How To Make Better Money Tradeoffs

How To Make Better Money Tradeoffs

“There are no solutions; there are only trade-offs.”

Thomas Sowell

There are tradeoffs in most aspects of our lives. We have a plethora of choices and cannot do everything we want to do. For every choice we make, opportunity costs requiring us to forego benefits for the option not selected. Opportunity costs are the loss of potential gains from other alternatives when making a choice.

Tradeoffs between time and money differ significantly based on age and lifestyle based on our unique set of values. With less time like Boomers as an older generation, you might place more importance on time while young people may favor money. That is not always the case.  Based on this global survey, those in the 20s and 30s tend to lean more time than money, valuing experiences over possessions than boomers, as seen in this infographic.

Each of us has to decide based on our characteristics and circumstances. Typical examples of trade-offs between time and money as we ponder our individual decisions, we:

  • Opt for a job requiring a long commute for a pay hike.
  • Have one income with mom or dad staying at home with the kids.
  • Go to a movie instead of working on an assignment due the next day.
  • Job security with the government or seeking a wealth opportunity with long hours and traveling.
  • Attend a community college initially, then transfer to a four-year college.
  • Work at home to spend more time with family.

Sure, we can try multitasking or combine activities when we face conflicting demands on us. However, there is often a price to pay when poor execution results.

Make Diligent Choices

Instead, we may inform ourselves by making diligent choices. How conscious are we when we make these decisions? For some decisions, make complex financial calculations as needed. On the other hand, there are times when we may not even be aware of having made a choice. Time, money, productivity, and health may act as alternative constraints, reflected in your priorities.

Time is a precious finite resource we often waste. Even if we have unlimited capital available, we just don’t have the time to spend it fruitfully. We want to enjoy our lives to the fullest, with health on our side. Without taking care of ourselves, time is short, and no amount of money may cure our illness. Since we have longer life expectancies, we need to support ourselves by fulfilling well thought out financial plans.

Typical Tradeoffs We Face:


Your Home: Buy or Rent

Owning versus renting your home is among the most common tradeoffs involving personal preferences, age factors, and your financial situation. Our family has rented and owned our home. After many years of ownership, we are renting a home in a lovely town, taking advantage of a great public school system.

If you seek to own a home, do you prefer stability, building equity, control over the home, and its responsibilities and tax benefits? Will you enjoy a sense of pride in ownership? These benefits come at a high cost based on a 20% down payment and mortgage loans for 80% of the home’s principal price, with interest rates strongly determined by your credit scores. The opportunity cost of owning your home may prevent you from saving for retirement and making other investments. Your home will not likely appreciate more than inflation.

The term of your loan can vary based on 15 years versus 30-year mortgages–another trade-off. The longer the loan, the lower your monthly payments. However, the 30-year mortgage raises your total costs compared to the 15-year loan.

Financial Implications For 30 Year 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, 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.

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 have 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.

My Take

The necessity of the tradeoffs of owning your home versus renting considers the tug between time and money differences.  When buying your home, you are making a long term commitment to the neighborhood, greater responsibilities in maintaining the property, insurance, and keeping up with monthly payments for some length of time. Alternatively, renting is usually a shorter-term commitment that may require future moves but with less responsibility and costs.

For families who want to control their home, buying is the way to go, especially if you can handle the shorter mortgage terms so you can pay off your debt sooner. Understand your long term goals for your family and financial priorities for your money. Don’t take on too big a house that you can’t afford. Renting is a great choice, especially if you don’t want the headaches of your own home. We compare advantages and disadvantages in our guide to owning and renting your home here.

A Car: Buy, Lease or Borrow

If owning your home is seen as the American dream, our culture has long embraced car ownership as a faithful supplement to our lifestyle. When seeking a car, you have a few alternatives. Do you want a new or used car, preferably certified pre-owned? Are you buying or leasing this car? If you are getting this car for personal rather than business use, the tradeoffs between buying the car with a loan or a lease are relatively straight forward. Assume you are getting a new car in a low-interest-rate environment and similar credit scores whether you are buying or leasing. About 30% of those getting a new car is leasing.

The Advantages And Disadvantages Of Leasing A Car:

There are lower upfront costs requiring a security deposit and usually the first month’s payment. Payments for registration and taxes are needed for leasing and buying the car. When leasing, you will make lower monthly payments for the lease term. Your credit score influences the amount, favoring those with very good to excellent scores.

The manufacturer’s warranty covers most if the leased car’s repairs.

Depending on your term, you are getting the latest technology available in safety, entertainment, and comfort. Those who lease can get a new car every 2-3 years.

There are mileage limits on the car though you may be able to negotiate a bit.

You don’t own the car at the end of your lease. Gap insurance is an optional add-on car insurance covering the difference between the amount owed on a vehicle and its actual cash value in the unforeseen event it is totaled or stolen. When returning the leased car, you may have to pay for excessive maintenance, wear and tear costs.

End of lease costs can be a bit shocking when returning the car. When we finished our lease recently, we were quite surprised at some of the hidden fees discussed when we initiated the lease. We incurred costs close to $1,000 to the lessor to reimburse them for taxes to the local municipality. These fees were relatively new to us, causing dismay. This lease was likely our final one.

Advantages and Disadvantages Of Buying A Car:

Higher upfront costs, including down payment and trade-in, if you have another car. Of course, the more the upfronts costs, the lower your monthly expenses.

Owning presents higher monthly costs than leasing, depending on term length. According to ValuePenguin, the national average of US auto loans is 4.37% in 60 months, though in recent years, buyers have increasingly extended their loan terms to 72 months, with 84 months gaining popularity. The longer the loan, the higher the total interest you are adding to the car’s cost. Experian has reported that new car buyers with the highest credit scores have average loans of 63 months versus those with the lowest scores taking out loans of 72 months.

As you own the car, there are no restrictions on mileage or what tires you want. While you can resell your vehicle, keep in mind that it is a depreciable asset that loses value in the early years and is impacted by mileage long term.

My Take:

The tradeoff on buying or leasing a car is similar to owning or renting your home. A third option to buying or leasing a new car is buying a certified used car. Depending on its age and mileage, it may have remaining time left on the manufacturer’s warranty. After purchasing and leasing cars for years, we recently chose this third option. We paid cash for a 4-year-old certified Subaru as a second car, given its strong reputation for longevity. We are tremendously happy with it.

Spending vs. Saving

This tradeoff’s concern is that it ignores the need to temper spending in favor of saving money. If you spend more than you earn, you either will be withdrawing from your savings and investment accounts or, worse, borrowing to pay for your purchases. On the other hand, if you spend less than you earn, you can better afford your living costs and enjoy life. Having money left over to build an emergency fund, save for retirement, and make investments provides you with more options over the long term.

Adopt an attitude that allows you to enjoy life but not be so costly that you can’t afford your bills. Avoid lifestyle inflation, which comes about when your earnings rise, and you increase your spending. The more you can delay spending and reduce impulse buying, the better your financial health. Many experiences are free, healthy, and worthwhile pursuits. Make room in your budget for a solid emergency fund, pay off your debts to manageable levels, and save for retirement.

Emergency Fund Vs. Debt Payoffs

You should be put savings aside for an emergency fund to cover at least six months of essential living costs. This habit will eliminate the stress of the unknown and reduce your need to abuse your credit card. Many people lack $1,000 in savings to pay for unforeseen costs like a job loss, an emergency surgery for a favored pet, or a damaged car. Having to pay for these costs often leads to higher debt, especially credit card debt with higher interest costs. Set small savings amounts aside earmarked specifically for an ample emergency fund and invest this money in a readily accessible liquid account.

Paralleling these savings, you need to pay your monthly student loans and your credit card bills. If you can’t pay your credit card balances in full, reduce your spending. It is easier said than done. However, committing to keeping debt at a manageable level is critical.

Saving For College Or Retirement: A Tough Choice

When faced with helping your children with their college funding or tapping your retirement money, it becomes a tough choice you don’t have to make. If you are in your 50s or more, you should not touch your retirement account. True, you want to avoid burdening your kids with student loans early in their lives. The average student loan is $31,172, a significant amount of debt to carry. However, they have the benefit of a longer-term horizon than you.

As a young couple, your earnings are rising through your 20s, 30s, and beyond. To avoid having to make a difficult choice, later on, save, and invest now. These are the years you should make your money work for your future. It may mean spending less now, so you have more money to address critical areas of your lives later consciously. These involve essential trade-offs.

Don’t ignore what you can do now to provide plenty of benefits to you and your family long term. Handling money allocation into key baskets for college funding, retirement, and investments early will improve your financial outlook.

Save For College Early Using A 529 Savings Plan

When you expect a child, put aside some money into a 529 Savings Plan or other plans you can read about here. You get tax benefits using pretax money invested in several options based on your preferences. The more money you can put into these funds, the greater likelihood of lower borrowing in your children’s college years. Most states have their plans and have a lot of investment choices. Prioritize saving early in your child’s life so that you don’t have to borrow from your retirement funds.

Retirement Savings In Your 20s

You should begin to save for retirement as soon as you enter the workforce, if not before. Most employers offer 401K retirement plans that make it easy to fund your account through your paychecks. Automating these payments is simple though it may require an opt-in process. Setting this up at work is among the first things you should do when you start your first job.

Many employers will contribute to your retirement account based on a pre-determined match formula. For example, if you save a targeted percentage of 6% of your paycheck to your company-sponsored retirement plan, they may add 50% of that amount or an additional 3% of the money to your account. Separately, you should also set up an IRA or a Roth IRA and focus on contributing up to the maximum amount allowed.

Saving for retirement in your 20s allows you to have a sizable nest egg with compounding returns when you are ready to move to the next stage of life. On the other hand, catching up to saving for retirement in your 50s, while possible, is very difficult. It may mean working longer or tapering down your lifestyle in your later years. The risk you have of waiting too long to accumulate retirement money is that of losing your job in your 50s or if, for health reasons, you no longer can work.

Facing these tradeoffs head-on and early in life create a lot of flexibility and freedom in your later years. Make your money and time work for you as productively as possible. It is easier to sacrifice some choices for the more significant wallet needed later on. Long term comfort in retirement is a worthwhile aim.

Final Thoughts

Making tradeoffs that consider time and money may be intuitive or involve financial calculations balanced with your financial priorities. Addressing many major decisions early in life may provide you with financial flexibility and the freedom to choose an array of lifestyle options. The more you delay thinking about your choices, the harder the trade-offs you have to make. Your 20s and 30s are golden times to tackle savings as your earnings rise. Avoid finding more things to spend on that don’t positively add to your comforts.

Thank you for reading! Please visit us at The Cents of Money to see other such posts and subscribe to our weekly newsletter.

What kind of tradeoffs have you been facing? Did your choices involve your lifestyle or career? We would love to hear from you!







How Safe Are Your Bank And Financial Accounts?

How Safe Are Your Bank And Financial Accounts?

The coronavirus has weakened our financial markets and our economy as social distancing has slowed economic activity. With high unemployment and tweaked growth, we have been in a recession. Many people are hurting. Unfortunately, there are many who like to take advantage of those who distracted by losing jobs, keeping businesses afloat, and worrying over the tragic virus. 

Are You Financially Safe?

Are your bank and financial accounts safe during this time? Yes, it is to a great extent. However, it is essential to know if your funds are secure. That varies by product and how it is offered. Which accounts are insured and from what potential risks?  We will review the different financial accounts you have. You also need to consider the safety of your bank. The last recession-plagued banks either were acquired by larger banks or collapsed. More than 450 banks failed across the US during 2007-2012 according to the FDIC.

We will discuss your financial accounts at banks, credit unions, and at your brokerage firm. Our stocks and bonds carry more risk than bank accounts. Recognize that fraud may rise due to swift economic changes. We have some recommendations below to better protect yourself. But first, a little background on where we are today given the havoc caused by the coronavirus.

The Federal Reserve’s Emergency Measures

The Fed has taken massive emergency measures not seen since the Great Recession, which we address here. Chair Jerome Powell deserves credit for aggressively providing liquidity to lenders and our financial system swiftly. We need to see these actions.

Thus far, Powell and his troops have reduced their benchmark fed funds rates to near zero. They lowered the Fed’s discount rate used for those banks that couldn’t borrow from peer banks. The Fed will lend to those banks as the banker of last resort.

As part of their program, they have purchased considerable amounts of government and mortgage securities and will do more. They have adopted similar quantitative easing levels used during the last recession. Also, they reduced the reserve requirement ratio to zero from the standard 10% level. A lower reserve requirement means that banks can increase the lending of their deposits in their vaults. Banks are being encouraged to lend 100% (from 90% regularly) of their capital to businesses and consumers in need.

There will likely be more liquidity sources from the US government, Small Business Administration, and the private sector as the Biden Administration takes over. There is a movement to provide increased financial support.  Check your local websites for more information

From Economic Stability To Economic And Financial Market Volatility

Today, banks are more robust than during the last recession. However, credit pressures are now rising, and cash is needed by many. That is especially true for small companies, their employees, and households who don’t receive paid sick leave. Fear of the virus spreading has required us to change how we interact, shop, and dine. Social distancing has become the new norm.

After a long economic recovery and a bull market, we are now moving into an environment reminiscent of the severe recession of 2007-2009. Then, failures of financial institutions caused bank customers to try to liquidate deposits. The Fed is trying to avert a credit crunch.

Fraud often rises in this environment. As a result, use available security features to protect ourselves from gaps related to new digital technologies. As consumers, we need to know what risks exist. We provide some recommendations.

Another question you may ask: how safe is your bank? Bankrate reviews and rates various banks. Banks with $1 billion in assets are typically more vulnerable in weak markets we have now. Check this list for your bank from time to time to make sure they are not troubled.

Financial Crisis Left Some Bad Memories

Market liquidity failure caused the Great Recession. Rumors and false news were always around. I remember watching Citigroup shares dropped to $0.97 per share in March 2009. Investors lost confidence and feared that more than Lehman would collapse. The market value of Citigroup fell below $6 billion from $277 billion in late 2006. People were standing in lines around the block at a New York City midtown Citibank location to withdraw their money. No one wants to revisit that scenario.

According to the Federal Deposit Insurance Corporation (FDIC), more than 450 banks failed from 2007-2012. Most of those that collapsed were smaller banks. While we are not facing such a scenario today, it is worth knowing what kind of protections are available for our financial accounts.

FDIC Insurance For Deposits At Banks And Thrifts

The FDIC insures deposits in banks and thrifts of up to $250,000 per depositor ($500,000 for joint accounts), per insured bank for each account. To check if the FDIC covers your accounts, you can check their estimator.

Most banks fall under the FDIC insurance mandate. State banks may have insurance coverage if they are members of the Federal Reserve. So are state-chartered banks that are not members. There are very few state banks that do not have FDIC insurance. You can check here.

What Accounts Qualify For FDIC Protection

You have coverage for deposits in accounts for savings, checking, negotiable order of withdrawal (NOW), money market deposit account or MMDA (but not money market mutual funds), time accounts like a certificate of deposit (CD), cashier’s check, or money order.

To maximize coverage, you can open accounts at different financial institutions and for other accounts. However, different branches do not count as a separate bank. If you are holding money in qualified accounts, like savings or money market securities, you may have coverage for retirement accounts, specifically for traditional IRA and Roth IRA. However, keeping your retirement savings in money market accounts are not a good way to build a nest egg.

What Is Not Covered

FDIC does not insure bonds, stocks, Treasury securities, mutual funds, annuities, municipal securities, life insurance policies, safe deposit boxes, or their contents or any investments. These financial products are protected separately by the Securities Investor Protection Corporation (SIPC). We will discuss this below.

What The FDIC Does Not Protect But Other Federal Laws Do

The FDIC does not protect bank customers from losses associated with bank robberies or thefts, including identity theft, fraud, or privacy.

While identity theft, fraud, or privacy is not protected by the FDIC,  report any occurrences to the Federal Trade Commission (FTC) as soon as you discover them. If your credit, ATM, or debit card is lost or stolen, federal law limits your liability for unauthorized charges. Report it immediately.

Data breaches have become more common in recent years. In this guide, we discuss what you should do if these fraudulent transactions hurt you.

The Electronic Fund Transfers Act (EFTA)

Consumer risks rise with the increase of instant electronic payments. The Electronic Fund Transfer Act (EFTA), also known as Regulation E, protects consumers when using electronic means to manage their finances. This federal law covers transactions that use computers, phones, or magnetic strips to authorize a financial institution to credit or debit a customer’s account.

Electronic payments often take the place of traditional paper checks. More consumers are banking online. While people still use paper checks, fintech adoption is expanding. Specifically, peer-to-peer payment (P2P) providers are enabling instant transfers via mobile apps like bank-sponsored Zelle and Paypal’s Venmo.

Fintech Platforms Are Convenient But Need To Be More Secure

These products were likely not anticipated by EFTA. As a result, they may have raised consumer risks without enhanced protection against data security and privacy breaches. However, providers are strengthening their products.

Statista estimates a total 2019 transaction value of $4.1 trillion in digital payments, with an average transaction value of $1,102 per person. However, an S&P Global Market Intelligence Fintech late 2018 survey reports consumers avoiding these mobile apps cite security as a significant concern.

Consumers should be responsible when using these P2P platforms. Peer-to-peer products are convenient for sending money quickly to those we owe money. Just make sure you are sending it to the right party. P2P users should double-check the relevant address, number, or username of the person they are trying to send money to. We can make mistakes, or worse, be defrauded.

Consumer Reports (CR) reviewed peer-to-peer payment providers comparing their safety features. They called for the EFTA to extend protections for unauthorized transactions when potential fraud may occur. 

NCUA Protect Credit Unions 

Credit unions are financial institutions like banks. They are member-owned financial cooperatives. Members, usually union workers, control these entities. They are nonprofit organizations, offering savings accounts and loans like a bank.

However, the National Credit Union Administration Insurance Fund (NCUAIF), not the FDIC,  insures credit union members’ accounts with $250,000 in coverage for their single ownership accounts. They cover the same type of accounts as FDIC but refer to accounts as “shares or share drafts” for savings and checking accounts.

If you go over the federal limit of $250,000, you can ask your bank or credit union if they offer private deposit insurance for more coverage.

 You can find an estimate of whether your share is covered, check here.

SIPC Provides More Limited Safekeeping For Investors

SIPC provides coverage for investment assets held in a brokerage, limited to the custody function. They only protect customers of member broker-dealers if the firm fails financially. The Custody Rule is to safeguard client funds or securities against the possibility of being lost, harmed, or misused.

Coverage is up to $500,000 for all investment accounts at the same institution, including a maximum of $250,000 held in cash.

No Coverage For Market Losses

SIPC does not provide blanket coverage. Market risk is not covered, meaning investors’ losses from the declining security values are uninsured. Investors assume all losses.  It’s part of the higher risks (and rewards) of investing in stocks and bonds. The latter securities are subject to more market fluctuation than risk-free and liquid cash and cash-equivalents insured by FDIC.

Instead, SIPC’s coverage protects unauthorized trading in customer accounts for stocks, bonds, treasuries, CDs, mutual funds, including money market mutual funds. They do not protect commodity futures.

Retail investors, including young investors and traders, increased participation to 20% of the market trades by mid-2020, up from 10% in 2019. Attracted to the rising stock prices, inexperienced investors may ultimately lose money if they are not fully aware of the risks. Retail stock trading app Robinhood, a SIPC member, has ramped up a young customer base in recent years. Like all brokerage firms, they need to make their customers aware of the risks they assume.

Where FINRA Comes In

The Financial Industry Regulatory Authority or FINRA is a self-regulating nonprofit organization overseen by the Securities Exchange Commission (SEC). While SIPC does protect market losses, consider filing a dispute against the broker if they bought securities that were unsuitable for your portfolio. FINRA resolves disputes between investors and brokers through arbitration and mediation.

If the broker sells worthless securities to a customer, the customer will file a complaint with FINRA, not SIPC.  FINRA is responsible for monitoring the broker-dealer industry. They oversee that qualified and licensed brokers remain so. Securities sold to investors must be suitable based on that individual’s needs and risks adequately disclosed. For example, selling high-risk securities to retirees is not generally appropriate.

For a time, I was an active FINRA arbitrator, hearing alleged injured investors and their brokers after stocks fell during the severe recession. Many investors lost a lot of money in fanciful mortgage lenders like Countrywide.

How Can We Better Protect Ourselves From Fraud

 Mandated consumer protections for our financial accounts only go so far. We need to have a healthy dose of skepticism and take our own precautions. Digital technologies are growing faster, providing us with more capabilities and convenience. Compliance gaps exist among incumbents (like Wells Fargo) and fintech companies.

Here are our recommendations to protect thyself:


1. Be Alert To Imposters And Phishing Emails

According to the FTC, scammers are sometimes posing as someone you can trust, such as a family member, government official, or charity. Never send money or give out personal information in response to an unexpected request.

2. Safely Dispose Of Your Personal Information

Use a paper shredder or wipe your computer’s hard drive. Find ways to delete all your information from your smartphone and remove your SIM card. To be honest, I keep all my old electronic devices.

3. Don’t Use Public WiFi

In the recent past, I always used Starbucks’s wifi, literally living at my local place when studying for the bar (to practice law). Now, we encourage our kids to use public wifi rather than drive up our data bill. No more! We find it easy to connect to public wifi because there isn’t authentication that is beneficial for hackers.

4. Don’t Believe Your caller ID 

It is effortless for scammers to use fake names and numbers. I have picked up my house phone because I recognized my own cell number. I hung up that baby so fast that I almost broke my phone. My house phone is on borrowed time.

5. Consider How You Pay

While credit cards have significant fraud protection when detected, wiring money does not. According to the FTC, wiring money is among the worse methods you can use to send money. If you are using Western Union or MoneyGram,  be aware that you can’t get your money back.

When I worked on a case for the court, an elderly woman who was losing her mental capacity was literally giving away a large portion of her significant net worth through MoneyGrams. She had a constant caller asking her to meet him in mysterious places in her neighborhood. Her family was unaware of her declining capacity or her constant money wiring until they found huge withdrawals.

When using Venmo, Zelle, or Apple Pay, make sure you are sending money to the correct party. Check the recipient’s address and contact info.

6. Keep Your Passwords Private

Young people tend to overshare everything including their smartphones, and often will provide friends their passwords. Change passwords often and use strong passwords. For those who worry about forgetting a password, use a password manager.

7. Don’t Carry Your Social Security Number In Your Wallet 

I am preaching the obvious but don’t carry any private information containing your social security number. That number is your identification and on many different kinds of documents, such as credit card applications, bank applications, or your health plan. You never want to lose your identity to others.

8. Review Your Credit Report For Possible Issues

The three nationwide credit reporting companies–Equifax, Experian, and TransUnion–are required to provide you with a free copy of your credit report at your request, once every 12 months. You can also visit for your free report. The FTC does not recommend that you use other websites for free reports.

9. Monitor Your Personal Statements

Review all your statements when you get them and call vendors when you spot a mistake. Check your deposit balances daily. Sign up for text alerts with your bank.

10 Don’t Open Suspicious Emails

When you get mail with a bank name, scrutinize it carefully. Don’t open links from someone you don’t know or appear to be suspicious. Your bank will text if they see unusual spending or call you.

For more on how to protect your privacy, see here. If your child has their own bank account or credit card, they need to take precautions as well.

Final Thoughts

Our financial assets are important to us. We need to make sure our accounts are safe from outside factors and take our own precautions. Our bank accounts are insured by the FDIC. To a lesser degree, so are our investment accounts by SIPC. As we do more banking online and use P2P platforms, we need to be aware of increased risks and take precautions.

Technology is a wonder given its convenience. Banks (and businesses overall) have increased data privacy and security. For the most part, our accounts are generally safe. Most importantly, I hope you and your families stay healthy.

Thank you for reading!

How are you fairing in this crazy world? What precautions have you taken that work well? We would like to hear from you.


Best Personal Finance Tips You Should Know

Best Personal Finance Tips You Should Know

This time of year is always a good time and place to see where you stand regarding your financial goals. Build and strengthen financial habits to achieve financial success. Use these personal finance tips as a checklist to become more financially organized at the beginning of the year. No matter what your situation is, your financial success doesn’t happen without work. Careful planning, often with professional guidance, requires that you look at a wide range of your finances and how you handle money.

We cover major tenets of personal finance and relevant tips you should know to have better financial health and success.

Evaluate Your Monthly Budget

Track your monthly income and expenses. Break your expenses into fixed or non-discretionary expenses and variable or discretionary expenses by category on an excel spreadsheet. Think of your budget as your household’s income statement. Your budget will help you to control your spending.

Use the 50/20/30 budget rule as a rule of thumb. Essentially, you are allocating your after-tax income into three budget buckets:

  • 50% of your spending are for your needs, notably housing, utilities, groceries, car payments and other needed fixed or non-discretionary expenses.
  • 20% for savings that can be used for paying down debt, emergency fund, and  investing or combination.
  • 30% are for your wants, that is discretionary or flexible spending for entertainment, vacations, and shopping. This what is left after your allocations are made for priorities, notably needs and savings.

Adopt a disciplined strategy as early as possible when you have fewer items to track. Use budget apps readily available or create your own excel spreadsheet.

Update Your Net Worth

Keep track of your net worth which is your household balance sheet. To calculate net worth, add all of your assets that you own less all liabilities that you owe. When you are young, you may have more liabilities because you are just starting out and may have college loans. However, over time, through accumulation of assets that grow at rates faster than your debt, you should have amassed comfortable net worth.

Net worth is an important benchmark to compare against your short and long term financial goals. Are you where you want to be in your 20s, 30s, 40s and thereafter? The fastest way to build wealth is through good financial habits that require saving, spending less, managing debt wisely and investing.

Build An Emergency Fund

Save for emergencies in a separate account that is readily available money. A common mistake made is not saving money for unexpected events like losing a job, pet surgery or a flood in your basement. Plan for 6 months of essential living costs to take care of rent, mortgage, uitlities, credit card bills and any other fixed monthly costs. Make sure your emegency fund is liquid in either cash or cash-equivalent (also known as money market) securities.

This fund should be used for emergency purposes not necessarily your wants for a high priced vacation. If you like to travel a lot, it may be worthwhile to have a separate vacation fund to set aside for those purposes.

Make Savings Your Mantra

Spend less than you earn so that something is left over to put in savings. Part of your savings should be allocated to investing. Growing your money in investment accounts is your best path to a comfortable financial life and to achieve wealth. Alternatively, spending more than you earn will result in more debt.

Automate your finances from your direct deposit paycheck so that some portion goes into your emergency fund, 529 college savings and retirement savings. Even with automation, review your amounts periodically. It is easy to set up withdrawals from your earnings and forget about it. However, you may be able to afford higher amounts than what you set up initially and can sock some more money away now.

College Savings Planning Should Be Started Early

Set up a 529 college savings fund as soon your newborn arrives. There are several ways to save for college besides a 529 plan like a Coverdell Education Savings Accounts and UTMA. Saving for college early gives you a headstart in growing funds through the power of compounding  while enjoying deferred tax benefits. Virtually all states have their own plan though you are not limited to your home state. There are a variety of funds to choose from including target date funds.

Retirement Savings And Earn Company Match

Save for retirement as early as possible. By setting money aside early you benefit from compound growth, that is, interest on interest. You may defer tax payments or reduce tax costs long term. Learn how your employer-sponsored 401 K plan works with respect to matching contributions which can be quite valuable. A company 401 K match may be a certain percentage like 6% of your salary with the firm matching dollar for dollar (or 100% which is generous) or something less of the amount you saved.

These contributions are like “free money” so don’t leave these dollars on the table. Open up a Roth IRA account to complement your 401 K retirement plan. You want to max out these amounts. Invest this money in a variety of investment choices offered by the plan.

Don’t delay savings for your 529 plan or retirement plan because of you are overwhelmed by the various options. Opt-in to a plan. You can make changes later on.

Health Care Savings Accounts

Find out if you have a flexible savings account (FSA) or a health savings account (HSA) available through your employer. Both plans can help you purchase qualified healthcare costs through pre-tax earnings contributions. The HSA is available either through your employer or if you are self-employed. You cannot have both plans.

The FSA plan sets lower contribution limits than HSA, and if you don’t use it by year-end, you forfeit what’s left in the account. The employer controls the FSA, while the individual controls the HSA.

The HSA plan has higher contributions, covers a broad range of medical expenses, and is more flexible. Unlike the FSA, it does not have a “use or lose” feature. Instead, if you don’t spend the remaining amount that year, it rolls over. The HSA is portable, so if you leave your company,  you can bring the account. You can earn interest on your HSA like any savings account. However, if you use those funds on unqualified items you will pay a penalty, and, if you are below 65 years, you may need to pay taxes as well.. 

Managing Debt Wisely

Pay your bills on time and in full so that your balances are not being charged interest. When you pay only the minimum amount required by the credit card companies, you are paying far more in interest for what you charged on your card. Give your cards a rest until you can pay it all every month.

Use shorter borrowing periods for car, student loans and home loans to lessen the interest amount.The shorter the time frame on your car,  home mortgage or student loans, the lower your total respective cost will be  Yes, you are paying more per month but over a shorter period of time. Perhaps you can increase your down payment.

Know your respective interest rates, fees, penalty rates and terms on all borrowings: mortgage, car, student loans, and credit cards. When interest rates decline as they did in 2019, refinance your rates.

Use Credit Cards With Care

Credit cards provide an essential convenience and help us to build our creditworthiness. However, if you only pay the minimum on those balances, you are incurring high interest rates on what you owe. This is when compound interest becomes your enemy, and you are paying interest on interest. Keep your balances as close to zero as possible.

Use cash more when possible. It can be a motivator to spend less and help us negotiate lower prices when bargaining. You feel the burn instantly as to seeing it on your monthly bill.

When using payment provider services like Venmo and Zelle, know the differences in your liabilities. Credit card holders are usually liable up to $50 for unauthorized charges if you report your card as stolen. User protections for P2P vary so check carefully for coverage.

When working on debt payoffs, eliminate debt with highest interest rate first. I understand the psychological benefits of the snowball method and if it that is an effective motivator for you, go for it.

Avoid payday loans should go without saying. however, if this is your only choice, work with a financial counselor as soon as you can.

Control Your Spending

Comparison shop for everything you buy or sign up for: groceries, clothes, cars, homes, applicances, and services such as financial advisors,  insurance, banks ,credit cards. Be as informed as possible about points, rewards and cash-back offerings that encourage more spending than necessary.

Negotiate when and wherever possible. This goes for shopping and the interest rates on loans. However, learn to negotiate for higher compensation as well.  Opportunties are sometimes waiting for you to be more proactive in the bargaining process.

Know your wants versus needs. You don’t need everything to survive. Many items we say we need are really wants we desire like a long vacation or luxurious clothes.

Don’t go grocery shopping without a detailed list. This was a game-changer for us when my husband would come home with loads of unnecessary items all the time. Use per-unit pricing to compare items. Find coupons online.

Window shop with friends and buy when alone.

Be aware of numerous biases playing with your decision making.

When car shopping, buy certified pre-owned cars which have been completely inspected, repaired and may have original factory warranties remaining on its life. Do your oil changes and maintenance check ups as required.

Building And Managing Your Credit

Review your credit report periodically. It is available for free from on an annual basis. You can also get one free report every 12 months to review your credit reports from each of the credit bureaus: Equifax, Experian and TransUnion. Then you can review your report more often especially when there are issues.

If and when you find errors, have the issues corrected as quickly as possible. Here’s how you do it.

Your creditworthiness is essential for more than just borrowing. Your prospective employer, landlord, utility provider and potentially significant other may want to know how you handle money too. By the way, background inquiries are usually soft inquiries that do not affect your score. However, hard inquiries happen when you are signing up for a new credit card or trying to refinance your mortgage loan  and will negatively  impact your score.

Know how the five key categories impacts your credit score. Your FICO scores are based on the following percentages:

  • Payment History – 35%
  • Credit Utilization – 30%
  • Length of Credit History – 15%
  • Credit Mix – 10%
  • New Credit – 10%


Your Child As Authorized User

Parents can help their children build up their credit by authorizing them as users on their cards. Think carefully about your own credit score. If it is low, it may actually hurt their score and defeat the purpose of being on your card. Know your child’s age and maturity, their ability to be responsible and setting up spending limits. There are virtually no age limits so it is up to parents to decide when their child is ready to have access to a credit card.

Yes, it is worthwhile for kids to get a credit boost. However, make sure you are not exposing them to fraud or identity theft, one of the downsides of children having a credit card. You will need to monitor their credit report along with yours.

Before getting them a credit card, talk to your children about money, spending and saving as a means to convey the need for good financial habits. The card is for their needs, not for paying for their friends’ needs and wants.

Raise Your Credit Score

The better the credit score, the lower your borrowing rate and the better on getting credit card deals regarding rewards and cash back. There are a variety of ways to raise your credit score or avoid inadvertently lowering it.

Don’t close any credit card accounts as this will ding your score. Instead, put these cards in a safe place like a drawer and don’t use them.

Keep your credit utilization rate well below 30% of total available credit. It may be beneficial for you to open an home equity line of credit(HELOC). If you have equity in your home you can take out a line of credit up to that value. This will expand your available credit, improving your utilization rate.

Certain programs are becoming popular that may help you boost your score for free or a low monthly amount. For example,Experian Boost, launched in late 2018 counts on time household payments for services such as telephone utilities tpwards your score. RentTrack And Rental Kharma report on time rent payments to credit bureaus.

If you have poor credit or in need of building up your credit, apply for a secured credit card as a means of boosting your creditworthiness. Become an authorized user on a close family member’s card for a period of time.

Applying To College

Fill out FAFSA, Period

If you are seeking funds for college, there is no downside to filling out the FAFSA (Free Application For Federal Student Aid) form other than your time spent. The form is necessary for federal loans, grants, work study programs and merit based scholarships. Don’t lose these opportunities by bypassing FAFSA. Federal loans tend to have better loan rates than private loans.

Be aware of your respective terms, grace periods, due dates and repayment options. Automate where possible so you don’t miss any payments. Try to target paying back your loans in a shorter time frame than the standard 10 year terms especially if you get bonuses or are getting nice raises.

Consider community or two year colleges which can be cost effective, for those who wish to work while going to school or want an interim step.

Save Money In College

When in college, look for ways to save and make money. College students tend to be better budgeters and track spending based on having less money to spend. As students living in a close environment, you are sharing similar tight money circumstances over the four years at school. College students eat ramen noodles, take public transportation and enjoy more experiences.

Keeping up with the Jones comes later on, after you get your first job and start making money. Try to remember your frugal days at college. Resist lifestyle inflation by having  good financial habits.

Understand Your Company Benefits Plan

Whether you are working at your first job or at the same firm for years, review your company benefits package. What may not have been of interest to a 20 plus year old, may be desirable now. Companies are increasingly adding to their compensation plans that can be customized for your life stage. Among the standard benefits plans are retirement plans, health care insurance, tuition reimbursement, insurance, flexible spending accounts (FSAs) or health savings accounts, paid vacation, sick time, medical or family leave.

You may need to add more coverage to parts of your benefits offerings such as life insurance. Typically, companies provide you with a starter package which will likely not be enough protection for a growing family. Company plans vary and may be a good reason to choose between two competing offers.

How To Start Investing Early

You can only reduce spending and save so much. Learning how to invest is the best way to outpace inflation, save money for college tuition and retirement, and accumulate wealth. According to a Gallup poll in 2019, 55% of Americans own stocks either individually, in mutual funds or in retirement accounts. This rate is below pre- 2008 recession levels of 62%.

Inflation refers to increases in prices resulting in reduced purchasing value of money. As prices go up say 2%, your money will get less units than it did in prior periods. Through  investing in stocks, you can better maintain your purchasing power. Stocks  tend to generate better returns (based on higher risks) than other securities, outrunning inflation. Stocks grow at a compound growth rate of 9% over the long term (over 90 years), though 2019 has been a banner year with S&P index, including dividends,  registering one of best gains since the 1990’s at roughly 30%.

Stock Market Games

Playing a simulated stock market game is a great way to learn how to invest and get familar with relevant terminology without losing real money. There are a number of free games  available and easy to set up that mirror realistic trading and investing with friends, family or on your own. Many of these sites have tutorials, videos and articles to educate you on the basics and provide strategic tips.

Start Investing With Small Amounts

Put small amounts  like $25-$50 per month into your investment account that you can afford to lose. That is, don’t invest your rent money. Starting small is a good way to get started as you gain a better understanding and confidence. Many large online brokers have lowered or eliminated commissions and initial minimum amounts designed to encourage small investors. Be aware that there may be management fees on your balances.

Buy Exchange Traded Funds or ETFs  which do not have minimum requirements, are available at low fees and provide you with diversification. Most mutual funds require a minimum initial investment between $500-$3000 and higher. For beginner investors, that may be a steep amount. You have many choices of ETFs and low cost index funds. Start with Vanguard’s offerings.

Some Investing Basics

When you begin buying stocks, have a long term outlook. Although commissions are reduced, you can realize better returns with long term investing (over a year or more) rather than trading. There are tax benefits when holding a stock more than one year by way of capital gains and capital losses.

Have some discipline strategies in place for when you should sell or exit a position. If you have a stock that is up 20%-25%, it is a good idea to sell a portion of your gains. A useful rule is “bulls make money, bears make money and pigs get slaughtered.” That is, don’t get too greedy.

Another good rule when investing in stocks, courtesy of Investor’s Business Daily (a great resource!) is to always sell a stock if falls 7%-8% below what you paid for it. The premise of this principle is that by selling at that level you are capping your downside potential. It has worked well for me. On the other hand, another strategy investors use is to buy small portions of stock initially and then buy opportunistically at lower prices to reduce cost basis of your stock.

I consider that all investors, including beginners, should have a basic knowledge about the Federal Reserve and their impact on interest rates, money supply and financial markets. We a have a primer on the Fed for those who want some insights.

Compound Growth And CAGR

One of the most important terms in finance to understand is compound growth. It can work against you when you are referring to a long term debt such as a fixed mortgage when you are paying interest on interest which increases your loan. Here, when investing, it can work in your favor when you are referring to the growth rate of your investment in your portfolio. Keep in mind, while stocks have above average returns, they have down years which can be sharp like during the 2008 recession.

The most accurate way to calculate returns is the compound annual growth rate or CAGR which smooths out returns over a longer period of time. Investors like to compare CAGR S&P 500 index (commonly referred to as “the market”) to their savings account or to that of a specific mutual fund or to their portfolio. This how investors can see how they are doing relative to the market. The formula for the compound annual growth is here. Thankfully, there are CAGR calculators to use.

If you are investing without a financial adviser, you need to do research. There are a lot of publicly available resources available to learn about the company and its businesses, its industry and its risks. You need to understand trends in the market. Expect stocks to be volatile and they may bounce back quickly after a fall in the market. BLOG POST

Diversification And Asset Allocation

Diversification of your stock holdings is important. Don’t put all your money in one stock or one sector of the industry. That is a recipe for greater losses. The best way to achieve diversification is through buying ETFs or low cost index funds which contain baskets of different securities. You want to minimize your risk as best as possible based on your own tolerance.

Not only do you want to have different stocks in your portfolio, you should aim to have different types of investments. This can include money markets, Treasury, municipal and corporate bonds, foreign securities and real estate. You can use ETFs and mutual funds to gain diversification within each asset class. Asset allocation is a means of diversifying these different investments. How you allocate your assets is based on your preference, age and lifestyle. Use a financial advisor or planner to talk through your planning and goals.

How To Choose A Financial Advisor

Meet with a financial planner or advisor to review your financial goals periodically and discuss how to achieve them. A financial planner does much more than selling you securities. Look for someone with a CFP designation. However, that should not be your only criteria. You should feel comfortable with this person and/or team.They should understand your household’s financial situation, lifestyle and your plans regarding children and college, career, retirement, insurance needs and estate planning. Here is how to choose a financial advisor.

Protect Your Family Financially

We love our families. Take proper steps to financially protect them. Providing financial security–besides making a good income, saving, paying off debt and investing– requires protective measures like buying essential insurance coverage and estate planning.

Insurance Coverage Is Essential

Your employer may provide you with some types of insurance as part of your benefits, including life, health and disability but often it is not enough. As your family grows you need to make sure you are adequately covered to take care of your family’s essential living costs and their future plans, including college. There are 8 types of insurance that you need to have proper coverage: auto, homeowners, renters, life,  disability, health, long term care, and  umbrella insurance.

Estate Planning

Prepare for the worst for your family’s sake. There are a number of steps to take for estate planning. Create a will and/or trust according to your wishes. You also need advanced medical directives and a living will as essential documents for your loved ones and health care providers.  Most people resist dealing with estate planning as a difficult topic. However, not dealing with it may leave your loved ones in a confused state during their time of grief. Think of estate planning as a plan of action that you are taking for your family.

Review And Update Your Designated Beneficiaries

An effective and efficient way to distribute our assets is by designating our beneficiaries outside the will through our bank accounts, insurance policies and such. Many of our assets are nonprobate property. As such, they are transferable to survivors by contract immediately upon death rather than under a will.

The advantages of contract transfer over the distribution of assets by a will are less time, cost and more privacy. Transfers to loved ones by a will could take 6 months-1 year if probate is not required. If contested in court, the distribution could take longer. Even worse, your will would be made public through court documents. At a minimum, be aware of the need to have designated beneficiaries for all assets. Review and update your beneficiaries based on life events such as having a new child or other necessary changes.

Invest In Yourself

Education does not end at the schoolhouse door. Embrace learning so you can master skills that are valuable to you. Read more and acquire knowledge so that you are competitive at work, have wider and diverse social circles and can teach others. Avoid procrastination which can be costly and cause unnecessary mistakes. Use time as the precious resource it is so that you may live everyday to its fullest.

Final Thoughts

To achieve financial success in life you need to have a game plan combined with good financial habits. Measure how you are doing with a review of your budget and net worth. They are key documents that help pinpoint where there may be some improvements needed. Financial planning should be discussed among family members. Calculate certain financial ratios, benchmarking your financial health. These ratios are tools designed to evaluate financial strength. As a companion to this article, see our post: 18 Financial Ratios You Should Know.

We hope this has been helpful to you. Thank you for reading and share it if you found it as valuable. Let us know what your thoughts are! Wishing you much prosperity and health in the coming year!






Valuable Financial Terms You Need To Know During The Pandemic

Valuable Financial Terms You Need To Know During The Pandemic

Ever want to know financial terms, but you were afraid to ask? During the pandemic, a lot of words are cropping up that may be hard to understand. In middle school, I was challenged by vocabulary, as my scores showed. As a result, I carried a dictionary to school when I was in college or graduate school. The coronavirus has been enough of a hardship to overcome. Explaining these key terms you need to know is one job I can handle to navigate these waters better.

See our article on Wall Street and investing jargon here.

17 Financial Terms To Know:

1. Bailouts

A bailout provides financial liquidity to people, companies, or countries on the verge of bankruptcy. Being strapped for cash due to losing your job or a drop in revenues create hardships and the need for immediate help. This financial assistance can take many forms and from different entities. Recipients may get cash, loans, bonds, or stock purchases. The Federal Reserve and the US Treasury have provided significant liquidity. Congress passed the CARES Act containing a stimulus package. There will be more aid in 2021, given the severity of this downturn.

Bailouts were controversial for banks and other financial institutions during the 2008-2009 Great Recession. The current bailout recipients have varied based on the coronavirus’s broad impact. Bailouts, or allocations of money, have gone to large corporations like airlines.  Like New York, several states have significant needs because of denser populations but, haven’t yet received the money. Hence, “Blue State Bailouts.” This is an unfortunate term. Asking for financial assistance to fund essential public employees sounds like a necessity.

2. Bear Market Rally

A bear market rally occurs during a bear market (I know, duh) when there are increases of at least 10%  in prices of stocks, bonds, or indexes. Our latest bear market began for the Dow Jones Industrial Average on March 11th, followed by the next day’s S& P 500 index. The market continued to drop to its lowest level on March 23, 2020. From that trough, stocks rallied through 2020 and up 16.3% for the year.. That is the epitome of a bear market rally.

3. Bear Market And Bull Market

We had been in a bull market for so long that a bear market had become increasingly inevitable. A bull or bear market rises or falls 20% or more. The “bear” market term came from the early 18th century.  Daniel Defoe said: “Thus every dissembler, every false friend, every secret cheat, every bear-skin jobber, has a cloven foot. The bear market was first popularized by a huge market crash known as The South Sea Bubble of 1720.

There is more to the history of the origination of bulls and bears here. Envision these animals’ movement: bears swipe their paws downward while bull horns rise.

4. Black Swans

A black swan event is an event that comes as a surprise (can be negative or positive) that has a significant effect impact of potentially ground shifting magnitude. The term is an ancient saying that relied on black swans not existing in contrast to the more common white swans. However, Dutch explorers were reportedly the first to see black swans in Western Australia in the late 1600s. The rareness of black swans became a metaphor for unpredictability.

Nassim Nicholas Taleb wrote of its theory in his book, “The Black Swan: The Impact of the Highly Improbable.” He argued black swan events have three characteristics:

  • Unpredictable;
  • Massive impact; and,
  • After the fact, an explanation is concocted that makes the event appear less random.

Some examples of black swan events are the rise of the personal computer, the Internet, September 11, 2001, World War I, and the 2008-2009 financial crisis.

Black swans are usually labeled after the event has passed. However, many pundits have immediately referred to the coronavirus-related pandemic as a black swan event. However, it is not clear it is so. Did you know there are white swans and gray swans beside the black version to reflect differences in predictability?  Geary Sikich elaborated on these other swans providing the guidance we share here.

White Swans

White swans differ in using the three principal characteristics used for black swans but reflect:

  • Highly certain events;
  • Carrying an impact that can be estimated; and
  • Later, the focus shifts to errors in judgment or some other human form of causation.

Gray Swans

On the other hand, a gray swan is a highly improbable event that fits black and white swans. Using the same three characteristics, the event is:

  • Highly probable;
  • Its impact can quickly cascade; and
  • Like the white swan, the focus shifts to errors in judgment or some other human form of causation.

 The Pandemic Is Probably A White Swan

Calling COVID-19 a black, gray, or white swan event may be premature. Were this virus and its effects foreseeable before its arrival? Taleb believes so. He believes the coronavirus pandemic is a white swan event because it was predictable. As a co-author in this January 2020 paper, Taleb issued a warning to prevent the worldwide coronavirus spread virus in Wuhan, China.

There were plans to prevent such a pandemic back in 2017. Recently, it became more known that Obama officials briefed Trump’s team to go through a hypothetical virus pandemic scenario. At this gathering of both teams, members considered the possibility of shortages of ventilators. The goal was to model such a scenario similar to the coronavirus we have now. Those who were there assumed the virus would appear in Asia before making its way to the US. These meetings should have been a valuable exercise. Instead, according to mixed reports, there were few accomplishments at these sessions.

5. Business Interruption Insurance

Many businesses buy interruption insurance to cover losses from lower revenues, fixed costs, or temporary relocation of operations. Typical commercial leases require this coverage. Insurance usually covers losses such as fire, natural disasters (e.g., Hurricane Katrina or Sandy), or potentially a virus pandemic. An important question is whether the insurance policy explicitly addresses viruses as a possible event.

It would be highly unusual for a virus to be specifically named. On the other hand, businesses with the SARS outbreak in the early 2000s may have adjusted their contracts to delineate viruses as a potential risk. The 2011 tsunami in Japan is another monumental example that interrupted businesses. So were those businesses covered then? I would be willing to bet that insurance companies will be scrutinizing all their contracts. They will attempt to decline coverage for this current crisis.

6. Deferred Interest

Deferred interest comes into play when interest has accrued, but there is a delay in the payment period. Typically, borrowers pay interest charges monthly. In some cases, lenders may agree to defer the interest. You will usually remain responsible for this accrued interest. Eventually, you will pay this interest. However, there are exceptions to this. The CARES Act allowed deferral interest on most federal student loans, with accrued interest beginning September 30, 2020.

Related Post: A Letter To College Students During The Pandemic

7. Economic Stimulus

Stimulus actions can be taken by the Federal Reserve (the Fed)  or by the US Treasury to help the economy. The Fed can implement measures through its stimulative monetary policy. Similarly, the Treasury’s fiscal policy can budget for stimulus packages with Congress. During the Great Recession, the Fed took aggressive action such as quantitative easing (QE) to provide our financial system liquidity. Quantitative easing is a fed tool used to aggressively purchase government (and other) securities from commercial banks. The Fed is essentially providing funds to the banks, encouraging them to use this money to increase lending.

The CARES Act was a $2.2 trillion package rolled out in 2020. More financial funding will be forthcoming to those unemployed and small businesses. Stimulus checks or economic impact payments will be directly deposited in recipients’ bank accounts or sent by check.

8. Emotional Contagion

Emotional contagion resulted from the coronavirus spreading to a significant global population. This phenomenon occurs when these individuals’ emotions and behaviors spread to other people. The round-the-clock news cycle and social media produce viral images continually showing quiet streets, people wearing masks, and ads providing instructions on washing your hands. The rise of anxiety, depression, and fear further amplify our vulnerable feelings. These are examples of emotional contagion.

9. Flight To Quality Or Safety

When markets become volatile and stocks decline, investors seek quality and safety from other securities. Turbulence happened in March 2020 as our stock market moved from a bull to a bear market in weeks. At times there may be several factors that converge on the markets, which add substantial risk. These issues could be rising interest rates, a slowing economy, and reduced earnings estimates for the upcoming quarters.

In declining markets, investors tend to rotate out of specific sectors like tech growth stocks and flock to safer stocks with above-average yields. They may even move out of the equity markets and put money into Treasury securities. In 2009, as the housing sector weakened, leading up to the Great Recession, buyers sought refuge in Treasury securities. Our markets will likely remain volatile, reflecting headline risk.  As the knowledge of our substantial unemployment sinks in, investors may take that flight again.

10. Forbearance

When a borrower has difficulty making loan payments, they may ask their lender for forbearance. Lenders may agree to a forbearance request rather than seeing the borrower(s) heading into bankruptcy, where recovery gets tougher. The Fed has urged lenders to be “responsive to the needs of low- and -moderate-income individuals, small businesses, and small farms affected by COVID-19 consistent with safe and sound banking practices.”

Our CARES Act addresses federal student loans that are in forbearance. Forbearance occurs when payments pause without interest accruing until a specific date.

11. Force Majeure

Force majeure is a French term often interchangeable with Acts of God. The coronavirus pandemic has certainly impacted businesses around the world. Many companies have found it difficult-to-impossible to maintain full operations and fulfill contractual obligations. Force majeure is a fairly common clause found in contracts. How it applies may be specific to the contract. An attorney may need to raise appropriate questions. They may ask if the coronavirus qualifies as a force majeure event and was performance impossible? How foreseeable was the risk of COVID-19  (see Black Swan above)? Firms usually have business interruption coverage ( see above) as well.

12. Furloughs Have Become More Common

We hear companies announce furloughs plans often. Companies continue to look for ways to reduce their costs as lower consumer demand has resulted.  Generally, furloughs are mandatory time off from work without pay. Furloughs or releases are not layoffs as employees retain their jobs, benefits, and any employee rights. Temporary layoffs are furloughs so long as employees expect to return to work at the end of the period. Many industries use releases when they see reduced demand either seasonally, a cyclical downturn, a union strike, or an emergency such as COVID-19. It could be for a fixed term of two weeks or longer or a particular day, such as all Fridays in the summer.

A furloughed employee typically expects that they will return to work. They retain their jobs and return at a specific time or a condition that ends their release time. That could mean the strike is over or demand for services or products has returned. When the employees are out of work, they retain some of their benefits, notably health or life insurance. Furloughs are not usually COBRA qualifying events, but it is always best to check with your respective employer.

What About Retirement Benefits?

Retirement benefits may pause for employees on leave. Workers typically make contributions to their 401K employer-sponsored plan via their paychecks. However, if they aren’t making money, they are probably not making contributions. Neither will their employers make match contributions during furlough periods. On the other hand, employees may seek part-time employment or new jobs altogether. Depending on how long the leave, this can slow growth in your retirement accounts.

13. Initial Jobless Claims For Unemployment Insurance

Average weekly initial jobless claims reflect the number of people filing for unemployment insurance for that week. It is a leading indicator that predicts future economic activity. In past months, the claims have been staying stubbornly high. The latest US Labor Department reported close to one million new signups for unemployment.

High unemployment rates rise during recessions. It peaked at 10% during the Great Recession. During the Great Depression, unemployment reached a rate of 24.9% in 1933. That said, we never have zero unemployment as companies move their businesses around, close unproductive firms causing frictional job losses for some employees.

Claims for unemployment insurance will remain high for the foreseeable future. Make sure to take advantage of these benefits. The US Department of Labor lists eligibility requirements on its website. We explain here, but you do need to check your respective state’s instructions. Look for the individual state standard in which you worked using CareerOneStop, which provides each states’ rules.

Unemployment Benefits Eligibility

You are eligible for benefits if you are unemployed through no fault of your own. Typically, you cannot file if you were fired or let go for “gross misconduct.” Please note that you should apply in any case because the firm must prove gross misconduct in most cases through a lawsuit. Relaxation of rules has been common during the coronavirus timeframe.

Federal/State Efforts

While there is federal guidance for eligibility, each state has its minimum requirements that a candidate for unemployment insurance benefits must satisfy. Each state varies regarding minimum time worked and wages. States pay the unemployment benefits to the claimant typically for 26 weeks. As a result of the CARES Act, the relief package provides an additional $600 per week in unemployment paid by the federal government until July 31st. This is in addition to the extended 39 weeks of state unemployment payments. 

The federal government provided this kind of financial support during the Great Recession as well. They extended the unemployment insurance period to the standard 26 weeks given by states for a record total of 99 weeks.

Related Post: Why Unemployment Matters

14. Lockdown or Stay-In-Place

The notion of a lockdown always sounds ominous when used for potential terrorism at schools, offices, or airports. Currently, lockdowns or stay-in-place orders have been used as an emergency protocol to encourage people to stay at home. Lockdowns prevented the spread of the coronavirus to an extent.

Beginning in China, then expanding into the largest global lockdown ever, it has brought the global economy to its knees. Some countries have been gradually lifting their respective lockdowns. The US has introduced phased guidelines for states to emerge from the lockdown though no state is fully open as of yet.

15. Margin Calls

Don’t do it! Sorry, that was a reflex reaction I have to that term. When buying shares in a company, you may use some of your own money and borrow the rest from your broker. Margin calls are an extension of credit, with the securities acting as collateral. When the company’s shares decline in price, your broker will ask you to put up more money towards the borrowed amount or to sell the shares. The broker uses margin to protect themselves from losses on loan to you. Both the Fed and FINRA set industry rules for investing in the market. Your broker usually sets the minimum margin requirement. They could be stricter than federal guidelines.

Margin buying offers higher profits and higher risk through the added leverage. By paying only a small portion of the total amount, investors amplify their purchasing power. However, when financial markets are volatile, brokers make margin calls. These calls boost the losses suffered as well. Margin interest rates for Charles Schwab are effectively around 8% on small debt amounts, declining to 6.575% for debit balances under $500,000. The higher the amount borrowed, the greater the risk. Given these risks, I have always avoided using margin to buy stocks.

16. Price Gouging

Many people have been experiencing price gouging as shortages increase. Certain products such as paper goods, sanitizers, masks, and  PPE (personal protective equipment) necessities have been in low supply. Price gouging occurs when a seller increases goods, services, or commodities in response to unusual demand due to lack of supply. Gouging is when prices elevate to unreasonable or unfair levels. As the virus affects worsened, there were reports of people hoarding some of these products and selling them at absurd prices. Besides being morally wrong, price gouging is illegal according to respective state statutes in effect.

17. Recession: Are We There Yet?

All this talk about an economic downturn requires some clarity. Are we already in a recession? A recession has at least two sequential quarters of negative economic growth measured by GDP (gross domestic product). We are technically in a recession with requisite economic indicators of weak growth and unemployment. Of course, we are in a recession with roughly 11 million people unemployed. Consumer demand is lacking, and with high initial unemployment claims still at high levels. Depressions are far more severe than recessions and last far longer. The Great Depression lasted ten years.

The current recession is not the typical kind caused by cyclical demand shrinking. This downturn is associated with a coronavirus pandemic, requiring lockdowns and changes in consumer behavior. While our economic downturn began in response to a health crisis, it has impacted supply (e.g., shortages) for what we need or reduced demand as we have remained home. If not working remotely or are essential, a significant portion of our workers may be out of jobs through furloughs or layoffs.

Final Thoughts

Financial terms related to the pandemic have been expanding our lexicon. Knowing these terms are useful to know when you participate in the market or need to understand your insurance situation. Many of us never heard of coronavirus before the pandemic. Now many of us have a working knowledge of medical technologies involved in vaccines and their development. I hope this list helps. Thank you for reading! Sign up today for your weekly newsletter!

We have a number of related investing posts you may have an interest in:

Guide For Investing Beginners

Diversifying Your Portfolio

How Stock Markets Games Can Teach Investing


Property and Casualty Insurance – A Complete Guide For 2021

Property and Casualty Insurance – A Complete Guide For 2021

Protection against loss is critical for everything you do, including running your own business or earning money from a side hustle. The primary tool for mitigating business risks, such as those described by Your Money Geek, is property and casualty insurance.

There are many insurance policies within the property and casualty insurance realm, each with its own vocabulary. Understanding the different types of property and casualty insurance can limit the number of many causes of catastrophic financial loss. In particular, you will want to know which ones apply to your business or side hustle.

This post will talk about the most important types of property and casualty insurance for small businesses and side hustles. These coverages include business owners (with key components – auto, liability, and property), professional liability, workers’ compensation, and fidelity and surety bonds. I’ll highlight the coverage provided by each type of business insurance. Also, I’ll touch on some factors to consider as you decide whether to buy them.

Businessowners Insurance

Some small businesses buy a package policy, called a business owners policy (BOP), to cover their vehicle, liability, and property exposures. It is similar to the combination of personal auto and homeowners insurance policies. Businesses that don’t need all three types of insurance coverage can buy insurance policies separately. The separate policies are commercial auto (covers all vehicle types), general liability, and property. The package policy is usually less expensive than the three separate policies, as long as you need all three coverages.

The limit of liability determines the maximum amount the insurer will pay for a covered liability claim. Also, one or more deductibles determine the insured’s amount before the insurer starts paying for physical damage claims. Separate deductibles can apply to each of the comprehensive and collision portions of vehicle coverage and claims related to physical damage to any buildings and/or contents covered by the policy.


The vehicle coverage is the same whether bought in a BOP or a separate commercial auto policy. It protects against anything for which the business owner becomes legally liable related to vehicles’ operation covered on the policy. That is, if an insured driver is in an accident, liability insurance will usually cover the costs to third parties. These costs can include injuries or damage to their property.

The insured has the option also to purchase physical damage coverage. This insurance can cover damage to the insured’s vehicles either from an accident (collision coverage) or other perils, such as theft and fire (comprehensive coverage). The vehicle coverages for commercial vehicles are very similar to those in a personal auto policy, which I cover in detail here.

If you use your personal vehicle for your side hustle or business, you must buy commercial auto coverage. Personal auto policies generally exclude coverage for:

  • Employees during the course of employment.
  • While used as a public or livery conveyance, ownership or operation of a vehicle, such as Uber or Lyft.
  • The insured, when employed or otherwise engaged in any business.

Almost all claims made against your personal auto insurance will be denied if your vehicle was being used for a side hustle or business.

Premiums for auto insurance vary based on the number and types of vehicles insured; the coverages, limits, and deductibles purchased; characteristics of the drivers; where the vehicle is driven; and the distances driven, among other factors.


Businesses usually face one or more of four types of liability – vehicle (discussed above), premises and operations, products, and professional. Premises and operations and product liability are parts of both general liability policies and BOPs. Professional liability is a separate policy, so I’ve covered it below.

Premises and Operations

Premises and operations coverage (which I’ll call Prem/Ops) provides insurance for things related to your business location or operations. It covers injuries to third parties (not employees) or damage to their property.

Slips and falls by customers at business locations are the most common types of Prem/Ops claims. For example, if someone is injured at your business location, in your parking lot, or as the result of your operations, your business may be liable for their medical expenses and/or lost wages.

If your customers come to your place of business, you’ll want to consider premises and operations coverage. Most homeowners policies exclude coverage for claims related to a business. As such, it is important to check your homeowner’s policy if you do business out of your home to avoid gaps in coverage.

The premium for Prem/Ops coverage depends on your business’s nature, the number of types of locations, and the limit of liability you purchase, among other factors.

Products Liability

Product liability coverage provides insurance for damages related to your product. These damages include third parties (not employees) who are injured or their property when damaged. For example, medical device manufacturers’ product liability insurance protects the company against claims that their products are defective and cause injury or illness to patients.

On a much smaller scale, burns from McDonald’s coffee that was allegedly too hot are also insured under products liability coverage. If you make a product that could injure someone or damage their property, you’ll want to consider product liability coverage.

Premiums for product liability coverage depend on the type of products sold, the number of sales, and the limit of liability you purchase, among other factors.


Property insurance protects your property, including buildings and their contents. You can also purchase insurance for just the contents if you don’t own the building. Property coverage protects against a long list of perils, including fire, hurricane, tornado, vandalism, and theft. In many places, you must purchase earthquake or flood coverage separately. Any intentional damage or damage from acts of war, arson, and sometimes riot is usually not covered. Read your policy to make sure you understand what is covered and what isn’t.

When you buy property coverage, you estimate the values of your buildings and contents. Insurers can often reduce the amount of any claim recovery, even for partial damage, if you underestimate your property’s value. As such, it is important to determine the value of your buildings and contents fairly.

Property insurance for businesses always includes business interruption coverage. Under this coverage, the insurer pays for lost profits and some overhead expenses when a covered peril has damaged your property. The insurer also covers expenses related to a temporary location where you operate your business while your building is being replaced or repaired.

Business interruption insurance applies only when your business is interrupted due to a peril covered under the buildings and contents coverage. For example, a pandemic is rarely a covered peril for buildings and contents because it doesn’t damage either one. In that case, there is no insurance coverage if your business is shut down from a pandemic.

Premiums for property coverage depend on the values, types, and ages of insured buildings, the value and types of insured contents, where the property is located, and the deductible you have selected, among other factors.


An umbrella policy allows you to increase the limits of liability on all your liability policies at once. An umbrella policy can provide coverage for vehicles, Prem/Ops, and products liability. The limits on the underlying policies must meet certain minimum requirements. An umbrella policy usually protects you against liability claims not covered by the underlying policies, such as libel and slander. The concepts underlying umbrella policies that protect businesses are similar to the concepts that underlie personal umbrella policies.

Umbrella premiums depend on all the characteristics of the underlying policies and the limit and deductible on the umbrella policy.

Professional Liability

Professional liability insurance protects you against claims that you have caused someone an economic loss by making a mistake when providing professional services. For example, if you are providing bookkeeping services, a client might sue you if you prepared tax returns incorrectly, leading to a client’s financial loss. If you are providing legal services, errors could include everything from missing a court deadline to providing incorrect advice. A professional liability policy usually covers all these errors unless intentionally made.

If your business provides advice or professional services to clients, you will usually want to purchase a professional liability policy. Professional liability covers services just as products liability insurance covers things your business manufactures.

Professional liability premiums depend on the type of services provided, annual revenue, and the limit of liability selected.

Workers’ Compensation

Workers’ compensation insurance (often called workers comp) protects you against the cost of injuries and illnesses to employees during their employment. Almost every US state requires you to provide workers comp for employees, as long as you have at least the minimum number of employees. That minimum number of employees is usually around four. Some states, such as California and Colorado, require you to provide coverage even if you have only one employee.

Workers comp reimburses employees for a state-mandated portion of lost wages and medical costs. Employees covered by workers’ comp cannot sue for covered injuries and illnesses except in minimal situations.

Premiums for workers comp depend on the number of employees and their wages, the state in which they work, and the type of work performed by each employee.

Surety & Fidelity Bonds

Some businesses need to buy surety or fidelity bonds as part of their operations. Most surety bonds provide guarantees to third parties (the obligees) that you (the principal) will perform certain actions. By comparison, fidelity bonds protect an employer against the fraudulent or dishonest actions of its employees.

Surety Bonds

One of the most common surety bonds is a construction bond. If your business is a construction company, it might promise to build a structure for a buyer. The buyer will likely pay your business for some of its services in advance. In that case, the buyer wants a guarantee that you will complete the structure.

You can buy a construction bond from an insurer for the buyer’s benefit (the obligee). If you fail to complete the structure, the insurer will either pay the buyer for the cost of completing the structure or will hire a contractor directly to complete it.

Other commercial surety bonds cover signature guarantees for notaries and remediation costs for mining or drilling operations. Surety bond requirements vary widely by state. I found the “What Bond Do I Need?” section of this website quite interesting.

Fidelity Bonds

Most fidelity bonds insure property, money, or securities owned by customers to which employees have access. For example, a fidelity bond usually covers the embezzlement of deposits by an employee for services or products not yet provided. Similarly, a fidelity bond can insure against misappropriation of pension assets or real estate escrow funds. A fidelity bond can also provide protection if an employee takes something while at a client’s business or home.


Most side hustles and tiny businesses don’t require fidelity or surety bonds. Nonetheless, they are essential components of a company’s risk management plan if it has any of these types of exposures. The face amount of the bond, the type of coverage provided, and the insured’s history and financial condition determine the cost of surety and fidelity bonds.

Other Types of Property and Casualty Insurance

There are several other types of property and casualty insurance that a small business might need.

  • Crime Insurance – Property insurance and fidelity bonds don’t cover all theft losses. If you sell a product, you might need to look into purchasing crime insurance.
  • Cyber Insurance – Cyber insurance can cover your operations if a cyber-attack disrupts them. It also can protect you if your confidential business and/or your customers’ or employees’ personal information is stolen electronically. If your business has any of these exposures, you will want to investigate the various types of cyber coverage.
  • Directors’ and Officers’ Liability Insurance (D&O) – D&O insurance covers economic losses incurred by third parties that result from significant decisions made by directors or officers. Publicly-traded companies or companies with more than one owner often buy D&O insurance. If you are not the sole owner of your business, you might want to evaluate the need for D&O insurance.

Where to Buy Property and Casualty Insurance

Buying property and casualty insurance for a business are similar to buying it for your personal exposures.

  • Some insurers, such as Progressive (just an example – in no way do I intend to endorse Progressive as I know nothing about its premium, coverage, or service), allow you to purchase insurance for your business online.
  • Other insurers, such as Liberty Mutual (again, just an example), are direct writers. You talk directly to an employee of a direct writer when buying insurance.
  • Insurance brokers and agents provide access to all other insurers. They usually have access to a wide range of insurers. Small businesses, especially those without unique exposures, can work with an agent to acquire insurance. You may need to work with a broker if you have a large business or need unique expertise.

If you are new to buying insurance for your business or your business has unique exposures, I suggest a direct writer, insurance broker, or insurance agent. Purchasing insurance online, especially if you are an informed buyer, can often, but not always, save you money. The lower premium reflects insurers’ lower expenses as it doesn’t have to pay commissions or sales force expenses.

Final Thoughts

This is a guide for protection against loss for your business or side hustle. There are many insurance policies within the property and casualty realm. Household insurance policies that cover health, life, car, and other types can be found here.

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

Better Financial Literacy May Help The Racial Wealth Gap

Better Financial Literacy May Help The Racial Wealth Gap

I grew up in a racially diverse Bronx neighborhood. It wasn’t until I worked on Wall Street as a financial professional that I encountered people with homogenous backgrounds. Specifically, my colleagues were mostly white people who appeared to be far more advantaged compared to me. As a grad of public schools and a public college, I felt uncomfortable and out of my league. The awkwardness faded over time. One of my bosses actually called me “a junkyard dog” and meant it as a compliment.  With my successes, my confidence grew, but I can still feel that insecurity today.

We come from different backgrounds, not of our choosing. While some may be entitled, many are underprivileged based on demographics. Looking at the statistics, African Americans suffer the greatest of disparities in social and economic inequalities. Social justice is way overdue, and reforms in our criminal system are needed. African Americans face more significant financial gaps in income and wealth than their white peers and other minorities.

Statistics Are Revealing

While I was aware of racial disparities, my research for this blog was eye-opening for the gaps’ magnitude. Statistics tell a story that needs to be shared. More than 4 in 10 Americans say the country hasn’t made enough progress toward racial equality based on a Pew Research 2019 study. However, 8 in 10 blacks say the government hasn’t gone far enough to give black people rights on par with white people. Fully half of blacks say it’s unlikely that the country will ever achieve racial equality.

 Common Factors Believed To Cause Racial Disparities For Blacks Are:

  • Substantially less fair treatment by the police and the criminal justice system;
  • Family instability;
  • Less access to good schools;
  • Lack of jobs;
  • Treated less fairly in the workplace;
  • Difficulties when applying for mortgages or other loans; and
  • lower quality medical treatment.


The question I often raise comes from the perspective of financial gaps. That is, whether improving financial literacy can narrow the economic divergences that exist for African Americans? These disparities are not new and remain visible in our society. However, for many, including myself, differences do not exist in our everyday lives. For minorities, especially Black Americans, they impact job prospects, wages, loans, and retirement savings. Financial education cannot wipe away systemic policies stemming from longstanding racial discrimination and accumulated inequalities. It is hard to stamp out these income and wealth gaps in our country that have existed for so long. However, at some point, now especially, it is time to recognize those gaps and find ways to narrow them.

Financial education can make a dent in the gaps in wealth between White and Black Americans. It cannot do so entirely without widespread intervention from the government and private sectors to lessen and erase policies that perpetuate these gaps. However, there may be ways that financial literacy, new technologies, and funding for new businesses can improve African Americans’ financial lives.

Critical financial gaps for African Americans Are:

  1. Less household income, earning about 58% of whites.
  2. College education doesn’t decrease the wealth gap.
  3. Higher unemployment, especially in downturns.
  4. More likely to earn the federal minimum wage (3%) versus 2% for white, Asian, and Hispanic workers.
  5. A smaller percentage of homeownership with more significant difficulties attaining conventional mortgages.
  6. Carry higher debt levels, including credit cards and student loans.
  7. Nearly half of black households are unbanked or underbanked, resulting in less access to financial products. McKinsey found that banks would realize $2 billion in incremental annual revenue if black families had the same access as white families. Overall, their report suggested narrowing the wealth gap for blacks would increase our GDP by 4%-6% by 2028.
  8. Only 54% of Black and Asian employees work for an employer who sponsors a retirement plan vs. 62% for white workers.

Different Realities of White and Black households


1. Black Households Earn Less Income

White households earned a median income of $61,200 compared to $35,500 for black peers. Their homes may earn less income than white families because more of their jobs pay wages closer to the minimum wage level. Earning less income means reduced abilities to expand wealth through more significant savings, paying off debt, and investing money.

Fewer blacks are visibly participating in the highest-paid professional jobs despite completing higher education levels. For example, some of the best-paying jobs are in the finance industry, specifically banking, credit, securities, and insurance. However, women and minorities are less likely to be hired as professionals or managers. According to this report, the African Americans’ participation is highest (7%)  in banking and credit areas while lowest in securities at 4.4%, which is typically more financially lucrative according to this report.

Education on its own doesn’t account for the difference in income or wealth between black and white households. The racial wealth gap expands with higher education. Black families where the head graduated from college had less wealth ($23,400) than white families ($34,700), where the head of the household dropped out of high school.

2. Lower Net Worth For Black Households

Typically, the higher the income a family makes, the higher the wealth accumulated. Net wealth or net worth’s calculation is assets minus liabilities. White families had a significantly higher median net worth at $171,000 or 9.7 times that of black families with $17,600 in net worth. While 19% of black families have zero or negative net worth, only 9% of white families generate zero or negative net wealth.

Two factors may account for the lower levels of wealth for blacks. First, accumulated wealth tends to rise with age. Over half of the white households were headed by someone who was 55 or older compared with 38% of their black counterparts. Secondly, family structure plays a role in households headed by a single parent versus a married or partnered head. Black households at just 37% were least likely to have a married or partnered head compared to more than 54% for each of the other groups. White households are the least likely to be headed by a single parent (8%).

3. Different Composition of Net Worth

The composition of assets and liabilities of black and white families are very different and tend to favor white families. A more significant proportion of white families (73%) are homeowners, while only 45% of black families own their primary residence. White households hold considerably more significant equity levels in their homes at $215,800 compared to only $94,400 for black households. White homeowners hold more home equity but housing accounts for only 32% of their total assets than 37% to 39% for Black and Hispanic homeowners.

White households tend to have more assets in investment and retirement accounts.

Lower Contribution To Retirement And Investment Accounts

Preparing for retirement is key for all households. 60% of white households hold retirement accounts, notably IRAs and 401(K) accounts, well above 34% of black families. Owning equity in retirement or other investment accounts reflects a more significant difference. 61% of white households hold equity, nearly double (31%) for black households. As such, Blacks have less access to these financial products from company-sponsored plans and fewer savings for emergencies.

Only one-third of blacks have an actual retirement 401K savings plan at work though 73% are in the retirement planning process, according to a 2018 Mass Mutual study. That study reflected that African Americans are the least prepared for a financial emergency, with only 33% having more than one of the expenses saved. Still, 75% view savings as their highest priority.

The best way to save for an emergency fund or retirement account is through your employer. Employees can deposit a portion of their paycheck directly into an automatic savings feature. However, not all employers provide this benefit. When employers offer automatic enrollment, there is usually higher employee participation.

Also, lower-income for blacks hampers their ability to have the liquidity to contribute to these accounts.

Lower Business Ownership

Whites own a more significant percentage (15%) of their businesses, with black families about half (7%) as likely to do so. It takes capital from family, friends, and bank lenders to build your own business. However, black families have had more significant difficulties getting loans at reasonable rates. According to the State of American Entrepreneurship by American Express, 47% of African Americans run their businesses by themselves compared to 33% of the average small business owners. However, black women entrepreneurs are the fastest-growing group in America. That is an exciting development in recent years. You can read our post: Unique Challenges Faced By Black Women Entrepreneurs.

 Family Inheritances For Blacks

White families receive much larger inheritances, or about twice that of black families, according to the Hamilton Project. Among households receiving an inheritance in 2020, those with an economic income of over $1 million are, on average, expected to inherit $3 million. On the other hand, low earners (under $50,000)  inherit $60,000. And so, the perpetuation of the wealthy gets more so.

4. Access to Credit May Be Tougher Causing Higher Debt

Liabilities can depress wealth. White families have a higher proportion of their primary resident’s debt at 46% versus 32% for their black peers. This mortgage debt is “good debt” because it is associated with an asset that may appreciate. On the other hand, black families carry more outstanding credit card balances (48%) and education loans (31%) than white families. Black families may require more student loans than relying on their savings or that of their families, including extended members.

Credit Scores

Our financial lives rely heavily on our creditworthiness reflected by credit scores. Typically, the higher your credit score, the better your access to credit at better interest rates. Black households face credit inequality associated with longstanding discriminatory banking practices. While there have been some improvements, the perpetuation of these practices takes a toll on black families accessing credit. They face difficulties, whether it is for conventional home mortgages or credit card approvals.

According to a 2017 study by the Urban Institute, more than 50% of white households had a FICO score above 700, compared with only 21% of black families. A 700 score is considered a good score for access to credit at better interest rates for most loan types. Still, African Americans, even when accounting for similar income, loan size, and other factors, are more likely to be denied conventional mortgages than white peers. According to a Reveal analysis of 31 million Home Mortgage Disclosure records, black applicants have disproportionately turned away in 48 metropolitan areas.

To some extent, black families lack access to credit, such as credit cards. Having a credit card often provides people with the ability to show creditworthiness. Yet, 32% of African Americans did not have access to credit cards than 15% of whites in the Fed’s 2018 Report of the Economic Well-Being of the US. In that same report, blacks as a group are more often unbanked or underbanked compared to whites. In the US, 6% of adults do not have a bank account versus 14% of blacks. More than a third of blacks have an account and use alternative financial services such as money orders, payday loans, and check-cashing services, which can be more expensive.

Black Households Need Better Access to Financial Products

Blacks have often encountered restrictions or higher fees at traditional banks in black neighborhoods. Those banks may require customers to deposit a certain percentage of their paycheck to avoid fees and account closures. A more significant portion of loan officers is white (82%), with only 9% of loan officers being black. Only 4% of financial advisors of color are designated Certified Financial Planners or CFPs. As such, it reduces their ability to receive valuable financial advice from someone familiar with their background.

Digital banks such as Chime may be a boon for underserved populations such as African Americans. These fintech companies may help break down some of the existing barriers that have restricted access to financial products.

5. Experience Greater Harm From Economic Downturns

During the Great Recession, unemployment peaked at 10%, but it was over 16% for blacks versus 9% for whites. Subprime mortgages, a significant cause of the downturn, were disproportionately higher for blacks and Hispanics. While 26.1% of white households held those loans, blacks had 52.9%,h the most significant exposure group. A 2010 analysis by the Center For Responsible Lending found that even after considering individual credit scores and other characteristics, African American borrowers were more than 30% likely to receive the more expensive subprime loans.

Between 2011 and February 2020, black unemployment fell to 5.8%, near the lowest levels since the early 1970s. However, as the coronavirus brought down our economy, unemployment for blacks rose to 16.7% in April 2020, while unemployment was better at 14.2% for whites. While 30% of whites can work from home remotely, only 20% of Blacks can. The COVID pandemic has disproportionately impacted the Black community in higher virus-related deaths, losing jobs, and obtaining financial relief. Blacks face a double whammy of far more significant economic and health insecurity.

Visible Gaps For Black Americans In Financial Literacy

According to two major reports, the financial well-being of African Americans lags that of the US population. One study was completed in 2019 by the TIAA Institute and Global Financial Center (GFLEC) at George Washington University. This study reported that black participants scored 38% correct versus 55% for white peers. However, black respondents did best in borrowing and debt management and lowest on insuring. Those black participants who were more financially literate were more likely to plan and save for retirement. Mobile payment users of new digital products were more likely to have more significant non-retirement savings.

The Financial Capability FINRA 2018 study found a widening gap in financial capability among groups. Younger Americans with lower incomes and African Americans exhibited less improvement than other groups. Simultaneously, 42% of white respondents spent less than earned, ahead of (34%) of African Americans. In most categories of the study, African Americans fared worse than whites. Also, blacks generally handled financial literacy questions more poorly than Hispanics, reflecting more significant financial stresses.

10 Recommendations For Improved Financial Well-Being of African Americans

African Americans have dealt with inequalities that have burdened their abilities to build wealth. Institutional differences have resulted in longstanding discrimination creating more incredible financial hardships. I am hopeful that the widespread protests across our country this year will result in a far more equal playing field, removing barriers to financial equality. Economists have talked about greater economic growth potential for our country if Black Americans, 13% of our US population could grow at parity. Our recommendations:

1. Go To A Financial Advisor

When developing your short-term and long-term financial goals, it is a good idea to visit with a financial advisor who is a Certified Financial Planner (CFP), which you can read here. Some advisors may be more interested in selling you financial products. However, seek out a CFP who has a fiduciary duty to serve you in your best interests. While there are less than 4% of financial advisors of color, their growth of 12% exceeds that of all CFPs, according to the CFP Board.

2. Emergency Funds

The emergency fund is a great place to start. Where possible, use automatic savings features available at work or through digital banking. Set aside separate savings account for this purpose. Aim for at least six months’ liquidity to have a buffer for your essential costs: food, rent, or home payments (mortgage, utilities, and such). However, this pandemic proves that a year’s worth of savings may be more prudent for unexpected financial emergencies. Invest these savings in securities such as a more liquid cash-equivalent money market deposit account (MMDA), FDIC-insured. For more on emergency funds, please read here.

3. Plan Early For Your Children’s College Education

Establish a 529 College Savings Plan as early as possible. Like retirement savings accounts, these accounts provide tax-advantages. By saving early for your children, you may help them lessen the debt burden long term.  Automate these savings if possible. Find an appropriate fund to invest your money or go with target-date funds that automatically adjust with your child’s age. See our post on Saving For College Early.

4. Save For Retirement Funds

Putting aside money for your retirement accounts is essential. It is less painful when done early and automatically through your workplace, your own 401K accounts, or create your own IRA/Roth IRA. Like 529 savings accounts, there are tax advantages to gain from establishing these accounts. Read our blog on saving for retirement as early as your 20s.

5. Investing In Taxable Investment Accounts

To build your wealth, investing in investment accounts remains vital for your long term time horizon. Studies have shown that 67% of African Americans earning $50,000 or more are investing in stocks and stock mutual funds. With digital technology enabling several fintech companies such as Robinhood, there are more excellent opportunities to purchase stocks in fractional shares without requiring minimum amounts and commissions. While stock investing carries higher risks, they tend to generate higher returns. Using prudent strategies like diversification through low-cost index funds can lessen some of their risks.

6. Spend Within Your Means

Spend less than you earn by having a monthly budget to understand your costs better. Track your spending on an app or whatever is comfortable for you to recognize patterns you may want to change. According to FINRA, only 40% of Americans spend less than their household income. See our post on creating a budget. Review and tackle some of your costs with money-saving ideas.

7. Use Debt Sparingly And Pay It Off

Pay your monthly credit card bills in full, not just the minimum amount. If you can’t pay down all of it, target paying more than the minimum and spend less. Only 32% of Americans pay their credit cards in full. The majority of those who don’t pay the balance in its entirety face a high borrowing rate (15% on average). Additionally, that will stretch out the number of years it will take you to pay down the debt and increase your total borrowing costs.

8. Review Your Credit Reports Periodically

Our financial lives depend on our creditworthiness. Reviewing credit reports for accuracy and for ways to improve your score, enhance your financial flexibilities. Your credit report is not just for lenders but often requested by the landlord, your workplace, insurers, and utility companies. There are ways to raise your credit score so that you can get the best loan rate.

9. Shorter Mortgage Terms Are Better

When taking out a mortgage loan for your home, consider the 15 years versus 30-year terms. You will make higher mortgage payments, but your total borrowing costs are significantly lower by cutting your time in half. The same premise goes for borrowing for vehicles where you pay lower interest overall when your borrowing period is shorter.

10. Insurance Products To Protect Your Family For The Unexpected

If you have a young family, consider life and disability insurance as a means to protect your family, especially if you are the main earner. Look into your company benefits plan to see if you have insurance coverage and whether you have access to lower rates. We discussed  8 Insurance Types You Need here.

Final Thoughts On How To Close The Racial Wealth Gap

African Americans have long suffered inequalities in many aspects of their lives. These gaps, hidden in plain sight, are a result of systemic policies. We reviewed many financial disparities that remain but need to be eliminated to allow for upper mobility for black Americans to be on an equal playing field. Intervention from the government and private sectors’ racial wealth gap, especially financial institutions,  fully relieves these burdens. In recent weeks, many corporations stepped with funding to combat social injustice. They can do more to help.

Efforts to change policies change can reduce large gaps. They can range from improving education, progressive taxation, and employment opportunities, especially in the financial services industry. Accommodating lending should replace restrictive banking policies in black neighborhoods. Banks need diversity with more black loan officers and CFPs ready to serve a needed market.

At the end of the day, better financial literacy can play a role in strengthening black households’  financial flexibility. Learning how to save, invest, and improving your credit when borrowing can pave a better road to building your assets and wealth.

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