the data released by N.Y. Fed, total household debt decreased in Q2 2020, marking the first decline since 2014


Best Performing Stocks in Nasdaq for 2020

The Nasdaq list of best-performing stocks encapsulates how everything changed in our lives during 2020.

Zoom became part of our everyday vocabulary as everyone started working from home, and all events were conducted virtually. Closure of gyms resulted in people working out at home using Peloton. Moderna using their mRNA technology took only six weeks to devise and manufacture initial lots of its vaccine.

Any list of best-performing stocks of 2020 would be incomplete without Tesla. The stock had a meteoric rise in 2020, capturing everyone’s imagination. The stock price increase propelled Elon Musk as the world’s wealthiest person, overtaking Jeff Bezos and Bill Gates.

Tesla Inc. TSLA 743%
Moderna Inc. MRNA 434%
Peloton PTON 434%
Zoom Video ZM 396%
Pinduoduo Inc. PDD 370%
Best Performing Stocks in Nasdaq for 2020

Best Performing Stocks in S&P 500 for 2020

When we look at the best-performing stocks in the S&P 500, we have Tesla at the top of the list again. The inclusion of Tesla into the S&P 500 was not without controversy. By far, Tesla was the largest firm by market value ever to join the S&P 500.

Tesla’s inclusion in the S&P 500 forced all the index funds that track the S&P to purchase tens of billions of dollars of Tesla stock in a bid to track the index as closely as possible. As a result, the stock spiked higher in price to a self-fulfilling prophecy.

Tesla’s impact on index inclusion was a real outlier. Usually, stocks are added at a much lower market cap, and it would not impact the index to such an extent. As per the S&P 500 committee rules, a company must report an accumulated profit over four consecutive quarters. Tesla turned profitable only recently. However, the stock price had risen a lot higher even before it started making money.

Tesla Inc. TSLA 743%
Etsy Inc. ETSY 302%
Nvidia Corp. NVDA 122%
PayPal Holdings Inc. PYPL 117%
L Brands Inc. LB 105%
Best Performing Stocks in S&P 500 for 2020

Best Performing Stocks Based On Lifetime Wealth Creation

According to the SSRN paper “Do Stocks Outperform Treasury Bills?” authored by Bessembinder, ExxonMobil (Ticker: XOM) created a staggering amount of $1 trillion in wealth between 1926 and 2016. It has been one of the best lifetime wealth creation machines. Undoubtedly, Exxon’s reliable dividend has paid out to shareholders since 1882 has contributed to its remarkable performance. ExxonMobil has been part of the Dow since 1928 and has rightfully earned its place with the wealth creation over generations.

Best Performing Stocks - Lifetime Wealth Creation
Lifetime wealth creation to shareholders in aggregate

Best Stocks To Buy Now

It might be tempting to look at the list of best-performing stocks to extrapolate that their performance would continue. However, past performance is not indicative of future performance. Picking individual stocks is hard, even if they have been the most successful stocks in the past.

Ironically, ExxonMobil was removed this year and replaced by Salesforce (Ticker: CRM). The WTI futures contract turning negative did not help ExxonMobil’s cause either.

If ExxonMobil’s fate did not convince you that stock picking is not a great idea, let us deep dive further into Bessembinder’s research. He found that most common stocks that have appeared in the Center for Research in Security Prices (CRSP) database since 1926 have lifetime buy-and-hold returns of less than one-month Treasuries.

Yes, you read that right. Holding the majority of individual stocks would be a losing proposition, and you would be in a much better position, just putting that money in safe and secure treasuries.

If you wonder how to reconcile this underperformance with the data that stocks outperform treasuries, the answer lies in a tiny subset of stocks. When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the entire U.S. stock market’s net gain since 1926.

In simple terms, only a small subset of listed stocks is responsible for most of the wealth creation in the overall stock market. Those are the real A+ players. The other stocks were true laggards.

The outperformance of this tiny elite group of stocks is such that it compensates for most other stocks’ underperformance.

“The results reinforce the importance of diversification, and low-cost index funds are an excellent way to diversify broadly.” Hendrik Bessembinder, Arizona State University’s W. P. Carey School of Business

Advantage Of Index funds

Bessembinder’s study is an excellent example of why index funds are a better choice for everyone. It is fun to look at the best-performing stocks and dream of picking the next Tesla or Amazon. However, it is hard to pick the winners in advance.

A better alternative to looking for the needle in the haystack is to buy the entire haystack. No one would have anticipated the company would survive or even reach the current valuation levels looking back at Tesla.

I have a small allocation of fun portfolio used for moonshot investing to pick individual stocks. But my assignment to my moonshots is such that even if it goes to zero, I would be fine. Define your risk tolerance and stick with your investment plan without getting swayed by the best-performing stocks because the best performing stock of last year could drop in value tomorrow.

Most of my net worth is concentrated in low cost diversified index funds. Instead of trying to time the market and determine if it is an excellent time to buy or sell stocks, I just auto-invest. My asset allocation is defined, and my investment platform periodically invests my funds and auto rebalance as needed for free.

I understand why looking at the stock indices at an all-time high might make you nervous. However, sitting in cash is not a winning strategy. As 2020 has demonstrated, you can analyze all the economic indicators and conclude that we should be in a recession. Yet stocks could march higher and higher.

If the volatility of stock markets makes you nervous, the best course of action is to examine your asset allocation. Define your asset allocation between stock and fixed income. Run the numbers using the best retirement calculators to figure out when to retire and how much you need.

If you want to reduce your stock investments due to volatility and the bond portfolio does not provide returns, look into asset-backed securities that offer higher returns, like farmland investing. While you do not get the safety of U.S.> treasuries, you do get higher returns.

Final Thoughts On Best Performing Stocks

Analyzing the list of best-performing stocks to determine if they would continue their outperformance is hard. Although momentum and trends persist for a while, using those factors to base your investment doesn’t always work out.

We have seen how one of the highest wealth-creating stocks in history, such as ExxonMobil, also recently fell out of favor.

The prudent course of action is to allocate the bulk of your portfolio to boring low-cost index funds that track the market. Have a small, fun portfolio if you want to pick individual names but be prepared to lose all value. And if the volatility of investing in stock markets makes you nervous, then invest a portion of your portfolio in hard, tangible asset-backed securities.

This article originally appeared on Your Money Geek and has been republished with permission.

Credit Card Alternatives Have Benefits

Credit Card Alternatives Have Benefits

Do you really need a credit card? Most people believe so. I have had a love-hate relationship with credit cards, admittedly using cash and alternatives more often than most people I know. Credit cards can be a valuable tool, allowing you to make purchases with credit from the bank or retailer, as issuers. You must pay these debts back.

For disciplined cardholders, who pay their monthly bills in full, credit cards are a convenient tool. However, Americans carry an average balance of $6,354 at the average 16.28% interest rate. These folks are borrowing to spend money, growing their balances at fast rates while incurring exorbitant interest costs. It is a toxic formula.

Many people believe a credit card is essential. Roughly 83% have at least one credit card in their wallets, and 52% are carrying a balance.

The Benefits of Credit Cards – Can They Be Found Elsewhere?



Credit cards are more convenient than paying with cash or checking accounts. Many retailers do not accept cash, and it is tough to carry a wad of bills in your purse or pocket. With credit cards, you can make fast payments, transfer between accounts, have more shopping options, and track your spending. Some alternatives like debit cards, share this convenience factor.

Building Credit History 

More than most alternatives, credit cards can help you establish your credit history and boost your credit score. When you make purchases with a debit card, the funds are deducted from your checking. You can improve your creditworthiness by paying your bills on time with checks like rent, utilities, car loans, or even a loan through the Lending Club. You can set up an Experian Boost for free, linking certain payments like your cell phone and streaming service to lift your credit score a few points.


Credit cards offer many perks to their cardholders, such as cashback, points, discounts, and other rewards. Keep in mind that higher fees may accompany better perks. Charge cards and even debit cards may offer some of these benefits. If you link PayPal to your credit cards, you can still get whatever points, miles, and rewards associated with your specific card.

Savings and checking accounts do not offer these awards, but you can earn some interest income, admittedly at low yields these days.

Borrowing Capacity

Credit cardholders may be able to get cash advances by borrowing money using the available credit limit to take out a short-term loan. This double-edged benefit is a more comfortable and quick way to borrow money than getting a personal loan, but it is also more expensive.

Its costs have two components: first, there is a $5-10 flat charge or a percentage of your borrowing, and secondly, your interest rate on the advance will likely be higher than your regular purchase APR.

If you borrow for immediate needs, advances may be faster. However, it is ideal if you have an emergency fund when you need funds in a hurry. You may tap into other alternatives to get various loans reasonably quickly from Peer-to-Peer (P2P) lenders like the Lending Club. Otherwise, you can go to a traditional bank for a personal loan but it may be a slower route.

Fraud Protection

Credit card protections for holders come from the Fair Credit Billing Act (FCBA).  Your card has protections if lost, stolen, used without your permission, and potentially fraudulent transactions. Holder liability for unauthorized use is limited to $50, which may get waived at some banks.

The Electronic Fund Transfer Act (EFTA) covers fraud associated with an ATM or debit card. Liability limits are a bit more complicated for debit cards. If you report your card lost or stolen, your liability is:

  • Zero before any unauthorized transactions, 
  • or $50 within two days; $500 within 60 days; and no protection after 60 days.
  • However, there is zero liability if there is evidence of fraud transactions without a stolen or lost card.

For online purchases, PayPal may be an attractive alternative to credit cards as it has an added layer of encryption technology to avoid fraud.

11 Alternatives To Credit Cards


1. Debit Cards

Debit cards provide the convenience of making purchases with a plastic card emboldened with a Visa or MasterCard logo. They are widely accepted at retailers and can give cashback and rewards.

You can withdraw money or transfer funds and make purchases via point of sale (POS) with a PIN. Some people do not like entering the PIN for security purposes, and especially during the COVID pandemic. They can bypass the terminal to complete the transaction by signing for their purchases.

Your debit card purchase amounts are deducted electronically from your checking account in days. Make sure you keep some balance in the checking account to avoid overdraft fees from overdrawing.

Debit cards don’t provide the user with the same temptation or danger of overspending as credit cards. As such, debit cards are useful for those who overspend, aren’t creditworthy, or have little experience using cards like teens. You can get a debit card without a credit history. The first card I carried was a debit card because I didn’t want to have cash.

It Won’t Help Your Credit History

However, debit cards do not appear on your credit history or positively affect your credit score, as you are making payments from your funds. Unlike credit cards, the credit bureaus (Equifax, Experian, and TransUnion) do not receive reports of your debit card activity. Therefore, debit cards won’t help you build up your credit history. There are other ways you can improve your credit history outside of using a debit card.

2. Prepaid Debit Cards

To avoid overdraft fees that may mount up from debit cards, some people prefer prepaid debit cards. It has all of the benefits (and drawbacks) the debit card has, but it has an increased limitation. You can only spend up to the amount on a  card. Like debit cards, it is safer and more convenient than cash or checks. Prepaid debit cards are a good option for parents who have children in high school or college-age. These cards can help students learn how to use a card with spending limits.

3. Charge Cards

A charge card (e.g., American Express, gas companies) requires you to pay your balance in full each billing cycle. Typically, to be eligible for a charge card, you need to have a good to excellent credit score of roughly 700 or higher. Unlike credit cards, you have uncapped spending abilities and do not pay interest.

High annual fees range from $100 to $550, and these costs go up quickly. The higher the fee, the more significant and tailored are the features.

The  American Express Platinum card is top of the line, is metal instead of plastic, and a status symbol for many. I have this card for years which I originally used for my traveling work schedule. It has tremendous benefits and flexibility, some of which I don’t fully use, and I think a change is in order.

Plastic or metal aside, it is your responsibility to manage this significant charging power well. You will incur a steep late fee if you missed the payment date, and it will be reported to the credit bureaus, impacting your score. You can easily overspend, so it is up to the user to recognize that you have to pay your balance down to zero during the cycle.

4. PayPal

Paypal is a payment app, has the convenience of a credit card when shopping in stores, online, or as a mobile application. You can use this Instant Transfer service to send money to anyone, make fast payments, and refund faulty goods options. While PayPal may not be yet as widely accepted as credit cards, that gap will likely narrow over the next few years.

Essentially, PayPal connects to your bank checking account, debiting each amount instantly. You can link PayPal to credit cards and continue to get points, miles, and any rewards available from your card. You can get cash from PayPal if you participate in surveys.

5. Secured Credit Cards

A secured credit card is usually the best card for those who have already had financial challenges such as bankruptcy or managing a traditional credit card. It can also help those with limited or no credit history. Unlike debit cards, secured cards can help you build or rebuild your credit history.

They are easier cards to qualify for than credit cards, but they will look at your credit background and employment situation. Also known as a collateralized credit card, it requires you to deposit money in a bank account equal to its credit limit. The security deposit is your collateral.

You are usually setting the credit limit by your deposit amount. Start with a small deposit, say $300, manage your spending, and pay your bills on time so that you can build up a positive history. Typically, the issuer reports your purchases to the credit bureaus. There may be fees to pay to apply for the card and its processing.

6. Become An Authorized User

If you don’t have a card for various reasons–too young, limited, or poor credit history–, you can become an authorized user of another credit cardholder such as a parent, a sibling, or a close friend. If you go this route, make sure that you become an authorized user of someone with a good-to-excellent credit score and manages their bills well.

You are piggybacking on their credit profile (for which you should be immensely appreciative), but, as an authorized user of someone with poor credit, your score will reflect that person’s score on your credit. In other words, you will not be doing yourself any favors in that situation.

Authorizing your child as a user on your card is a good option for creditworthy parents. They can teach their children how to handle credit cards responsibly, set limits, keep track of spending, and take away authorization if the cards are misused. It may be a more challenging situation to set boundaries for an older adult as an authorized user.

7. Store Credit Cards

I am not a fan of retail (or store) credit cards, nor have I ever been. It’s the sales pitch at the point of sale where you are most vulnerable to getting a credit card you don’t need. It’s the retailer, not the clerk at the checkout, who I fault for the technique that turns many people (myself included) into silly putty.

Typically, the sales clerk will often talk to their customers at the point of sale, asking if you have their branded store card. Your arms may be holding a significant load of purchases and a credit card, but before you answer their question, they are offering a 10% discount on your purchases. Oh, and it will only take ten minutes more. It takes longer than that as the clerk tells you to look around since you are getting money back into your pocket.

The discount and future discounts in a store you tend to visit us often can be worthwhile. However, I don’t recall receiving any deals that were greater than 15%.

The negatives of having a store credit card far outweigh any positives, at least in my experience. Store cards carry higher interest rates than traditional credit cards, which are high enough. Applying for the card will impact your score slightly.

My personal experience years ago (the late 1990s) with a store credit card, which I used probably twice, lingers with me still. I signed up for the card. After getting the 10% discount on a warm coat, raincoat, and a few other garments, I did get their card. It was a higher bill than usual as I was shopping in a hurry, leaving my office to get these items for an overseas work trip. As is my practice, I paid the bill before its due date so I wouldn’t forget.

Months later, we applied for a mortgage refinancing but, I found an error on my credit report. It indicated that I had an outstanding bill from the retailer, where I had my one and only store credit card. Without identifying the retailer (it’s a Fifth Avenue behemoth), I called and wrote letters, receiving no answer. I visited their credit department, but no one would reverse the notation.

Ultimately, as we ran out of time for our refinancing application, I paid the bill twice! The second mistake I made regarding the store card, I closed the card. Later on, I realized you never close any credit card, just put it in a drawer.

8. Gift Cards

A gift card is a stored-value card containing a specific dollar amount for future discretionary spending. There is usually an expiration date that can be short term. Once the card’s sum is spent down or has expired, the card no longer has any value. Gift cards represent a retailer and potentially its affiliated businesses.

You can buy the gift card with cash or a credit card. Gift cards are on display on checkout lines, sold physically or online as an eGift such as an Amazon card. It is an easy way to give someone a present, especially during holiday times. We gave and received many gift cards through the years, especially for countless children’s parties, ours and their friends.

Besides the impersonal nature of gift cards, they are easy to lose, forget, and expire, so that it may be a waste of money ultimately. When these cards expire, the money you spent on the card is gone for the person you were gifting. On the other hand, the retailers do well from the gift cards as the unused dollar amount goes straight to their bottom line.

People spend roughly $100 billion on gift cards, with about $3 billion going to waste. National Retail Federation reported more than 59% of people surveyed in 2019 preferred a gift card for their holiday present. Another survey said that 80% of the gift card funds are spent within a year, leaving 20% on cards. Looking back, I regret giving cards, preferring more memorable gifts.

9. Apple Pay

There has been a significant rise in mobile commerce, ushered with new technology in recent years.  Electronic mobile wallets like Apple Pay and Google Pay are widely accepted digital cards linked to your credit and debit cards. They are a mobile payment service that works off your smartphone device, allowing you to make contactless, secure services in retail stores, in apps, and online.

It is convenient having a card on your phone, limiting the need to carry a lot of cards or cash in your physical wallet. You can track your spending like traditional credit cards.

If you lost your physical wallet or someone stole it, you would lose cash and need to contact each of your credit and debit card issuers. Your stored information is with a third-party provider. Each transaction must be approved by the user using a PIN or a fingerprint as a security measure. It may offer rewards or discounts but in exchange for fees.

Among its disadvantages, there are spending limits, and it may be even easier to pay, and your phone is readily available. At least with credit cards, you can leave them behind and window shop. Your phone needs charging, which may temper some of its convenience. As far as security goes, it may depend on how you manage your phone security.

10 Cash And Checking Accounts

They say cash is king, and for many, it remains an essential alternative to credit cards. It doesn’t provide points, miles, or rewards and may not be accepted everywhere. Cash is not convenient to carry and is easily lost and stolen. When cash is gone, it is gone like a home run over a  New York Yankees’ fence or wall.

Its significant benefit is in serving as a limit to spending and as an emergency fund. Cash has a tangible feel, and you can put it into your savings and checking accounts, which will not generate much interest in this low-interest-rate environment, but you may pay fees if you don’t maintain the bank’s minimum.

You can invest your money from assets you can convert to cash in your retirement investment accounts to watch your cash grow through compounding. You can use your checking account to pay your bills, at some retailers, and to everyone who will accept a check as payment.

I use cash and checking accounts for discretionary spending where possible.


Overdraft protection is a personal line of credit you can get from the bank to cover your checking account. This credit works when you spend more than you have on deposit in your checking account. By arranging this, your check will not fail for insufficient funds. A bounced check is embarrassing and a red flag. You can’t withdraw money from an empty checking account depending on overdrafts.

You should not rely on this protection except in an emergency. If you are prone to a miscalculation of what is in your account, you need to remedy it by handling money with care.

The bank will either charge an annual fee or $25-$30 for each overdraft. That can add up. How much coverage you have from your bank depends on you and your creditworthiness. You should not rely on overdrafts except as an emergency, such as when your car broke down, and you only had a check with you but not much in that account.

 Final Thoughts

Credit cards are a valuable tool if you pay your balance in full, avoiding debt accumulation. Used the wrong way, credit cards can be toxic. For those who need more discipline, there are alternatives that can limit your spending but still provide the convenience you don’t get from carrying cash around. There is a range of credit card alternatives that provide benefits and serve various purposes that can reduce your reliance on credit cards.

Thank you for reading! Please visit us at The Cents of Money for other articles of interest, and consider subscribing and get our weekly newsletter.

Dealing With The Awkwardness of Money

Dealing With The Awkwardness of Money

Ever have difficulty talking about a money situation with your friends, family, colleagues at work, or significant other? Sure, you have, and you are not alone. Money, along with politics and religion, can be taboo topics. Being awkward in money situations with others can be uncomfortable, cause envy and add stress in relationships. In extreme cases, distrust may lead to financial infidelity, marital discord, and even divorce.

However, it may be helpful to gain comfort in dealing with financial issues in common situations without breaking too much of a sweat.

When You Are In A Different Economic Situation Than Your Friends

Post-graduation from high school or college, your friends, may take different paths. Some pass on going to college and head straight to work after high school. Others work after college, with plans to go to graduate school. Some commit to going directly to a graduate program, like business, law, or even medical school. You may be in different economic circumstances and make different choices. When you earn less than your friends, don’t shy away from being together whether eating out, shopping or going on a vacation. Prioritize what is most important to you.

Be honest with your friends if you recognize that you cannot afford to spend as they do. There are several things you can say upfront to thwart any embarrassment for you. You can be direct, saying, ” I am not able to spend X for dinner, but I will order what I can afford” or “I am saving money to do X, and I am somewhat limited now.” Make suggestions like outdoor experiences when your friends are making plans to do something.

When your group is picking a restaurant, splitting the bills can be challenging, you can opt for a small salad. Tell your friends ahead of time of your preferences if there is a better dining choice for you. Make sure you can cover your bill with cash. I had experienced awkwardness in both spectrums when I earned too little or was the higher earner. Being with my friends was what mattered most. It takes some finesse to navigate, but good friends are worth being with. Find out ahead of time and learn how to reciprocate such as having friends over for dinner.

Shopping With Others With Different Spending Habits

Ever go shopping with friends for clothes you have no interest in? I have and I will return items that I know I won’t wear. However, when I was younger I was often afraid to hurt my friends’ feelings so I would keep the clothing. Later, I realized they wouldn’t care a wit if I ended up not buying their suggestions. The point of shopping is to have a fun afternoon with friends. Overspending for the sake of an outing will be a regret later on.

We are particularly prone to overspending when we shop in a group, especially being with people who have more ease at purchasing high ticket items. It is easy to get that shopping buzz and justify that impulse. That said, know who you are going with and whether it will be a good experience or a waste of time. Shopping with like-minded friends can be helpful and less stressful. Other times, when I need to get a specific dress or outfit in a hurry, I prefer shopping alone, with my daughter or a close friend.

Holidays are a particularly stressful time to go shopping for gifts for family, friends, and coworkers. Take a list and be careful when shopping in a group during this time.

Making A Loan To A Friend Or Being A Co-Signer

Being asked for a loan by a friend or family can be awkward. Just because you are earning more money does not necessarily mean you have to make a loan. You may have many uses for your money, notably savings and investments. Sometimes it is a small amount, such as when a friend forgot a credit card or their card didn’t work. It happens to everyone. Usually, your friend will pay you promptly back, or it is for a negligible amount.

On the other hand, a friend may be having significant money problems. Now you are being asked after his or her family or other friends have declined. Continually borrowing from others may be a red flag. I have been in this situation a few times and it is never easy. There are several things you can do:

You can politely and promptly say no. It may be your rule or that of your significant other not to make loans given your situation. Consider the relationship you have with this person and this person’s character. There may be other ways to help a friend resolve their debt or money issues, such as creating a budget or recommending a financial counselor. The following story is instructive from one of my favorite books.

Should Rodan Lend Money To His Sister? Ask Mathon

In The Richest Man In Babylon by George S. Clason, Rodan, the old Babylon spearmaker, has a dilemma. He earned fifty pieces of gold as a reward from the King. For Rodan, this was an absolute fortune he had never held in his hands before. He went to ask the advice of Mathon, the gold and jewels lender. Rodan’s sister is having financial difficulties and has asked him for a loan, but Rodan doubted her lazy husband would repay. Mathon told Rodan how he decides when to lend money:

  • Safest loans are when the borrower has valuable possessions that could serve as collateral;
  • When a borrower can earn money because of a particular skill or talent; or
  • The person seeking a loan is honorable or has a guarantor to pay back the money. 

Recognizing that he was letting his love and emotions for his sister get in the way, Rodan pondered and realized his brother-in-law would put him in a worse financial situation.  Ultimately, Rodan declined his sister’s request.

If you want to help this person, it would be essential to work out a budget and a timetable for repayment. The agrement should be in written form and signed by both parties.

Alternatively, a friend may ask you to co-sign a loan because you have excellent credit. You could be on th hook, and your credit score could suffer if your friend as the borrower fails to make payments on time. While co-signing for your child’s student loans is probably a given, you should not feel the same obligation for a friend. I would advise passing on such a situation.

Once making a loan to someone, it is essential to remember not to pass judgment on how they use or spend the money. Better to find out ahead of time.

Roommate Agreements Will Spare You Some Discomfort About Money Issues

Living with roommates can bring out inelegance when dealing with money. While sharing an apartment or house is a great way to save money and have independence, there will inevitably be challenges. Everyone’s name should be on the lease so that the responsibility is somewhat split.

Before taking an apartment, pick your roommates wisely and make sure you all agree to the place, its rent, and requirements. Good friends don’t always make the best roommates and vice versa. Find out about your prospective roommates by word-of-mouth or social media. Consider each person’s financial ability to pay for the place you have selected and whether it is affordable for all. Everyone’s name should be on the lease and respect due dates for rent and related bills. Do not agree to be the sole account holder as your credit will be at risk, not the others.

A roommate agreement (RA) may be an excellent way to divvy up responsibilities, accept rules and set up a protocol for known issues. An RA may not be legally binding as your lease. They are relatively prevalent in colleges. Among problems that can be covered by an RA are:

  • Paying of bills (rent, renters’ insurance, gas, electric, internet, cable) by the due date;
  • Communal space;
  • Sharing of groceries and meals, especially if someone is a competent cook;
  • Chores, keeping space clean and rotation schedule;
  • When friends/significant others stay over;
  • Dealing with a roommate who lost a job, and can’t contribute;
  • Parties and reasonable noise levels; and
  • Roommates are paying for damages to the apartment.

You won’t consider every possible conflict you and your roommates will face but an RA will help put a framework in place. Recognizing everyone has their habits, foibles, stresses, and needs for personal space is essential for making a living together with a good reality.

Asking Your Boss For A Raise

Finding out your peer is making more money than you doing the same job is frustrating. It may also add some resentment towards that colleague or, at the very least, be awkward for you in dealing with that person and your boss. Rather than obsess over it, it is time to ask for a raise. However, when doing so, be thoughtful, calm, and without anger..

Being informed about the gap in your compensation should be used as motivation to speak to your manager. Whatever you do, don’t throw the person who is making more than you under the bus. It may look petty and nasty for you. There may be legitimate reasons for those differences that aren’t visible to you. You do not want to be rash about the conversation with your manager. You don’t want to harm or undermine the relationship you most depend on, at work.

HR First Stop

Instead, it is better to arm yourself with more information ahead of time. Consider whether it is a serious enough gap. Certainly, if you believe it is a gender gap, you may have more ammunition. Going to HR first may be a good strategy and be less aggressive. They usually have a handle on compensation in your department and for various pay levels. Your inquiry is an appropriate way to educate yourself about future compensation.

When you go to see your boss, make sure you say how much you enjoy working at the organization and with them. Rather than name the higher paid colleague, you can say, “It has come to my attention that others are making more than me for doing the same job, what can I do to get a raise?” Depending on the answer you receive, you may want to ask for possible benefits, such as working from home, if a raise is not in the cards yet. Alternatively, it may be time to look for another job. Sometimes having another job is the best way to negotiate for higher compensation, but only if you are ready to leave.

Learn negotiating skills so you can strengthen your ability to ask for a promotion, higher compensation, or better benefits. Women especially need to take steps to enhance their negotiating abilities. This post provides the steps to take to achieve what you deserve.

Don’t Hire Someone You Know… It Can Be Awkward

When working at a desirable company, A friend may ask if you can put in a good word for someone or get them an interview. Think carefully before you do so. It can sometimes be better to pass if you know of their shortcomings or lack of experience for the job.

One of the worst mistakes I made in the past was hiring an associate for my equity research team on a friend’s recommendation. It was a desirable job with high pay at a significant investment bank. I could not confirm the person’s background independently. I interviewed the person who was likable enough and felt more obligated than I should have at the time. I had always told interviewees the worst parts of the job: long hours, tight deadlines, and sometimes crazy pressure.

I hired this person to start soon after because of the upcoming demands for our group.  Within the first couple of weeks, he would leave in the early evening during the busy earnings season. 

Following many conference calls with company management, reports, and models had to be done. He had ignored the job description and the needs of our team. He was a 9-5er in a job that required significant hours.

While he was intelligent but he didn’t try to fit with the other associates. I felt awkward that I made a wrong decision by putting too much weight on someone’s recommendation that solely wanted to do this person a favor. I gave him a more extended trial period than I should have, putting our whole group in a difficult position. Ultimately, we mutually agreed he didn’t fit with us. While this happened years ago, I still feel wrong about this hire.

Talking With A Significant Other About Money 

When you are first dating, you don’t usually talk about what you earn or how you deal with money. As you become more serious, however, you may want to find out about each other’s values, including financial priorities. How financially compatible you both are matters in the short and long run. It is alright if you both earn different incomes, but you should share your life goals. Your financial goals are very much a part of that. You want to avoid financial infidelity, which is damaging a valued relationship.

However, the more I talk to others about money, it is clear that couples are very awkward when discussing money. They may not know each others’ salaries, savings amounts, or debt levels. Yet money accounts for many of the decisions you will make over a lifetime with your spouse or significant other. My husband Craig and I have very different attitudes about money, which have caused many financial issues. This requires us to have awkward or even difficult conversations.

Are your credit scores compatible? While I wouldn’t recommend you share each others’ scores on the first date, how you both manage finances is a serious topic to broach down the road. Couples with different credit scores can live together but poor financial habits can cause significant marriage friction. Some 72% of Americans say they’d reconsider a romantic relationship because of another person’s debt, according to the latest findings from Finder.com.https://www.finder.com/unacceptable-partner-debt. 

A Not So Funny Conversation

Couples often lie about their money, whether it is lying about their purchases or paying the bills on time. I had a funny (not so amusing) conversation with my dentist the other day about another awkward situation he once faced. He treated two spouses in his office but always separate as most couples don’t usually come on the same day.

One day, the wife and husband came together for dental work they needed to be done. The dentist was working on the wife who had a problem with her denture. The door was partially open, and the husband came in to see how much longer the wife would be as he had to leave to go back to work. When he saw his wife of 30 plus years with her teeth removed, something he never knew about, he went ballistic. He was angry at his wife’s sudden transformation, that is, being toothless, but he also demanded to know how much it cost and why hadn’t she told him. They left this office, apparently a very unhappy couple!

The bottom line is that you need to be open, transparent, and honest about your significant other’s financial issues. Hiding financial problems could lead to different circumstances, distrust, and, potentially, divorce. Deal with it gracefully and early so you can resolve the issues together.

When People Tell You How To Spend Your Money

People usually mean well when they give you advice on your clothes, weight, or working too hard. One sensitive area is money and how you should spend it.  After some success on Wall Street, I still lived relatively modestly.

However, I recall getting a few comments that made me wince, such as:

What are you doing still in such an apartment?”  That apartment was a convertible 3 bedroom co-operative apartment on the Upper East Side. We had plenty of room for my husband and me before we had kids and our dog. We did move to a bigger apartment, but I still miss that “smaller” one.

For sure, I thought you’d be living at least on Fifth Avenue, why aren’t you?” Same apartment as above and from my mother’s best friend. She came to our home after my mom’s funeral. She thought my apartment did not convey the image of success she expected.

“Why do you work so hard if you are not going to spend what you earn?” My boss, also my mentor, spoke to me with concern after he gave me a promotion (to managing director) and a sizable bonus. I had a look of worry rather than glee, and he was disappointed. I explained that the higher the compensation the more that would be expected of me. I had been previously viewed as an underdog and wanted to remain so. He lectured me on my lack of a second home, not taking vacations, and driving a sh***y car.

Parental Influences on Our Money Values

I chuckle now when I recall these awkward moments. However, I didn’t like hearing it at the time. I remain happy to be frugal about prefer spending wisely. I should have answered with grace, “We are happy living here now and will see where the future takes us.”

Regarding my work ethic, that is working too hard or buying something I could afford was a different topic. My boss was somewhat right, but I loved my job. Longevity on Wall Street is relatively short, akin to being an athlete. I guess it was my cautious nature to save and invest.

Also, I never had a lot of free time to shop or take off from work. I had relatively little debt and liked spending below my means. I wanted experiences over material things at the time. My brother, a very successful physician, was as frugal as I was, if not more so. Monetary values learned during our upbringing often influence our adult attitudes.

An NBER study found parents’ attitudes toward debt can significantly influence children about their approach to spending and borrowing money. As an adult, they tend to adopt conservative views towards debt. Tendencies go the other way as well. If your family tends to be splurgers, there is a good chance you will be one too. We can always learn better financial habits to counter inclinations towards overspending and higher debt accumulation. It may take effort and more conscious behavior to change, but it is doable. Parents should talk to kids about money.

Frugality means being more conscious of your spending and getting what you most value. It should not mean obsessing over every dollar to the point of not being able to enjoy your life and be happy. Keep the right balance in your life that you can maintain. Yes, money can buy happiness if spent the right way.

Giving To Charities At Work

Friends or coworkers may ask you to contribute to their charities at work or on social media. It may be small amounts or to a worthwhile charity. However, sometimes there are too many people asking for support at the same time. You may have several charities on your list. Just let others know that you appreciate that they are asking but you are giving money to your charities.

Don’t feel pressured into giving to others unless you ask them to support yours. If you don’t want to give to others, tell them you have your list. In an Awkward Money Moments survey by CouponCabin.com, 34% of people felt pressured to donate to a charity on behalf of a coworker, family member, or friend, making them very uncomfortable.

Final Thoughts

We experience awkwardness when dealing with common money situations. Talking about money is a sensitive topic but frequently arises with our friends, families, coworkers, and bosses. Be open, direct, and honest when you can with others.  Learn to say no when people ask for money if you aren’t able to make loans or give to charities.

Your own financial situation should be in harmony with your own beliefs, values, and abilities and doesn’t have to be compromised when you are with other people. Don’t shy away from asking for a raise but learn the power of negotiating for yourself. The awkwardness of money can be stressful, provoke distrust, and ruin relationships. Always deal with money problems head-on with significant others. Like Robert Frost said, “The best way out is always through.”

Thank you for reading! Please visit for other articles of interest.






How To Grow Your Potential For Financial Success

How To Grow Your Potential For Financial Success

“It doesn’t matter how many times you fail, you only have to be right once.”

Mark Cuban


What Are Your Chances Of Reaching Success?

100%! (If you want it!)

Growing up, I heard snippets like “do the best you can,” “apply yourself,” “be productive,” and “accomplish things daily.” Sounds so easy.  If I follow this advice, I will be successful. But, successful at what? Ah, that was the hard part! You need to define your own strategic goals in your field, finances, and life. Make sure they are reasonable and achievable.

You Don’t Need Mark Cuban’s Wealth To Be Successful

Being rich is not necessarily a sign of success. Understand what you want in life. Set and align your strategic goals with a plan to achieve specific results. For example, if you plan to reduce or eliminate credit card debt or student loans, getting to a lower balance is quite an accomplishment, and then set your sights on a zero balance. 

Setting Yourself Up For Financial Success

To grow your potential for financial success, understand the basics of a financial plan based on your goals. This plan is a roadmap that can help keep you disciplined when managing money. You can manage changes to your plans but consider having reasonable rules you can live by.

1. Live within your means by spending less than you earn so you can use these savings for investing in the market.

2.  Pay your credit card balances in full so you don’t accumulate high-cost debt that will outpace your ability to handle it.

3. Set aside money for an emergency fund that can support your basic living needs for six months. Unexpected costs for a lost job, a pet’s surgery, or car damage happen to people all the time.

4.  Establish your retirement savings account at work, and earn their match contribution if they offer that as part of plan. Open a Roth IRA account, and plan to automate savings from your paycheck. You can start with small contributions at first, increasing amounts as your compensation grows. 

5. Grow your investment and retirement accounts like a garden, paving your path to wealth and financial security.

6. Consider your loved ones as you buy the insurance you need to protect the assets you are building.

 Have A Good Mindset Starting Out

My college students feel great when they are able to get better grades in the hopes they will be able to complete their degree and get a good job. Today, I often guide my college students in picking the “best” majors, careers, and how to succeed at work. Rather than share my successes, I enlighten them by sharing my failures. Failure is a likely outcome of taking risks but worth a try. People at the top of their fields have often failed many times before achieving financial success. We need to learn from our mistakes.

Related Post: What Every College Grad Should Know

How To Grow Your Potential For Success:


Take Risks Early In Life And In Your Career

When you are young, take risks that will add to your portfolio. Step out of your comfort zone. What is easiest is not necessarily a good choice. Seek challenges to expose yourself to different environments. In the early stages of your career, build character, skills, and experience. That matters more than how many “A’s” you had on your transcript.

Employers will ask you about the greatest risks you have taken. How did it work out? Working hard is simply the minimum. They want to know how you dealt with challenges and failure. Failure is acceptable if you learned from it. Those experiences provide valuable benefits. There are no linear courses to success but learn how to deal with obstacles.

Don’t Feel Locked Into One Major And Career If Not Suitable

Many successful people have changed career paths. I was a liberal art major. It was a safe choice for someone who was 16 years old at the time. I didn’t explore any other areas of study until I went for an MBA several years later. Even then, I chose an accounting major, but I added finance and investments to my studies. My business career went through some modifications. Then I became an equity analyst at an investment bank, which I enjoyed for many years.

Pursuing one field shouldn’t stop you from exploring peripheral or different areas. Michael Jordan was among the greatest scorers in NBA history, winning a record ten scoring titles and averaging 30.1 points per game. Then, at age 30, he retired and pivoted to professional baseball. He signed with Chicago White Sox’s minor league system for a short time.

Could Jordan have succeeded as a professional baseball player? Many experts believe he was promising and had the potential to remain, but he returned to the NBA a year later. We will never know. At least he challenged himself by making a career move.

Love What You Do

It is easier to work hard and find success if you enjoy what you do for your career. Steve Jobs said, “The only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” Finding purpose and meaning in your job increases motivation, engagement, and self-worth.

According to a Gallup Poll in March 2016, only 34% of the US workforce were engaged at work. Be committed to your work or consider changing jobs you may be happier doing. It is hard to be successful if you are spending so many hours of your week not engrossed in your work.

“Building A Cathedral”

There is an old parable about three bricklayers. It dates back to the great fire of 1666 that leveled London. Asked what they were doing, the first bricklayer said, “I’m putting one brick on top of the other,” the second bricklayer replied, “I’m building a wall,” and the third bricklayer smiled and added, “I’m building a cathedral, a House of God.” That bricklayer had found his calling.

Find meaning in your job and career. Valuing how you spend your time provides satisfaction. Successful people often tell others that they felt most happy when making contributions to society, whether in medicine, technological developments, entertainment, raising capital, teaching, crafting glass, wood or leather.

My mom told me a story about when she worked in a shoe factory. Having just arrived in America, she sat next to a woman who had sat at virtually the same sewing machine for 40 years. This woman was engaged as she put the sole, toe straps, lining, and other materials on the shoes with outright pride. Her job gave her meaning, just like Anthony Mancinelli, the world’s oldest barber at 108 years. I have spoken of Mancinelli in the past as someone who enjoyed cutting hair for decades. Spend your time working on what will make you happy.

 The Evolving Workplace As An Opportunity For New Employees

Changing workplaces is happening far more rapidly than ever before. Those days of staying at the job for 40 years seem prehistoric now. The work environment is different as well. Thanks to digital technology, robots may eliminate some jobs, while other areas are emerging in digital marketing, artificial intelligence, software architects, and robotic engineering. These emerging areas may create more jobs and be a good opportunity for tech-savvy Gen Zers entering the workforce now.

Employability is a moving target. You need to stay fresh and up-to-date in your field. Keep abreast of upcoming developments in your company and industry. Make yourself invaluable by accepting challenges in your department or a neighboring one. Seize every opportunity that adds skills, knowledge, and recognition of your abilities.

Embrace Learning New Skills

Adopting new skillsets will make you more valuable. Business leaders point to growing needs in their companies that remain unfilled because they can’t find the right candidates for specific skillsets. They refer to soft skills–interpersonal communication, initiative, problem-solving, critical thinking, collaboration with others in an organization.

Developing soft skills in school and at work makes you an attractive candidate. With the rapidly changing landscape, employers recognize that prospective hires may lack the experience needed. Therefore, they are seeking potential over performance. Adapting some of these skills is a massive opportunity for young people in college, those newly entering the workforce, or people willing to adopt new skills.

 Business leaders are seeking young people with soft skills to serve in their companies. It has become clear that companies are more open to looking for personal and academic characteristics with less experience than they had been in the past. The workplace needs to change to fit the macroenvironment that is digital, connected, and global.

In Deloitte’s 2016 Global Human Capital Trends report, 92% of those surveyed said reinventing the organization is a top priority. Digital technologies are disrupting business models. Companies need to be embrace innovation, greater diversity, a learning culture, and upgrade skills. Those positioned to fill these growing needs will be successful. Flaunt your strengths such as being multilingual, understanding diverse cultures, working well collaboratively, or understanding data analytics.

Age Is Not A Limiting Factor To Finding Success

Young and old, success can be rewarding. At age thirteen, Alina Morse is CEO and founder of Zollipops, a candy company with sales in the millions. The idea of lollipops started as an idea when Alina was seven years old. Alina’s early success is a far more unusual example than the press would have us to believe. Yes, in specific careers like sports, people peak at young ages due to physical limitations.

On the other hand, many have become highly successful later in life and perhaps not even in their planned careers. Stan Lee created Marvel Comics at age 39 years. Vera Wang entered the fashion industry at age 40 after failing to make the Olympic figure skating team she had targeted.

Age should not be a limit to success. How about John B. Goodenough? At age 97, he won the Nobel Prize in Chemistry and is its oldest recipient. He still works, developing new polymers in his lab. Upon winning, he said, “Don’t retire too early,”

Enjoy The Sweet Smell of Success

Sometimes we work so hard and stress about the next stage of our career. We may feel guilty, having just earned a big bonus or promotion that your co-worker hoped to get. Concerns that we won’t get that chance again worry us. How may we further preserve a good reputation that we forget to come up for air?  We don’t even stop to realize that we are in that sweet spot of success. If you are at the pinnacle of achievements, learn to enjoy that moment and sustain it. Money and success can make us happy.

I have heard authors say they wished that their first hit novel came later in life. Young actors who get early recognition in the form of an award find it hard getting another. You can find one-hit wonders in many fields, not just in music. This refers to those who achieve mainstream popularity for one piece of work and gain momentary success.

Sometimes your brief success comes so early that you didn’t have time to be mature. Avoid the arrogance that may come with your achievements. Sustain your success by recognizing those who helped you and that you were fortunate. Keep up with learning in your field, evolving technology, and changes in demand. Keep a long-term view and be patient.

Behavioral Science: Perseverance, Resilience, And Grit

Generally, success doesn’t just appear out of the blue. You need to work at improving your skills and nurture your abilities over long periods of time. Behavioral scientists pointed to certain factors such as perseverance, resilience, and grit that lead to successful accomplishments.

Growth Mindset

Carol S. Dweck, Professor of Psychology at Stanford University, has researched the mindset psychological trait. She points out that people who believe they can develop skills through hard work are far more likely to be successful than those who don’t. They have a “growth mindset” and benefit from being “can do’s” and are often reliably great employees.

Practice Makes Perfect

Work hard and persevere despite setbacks. Endurance is reflected by those who strive to increase their abilities, who optimize performance through intense practice over the years, whether practicing an instrument or experimenting in a lab. In a 1993 study, K Anders Ericsson, a behavioral scientist, found that certain factors, such as prolonged efforts of practice propel people to reach high levels of performance.

Success usually doesn’t happen without the occurrence of failures. Achieving success usually happens to those that are more resilient. They can bounce back from disappointments or failures. The trick is knowing how to dust yourself off and move on.

Grit= Passion + Perseverance

Angela Lee Duckworth, a behavioral scientist expert, published Grit: Power of Passion and Perseverance. The definition of grit is the tendency to sustain interest and effort towards long-term goals. Grit is associated with self-control and deferring short-term gratification.

Delaying gratification was the basis of The Marshmallow Test, conducted by psychologist Walter Mischel at Stanford University in the 1960s. He studied children offering them a choice between one small reward given immediately or two rewards if they waited a short period. The reward was either a marshmallow or a pretzel stick and up to the child’s pick. Those willing to delay gratification correlated to success.

In follow-up studies decades later, Mischel found correlations between delayed gratification and competence and higher SAT scores.

Having Money Is Not Necessarily A Sign Of Success

Ayn Rand famously said, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” There are countless ways of having money– earning, investing, inheriting, and winning–and losing it. Examples of poor money management, bad investments, and squandering fortunes are plentiful. They are often what derails our achievements.

Signs of success are everywhere. Most importantly, it is how you measure it and over what time frame. What did you accomplish today, this year, or in life? What did you set out to do? 

There are many ways to succeed and feel satisfaction. You can feel success by publishing a book, finishing a project, paying down debt, cleaning out your garage, raising good children, or even winning the Nobel Prize at age 97 years.


Final Thoughts

Your potential for success is a matter of pursuit. While luck often plays a role in achieving success, you have some control in realizing your potential. Leverage your advantages, take risks and learn new skills. Don’t play safe just to avoid making mistakes.  Find and enjoy your sweet spot of success in your field, finances, and life.

To sustain success, use sound money management as your financial engine. Sometimes we derail our achievements by overspending, delaying retirement savings, and not recognizing the importance of investing for the long term.

Put a sound financial plan in place to properly handle raises and bonuses when you realize success at work. See our post on avoiding lifestyle inflation. Spend within your means, save for retirement, and make investments, and use debt sparingly. These are all ways to stay on the path to a comfortable life. It is a good idea to measure financial success to see where you stand.

Related post: Reaching Your Goals With Better Money Habits

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Key Financial Concepts When Saving, Investing, and Borrowing

Key Financial Concepts When Saving, Investing, and Borrowing

“Many people take no care of their money till they come nearly to the end of it. And others do just the same with their time.”

Johann Wolfgang Von Goethe

Use Time Value Of Money To Achieve Your Financial Goals

Understanding financial concepts can help you make better decisions. Time and money relate to each other as in  “Time is money.” A dollar in your pocket today is worth more than a dollar received five years from now. The time value of money is the notion that money can grow in value over a given period.

You should save or invest today’s capital so that it is worth more in the future. Present value relates to what the sum is worth today. On the other hand, the future value is what an investment (or a series of investments) made today will be worth later on.

Earning Simple Interest Is Good

Invest your savings today to have more money tomorrow. This earnings capacity’s potential depends on how you invest the money and earn on its interest rate.  One way of calculating interest is using the simple interest formula. Here, the principal generates interest income dependent on the interest rate. So if you had $10,000 in your savings account at 8 percent for four years, you would earn $3,200. However, you can do better by compounding the interest.

Compound Interest Is Far Better In Building Your Wealth

A different and more beneficial way is to earn income through compound interest, closely related to time’s money value. Assuming you don’t withdraw any money, compounding allows you to earn interest on interest on your balance. That is, your principal continues to rise as you make interest—the frequency of the compounding matters.  More frequent compounding (daily rather than annually) adds incrementally to more money.

Compounding serves as the basis of the time value of money. By adopting good financial habits of saving money, compounding over time is what builds wealth. Instead of earning $3,200 over four years at an 8% interest rate, compounding gives $405 more or $3,605 on your initial $10,000 deposit. Over a more extended time of 40 years, that $10,000 would grow to $217,245. Most of that growth comes from interest earned on interest. Ka-ching!

A Positive Effect On Your Money

Compound interest is one of the most powerful forces of investing. It fuels the urgency to set aside money early for your retirement. This financial term simply means that you add interest to the sum of a loan or deposit or interest on interest. Your balance grows at an increasing rate so long as you don’t withdraw money from your funds.

The power of compounding is the basis of key financial decisions, from your personal savings plan, 529 Savings Plan, retirement, and investment accounts. The earlier you save and invest money in the stock market, the longer the compounding works for you.

To better illustrate the power of compound interest is the classic question, “what would you rather have, a penny that doubles every day for 30 days or $1,000,000?” And the answer is the doubling penny which yields $10,737,418.23. Quite a bit more than the one million dollars. Take a look at our excel spreadsheet here.

It is not reasonable to assume a 100% annual growth rate for any investment annually, let alone daily.

However, suppose you save $2,000 per year in an investment account when you are young at 8% return, and save an additional $500 per month over 35 years. In that case, you could accumulate $1.1 million. Try using a compound interest calculator.

Saving For Retirement Early Beneficial For Growth

The power of compounding interest, linked to the time value of money, will benefit you the most if you save and invest early. Let your earnings accumulate and grow rather than withdraw cash from your accounts. It makes a big difference if you start saving for your retirement ten years later than your friends or if you invest for ten years and then stop contributing to your 401K retirement account. It is difficult to catch up by doubling the amount if you start investing later on.

As a goal, try to contribute to your 401K plan to the maximum level, which is $19,500 in 2021.  Some years it may be hard to do, especially when you are experiencing a job loss. Resist withdrawing money from your retirement account as there is usually a 10% penalty tax to do so before you turn 59.5 years. Withdrawing this money will put a dent into your retirement fund that will be painful later on. Instead, your plan is for you to retire comfortably in the future.

Lottery Winners: Lump Sum Or Annual Payments

There is only a tiny probability of winning the lottery. However, it uses the time value of money calculations (present value and future value) to decide whether to win a lump sum or annual payments. Lottery winners, after the rush of adrenaline, have a choice to make regarding time and money. Most lotteries allow the winner to take a lower lump sum or an annuity. The annuity option is a series of annual payments.

If the jackpot is $100 million, the lottery could arrange for 20 annual payments of $5 million while investing a lump sum to fund those payments to the winner. Assuming a present value of a series of equal payments of $5 million at 6%, they would need only $57,349,500 to fund the stream.

What Should The Winner Do?

If the winner takes the lump sum payment immediately (setting taxes aside), they would receive cash of $57,349,500 before taxes. I used a present value of an annuity table, finding a multiple of 11.4699 (at 20 years and 6%), multiplying it by $5 million.

The savvy winner would have the opportunity to invest the money and take advantage of compound interest. They would have to pay federal taxes and possibly state and local taxes as well.  Most lottery winners do take the lower lump sum payment upfront.  They want to have full access immediately rather than over several years, which is fine if they stave off friends and family who often benefit from this sudden wealth.

Choosing the annuity may be better for tax implications than the lump sum. Receiving a large lump sum can lead to sudden wealth syndrome and the risk of overspending for many people.

Like Warren Buffett, Invest early in the stock market, consistently with a long-term perspective, so you can build lasting wealth. 

The Downside Of Compound Interest

When borrowing money, compound interest works against you. Your lenders are reaping the benefits of earning interest on interest on your loans. Consider this when going for a loan such as a mortgage, student loan, personal loan, and credit cards.

Using credit cards can be particularly detrimental when you carry balances rather than paying the entire monthly balance. By merely paying the minimum on your monthly card balance, your debt is ratcheting up quickly with high-cost debt. Most credit cards carry interest rates at the mid-high teens level. Your lenders are channeling the Rolling Stones, “Time is on my side, yes it is..”

Manage Debt Carefully

Let’s say your credit card balance is $5,000 with a 20% interest rate, and you pay only the monthly minimum. The average minimum is usually a small percentage, such as 3% of the balance or a flat amount of $25. We ignore this for illustrative purposes. The issuer will add your interest of $1,000 to your new total of $6,000. At the end of the second year, you will have a debt of $7200, adding interest of $1,200.

The debt mushrooms in a negative way, holding you back from paying your debt off. Spend less than you earn. Make savings your priority, so you outpace the growth in debt and reduce it to more manageable levels.

Related Post: How To Manage Debt For Better Financial Health

Financial Implications For 30 Year versus 15 Year Mortgage

Typically, when buying your home,  you put 20% down and borrow  80% of the value of a house or an apartment. You will pay less interest when opting for a shorter-term mortgage.

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

  • The annual percentage rate (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, equalling $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.

Rent As An Alternative To Buying Your Home

On the other hand, renting provides flexibility and freedom. Your rent is usually more affordable than home costs, not having to deal with the home’s repair and maintenance, freeing you to use savings to make investments, and not having to worry about potential declining home values. The downside of renting your home has restrictions to do what you want to make your place more livable. Your landlord could decide to sell the property and require you to move. There is always the risk of having a bad landlord whose actions force you to pick up and leave.

Related Post: A Guide To Buying Or Renting Your Home


Rule Of 72: How Long To Double The Principal

This handy formula always reminded me of a card trick. The Rule of 72 is a simplistic formula used to determine how long an investment will take to double given a fixed rate of return. Simply divide the interest rate that the money will earn into the number 72.

For example, suppose that you owe $1,000 on a loan and the interest rate you are charged is 20% per year, compounded annually. If you didn’t pay anything off at this interest rate, how many years would it take for the amount you owe to double? The formula for this rule is 72 divided by interest rate or 72/20 and equals 3.6 years.

As mentioned earlier, it is always key to use the magic of compounding in your favor and money growth, not debt. For other financial ratios like the Rule of 72, read this related post.

Opportunity Costs in Decision Making

The opportunity cost of any decision is the cost or the value of the following best alternative that must be foregone. We have many choices that may consider time, money, effort, health, and enjoyment in our lives.

When we invest in financial assets and building our net worth, we should consider risk, return, safety, and liquidity. We are making tradeoffs between these variables that we balance off of each other. Am I seeking higher returns in my portfolio and taking on some high yield bonds, or am I opposed to such high levels of risk?

When managing money, you may need to reduce high-cost debt before actively saving and investing. Consider your alternatives and research to find reasonable options. We have written on How To Make Better Money Tradeoffs here.

Final Thoughts

Time value of money and compound interest are among the most important financial concepts. Understanding these terms can improve your decision-making when managing your finances. Time is money though time is a priceless resource. Use it wisely and more productively.

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