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All About The Personal Financial Statement

All About The Personal Financial Statement

by | Feb 23, 2021 | Investing, Managing Money, Retirement | 0 comments

By keeping tabs on your finances, you can create a secure and fulfilling future. That’s where a personal financial statement comes in. At its core, a personal financial statement offers an overview of where you stand financially at any point in time. It can help you succeed in various aspects of your life.

Why You Need a Personal Financial Statement

There are several reasons you may want to create a personal financial statement. It can help you if you’d like to:

  • Take out a loan.
  • Apply for financial aid.
  • Make a guarantee.
  • Design a retirement, estate, college savings, or other financial plans.
  • Lease a commercial office or other types of business space.
  • Develop strategies to reduce your tax burden.
  • Run for public office.
  • Keep track of your credit.

Ideally, your personal financial statement will show that you have a positive net worth and your assets are greater than your liabilities. This can allow you to position yourself as a responsible borrower and someone who knows how to manage their money well. It may also prove that you’re thriving with your finances.

How a Personal Financial Statement Can Change Your Money Habits

A personal financial statement can be instrumental in the way you think about your money and manage it. Here’s why: When you see your net worth, you’ll realize that many of your previous and future behaviors affect that figure. It informs you of whether or not you’re on track to meet your financial goals. A high, positive net worth, for example, may mean that you’re closer to your dream of:

  • Buying a dream home or rental property.
  • Retiring early.
  • Working part-time instead of full-time so you can spend more time with your family.
  • Donating more money to a cause or organization you value.
  • Funding your children’s college.

Low or negative net worth can give you a wake-up call. It may be just what you need to change your behaviors and be more cautious with the way you spend your money. You may be more likely to get out of debt, pick up a side job, and stick to a budget if you’re displeased with this figure.

What’s Included in a Personal Financial Statement

The three major components of your personal financial statement are as follows:

Balance Sheet

Your balance sheet is an overview of your personal net worth and will list all of your assets and liabilities. Assets may include your home, car, savings accounts, and investment accounts. Liabilities, however, might be your mortgage, auto, student loans, and credit card balances. Your balance sheet will state the difference between your assets’ total value and the total amounts you owe on your liabilities. It’s a great representation of your net worth.

Income Statement

Your income statement will consist of your salary, bonuses, and commissions. If you have other income from interest, a side job, or dividends, you’ll include this information as well. Your income statement will also outline your insurance premiums, income taxes, and any other consistent cash outflows you may have. With your income statement, you can determine whether you spend more than you earn and what you can do to improve the way you spend money.

Cash Flow Statement

A cash flow statement shows how you spend your money. It breaks down your cash into three main categories: fixed, non-discretionary expenses, variable, non-discretionary expenses, and discretionary expenses or fun money. It bridges the void of information from the Balance Sheet and Income Statement. You can use a cash flow statement to figure out if you’re on the right path to building wealth and meeting your goals.

What to Exclude From a Personal Financial Statement

Now that you know what’s included in personal financial statements let’s discuss what they should exclude. Your personal financial statements will not contain any business-related assets or liabilities. The only exception is a personal loan for your business or any other tool you’re directly accountable for.

Your personal financial statements mustn’t include anything you rent or personal belongings like household goods or furniture, as their values are rarely high enough to be considered assets.

How Often Should You Update Your Personal Financial Statements?

Once you prepare your personal financial statements for the first time, your work is not done. Since your finances will likely change regularly, your personal financial statements require frequent updates. It’s essential to review and modify your statements every month or every other month. This way, you’ll always be up-to-date on where you stand with your finances and can make adjustments to your spending and saving habits as necessary.

Personal Financial Statement vs. Business Financial Statement

Business financial statements usually consist of a profit and loss statement and balance sheet. As stated, personal financial statements include a balance sheet, income statement, and cash flow statement.

With a business financial statement, you can start or grow your business and obtain small business loans to help you do so. However, personal financial statements focus on your personal life and can help you achieve your personal financial goals like buying a house, retiring, or sending your children to college.

Ways to Increase Your Net Worth

Your net worth is essentially the value of your assets over your liabilities. You can have plenty of assets and have plenty of liabilities, meaning you don’t have a high net worth. On the flip side, you can have minimal assets but no liabilities and solid net worth.

So what is the ideal net worth? It depends on your age, unique lifestyle, and comfort level. There is no hard and fast number that everyone agrees with. However, you can use a formula developed by Thomas Stanley and William Danko, authors of the book “The Millionaire Next Door,” to get an idea of where your net worth stands. The formula is Net Worth=AgeXPretax Income/10. If your pretax income is $60,000 and you’re 35, for example, your ideal net worth would be $210,000, according to this formula. There are 18 financial ratios you should know, including this one.

Of course, this is just one way to look at your net worth and doesn’t necessarily mean that you’re struggling with your finances if you’re below the $210,000 mark. It’s all about what type of net worth you feel comfortable with. Another way to use your personal financial statement is to look at your liquid net worth that provides a more conservative view.

If your personal financial statements prove that your net worth is in the negative or lower than you’d like it to be, don’t worry. There are a variety of ways you can achieve a positive or higher figure. Here are several suggestions.

  • Cut Expenses: The less money you spend, the more you can use towards saving and investing. Take a look at your budget and figure out where you can reduce or eliminate expenses. If you rarely use that gym membership, for example, cancel it. If you tend to overspend on dining out, cook more meals at home. Remember that even a few dollars here and there can add up and increase your net worth in the long run.
  • Look for New Income Sources: If your 8 to 5 job doesn’t pay enough, don’t be afraid to earn money through other outlets. Depending on your schedule, preferences, and interests, you may want to take on a second job or freelance work. Or perhaps you have many items that you no longer need or want and can sell them on Craigslist or Facebook Marketplace.
  • Buy a House: If you’re currently renting, saving for a house may be a good option. Your mortgage payments can allow you to build equity, which can increase your net worth. If you do pursue homeownership, make sure you choose a home at or below your means. Otherwise, it can turn into a liability rather than a wealth-building tool.
  • Build an Emergency Fund: Unfortunately, life happens, and your car may break down, or your roof may need to be replaced when you least expect it. In these situations, it’s helpful to have an emergency fund. With an emergency fund, you can cover these unexpected expenses and avoid debt. Most financial experts recommend three to six months’ worth of savings in an emergency fund.
  • Get Out of Debt: Although it’s easier said than done, do your best to reduce or eliminate your debt. This includes your student loans, mortgage, credit card debt, car debt, and other places you make monthly payments to.
  • Invest: The sooner you begin to invest, the better. Once you have an emergency fund, make your money work for you via investing. You may want to consider some investment vehicles, including a 401(k), Roth IRA, Traditional IRA, and 529.
  • Get Insured: Insurance can protect you financially when and if the going gets tough. Life insurance, car insurance, and health insurance are important investments that can protect your (and your family’s) financial future.

How to Prepare Personal Financial Statements

If you’d like to prepare personal financial statements, you have two options. You can go the DIY route and complete them yourself. Fortunately, there are many free and fee-based templates available to guide you through the process.

Another option is to consult a financial advisor or hire a financial coach to help you. They can provide you with the expert guidance you need to ensure your personal financial statements are thorough and accurate. Even if you create your own statements, a financial advisor may review them and provide you with the peace of mind of knowing it’s in good shape.

A financial advisor can also help you increase your net worth. Once they learn more about your particular situation, they can make appropriate recommendations and steer you toward a healthier, happier financial future.

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

The Best Free Debit Cards For Kids To Teach Them About Money

The Best Free Debit Cards For Kids To Teach Them About Money

by | Feb 11, 2021 | Credit & Debt, Managing Money | 0 comments

Giving your child a debit card can be an excellent way to teach them about money and budgeting early in life. With consumer debt in the US growing to over $14 trillion, according to CNBC and the Fed, any step you can take to help promote financial literacy early can go a long way.

However, not all debit cards for kids are created equal.

Some have higher monthly fees. Others are free but have ATM and card reload fees. And a few cards offer features above and beyond the competition.

It’s important to understand your options before choosing which debit card to get your kid, especially when it comes to cost. So below, we compiled a list of some of the best debit cards for kids, including a couple of free options you should consider.

What Debit Cards Can Teach Kids About Money

There are a lot of money lessons that kids can learn when using a debit card. Though, the one skill that they will likely pick up above everything else is budgeting.

By allotting them a predefined amount of money, you put the power in their hands to decide how they want to spend their cash.

Rather than saying they can purchase one toy when at the store or one candy bar when at the grocer, they have to look at each item’s price and decide what’s worth it and what’s not, just like the rest of us. They have to consider much more in terms of opportunity cost.

Plus, I think using plastic over cash can have some advantages. It’s like using training wheels before getting their first credit card.

With a kids’ debit card, you can put limits on how much they can spend. You can essentially make it impossible for them to overspend, and they might start to learn those boundaries.

Then, you take the training wheels off when they get their first credit card, and I think they’ll have a higher chance of not maxing out the credit limit right away because they have built the habit of sticking to a budget when using a card.

If we were following Dave Ramsey’s Baby Steps, teaching someone about money early would be like step 0. Although, he’d probably frown against the credit card training…

I digress. At the very least, giving your kid a debit card and talking about money will help promote financial literacy. Hopefully, that will go a long way in stopping them from contributing to that multi-trillion consumer debt number mentioned above.

What Defines a Kid Debit Card

Before diving into the list of the best kids’ debit cards, I wanted to define what a kid’s debit card is to me. Generally, I think it must comply with three rules:

  1. A kid (under the age of 18) must be able to use the card on their own
  2. The card must be accepted at most retailers and online
  3. There must be spending controls and parental controls, including transferring preset amounts to the card from a checking account

Also, there are usually features that allow you to track and monitor spending and manage chores.

Most of the best debit cards for kids are prepaid cards that you can load money onto. Since they are prepaid, you avoid the need to open a checking account and eliminate any possibility of overdrawing an account. The card being “prepaid” is the training wheels from the example above.

The 6 Best Kids Prepaid Debit Cards

Before diving into the list, I wanted to call out that the first two options are free! Meaning, there is no monthly fee associated with them.

The rest are still good options, and in some cases, better options, but there will be a monthly fee associated with them.

1. Akimbo Prepaid Mastercard

  • Monthly Fee: $0
  • Card Purchase Fee: $0 (first sub card free, after that $4.95)
    • Reload Fee: $5.95
  • ATM Fee: $1.98

The Akimbo prepaid debit card is technically free. However, even though there is no monthly or annual fee, there is a litany of other costs.

On top of the hefty $5.95 cash reload fee, there is also a $4.95 card replacement fee and a $5.95 inactivity fee (if your card is unused for 12 months).

I like the card because it’s free, and creating sub cards for your kids to use is relatively easy and only comes with a one-time fee of $4.95. Still, the other expenses associated with this card add up fast (especially the fee to transfer money onto the card).

Learn more about the Akimbo Prepaid Mastercard here.

2. Movo Digital Prepaid Visa Card

  • Monthly Fee: $0
  • Card Purchase Fee: $0
    • Reload Fee: $0 (in most cases)
  • ATM Fee: $2.00

The Movo card outshines Akimbo as a free debit card for kids in a few ways.

For one, there is no reload fee if you opt for direct deposit or other approved methods, which is head and shoulders above the Akimbo card. Imagine reloading $20 onto a card for a kid’s monthly allowance and having to pay $5.95. That’s over a 25% fee!

Even if you loaded $100 at a time, Akimbo is still taking nearly 6% from you.

With Movo, it’s free, which is a massive advantage if you plan to load small increments of money onto the card frequently.

However, there is a $4.95 inactivity fee that kicks in after only 90 days (compared to 12 months for Akimbo). If your kid is a good saver and doesn’t use their card often, you may face this fee from Movo. Like many other cards on the list, you have to watch out for ATM fees with this one as well.

Learn more about the Movo Virtual Visa Prepaid card here.

3. Current Visa Debit Card

  • Monthly Fee: $3 ($36 billed annually)
  • Card Purchase Fee: $0
    • Reload Fee: $0
  • ATM Fee: $0 (for in-network ATMs)

The Current card is not free, but it does offer transparent pricing and a one-month free trial. For only $36 a month, you add money to your card as many times as you’d like, worry-free.

Plus, Current offers more than just a debit card. They offer a mobile app with a whole suite of products, including teen banking. It’s one of the most technology-forward options on this list.

Also, for what’s it worth, the card looks cool and wins style points there.

Learn more about the Current Visa Debit Card here.

4. FamZoo Mastercard Reloadable Prepaid Card

  • Monthly Fee: $5.99
  • Card Purchase Fee: First four cards free, then $3 per card
    • Reload Fee: Free when using a qualified bank transfer or direct deposit.
  • ATM Fee: Varys by ATM

The FamZoo card is probably the most popular kids’ debit card option on this list. That’s because it was designed to be a kid’s debit card, whereas some other options on the list are just prepaid debit cards that happen to be good for kids.

Because the card is designed for kids, it offers a lot of neat features, including:

  • Setting up payments for chores
  • Monitoring and tracking kids spending
  • The ability to set savings goals for your kids

The monthly fee is $5.99 per family – so the value gets better the more kids you have using the card. Plus, there are methods to reload your card for free to help keep costs down.

Learn more about the FamZoo prepaid debit card here.

5. Gohenry Prepaid Mastercard

  • Monthly Fee: $3.99
  • Card Purchase Fee: $0
    • Reload Fee: $0 (when loading via debit card)
  • ATM Fee: $1.50

Gohenry offers a free 30-day trial. After that, it is one of the more expensive cards on the list, coming in at $3.99 per month per child.

The premium price could be warranted depending on what you are looking for in a kid’s debit card. Gohenry is designed for kids, similar to FamZoo, and offers a sleek app intended to help teach kids about money.

Last, the ability to personalize the card is a nice touch and could help your kid get a little more excited about learning about money. However, it costs $4.95 to get a customized card.

Learn more about the gohenry card here.

6. Greenlight Kids Debit Card

  • Monthly Fee: $4.99
  • Card Purchase Fee: $0
    • Reload Fee: $0
  • ATM Fee: $0

Rounding out the list is Greenlight, another card designed for kids.

In fact, their tagline is “the debit card for kids, managed by parents.”

The pricing is set up similar to FamZoo, where you pay $4.99 per month but can have multiple kids on the account. It also offers countless great features to promote financial responsibility for kids, including:

  • Chore management
  • Allowances
  • Real-time transaction notifications
  • Parent-paid interest on savings
  • And more…

Learn more about the Greenlight card here.

Bonus: Open a Joint Checking Account

  • Monthly Fee: asdf
  • Card Purchase Fee: asdf
    • Reload Fee: asdf
  • ATM Fee: asdf
  • Rewards/Perks: asdf

The bonus option on this list is to opt for a regular (non-prepaid) debit card.

You can do this by opening a joint checking account with your kid, giving them access to an FDIC-insured bank account and a debit card at the same time.

The two watch-outs with this option are:

  1. You need to make sure that you won’t get hit with any overdraft fees
  2. You need to check the minimum age to open a checking account, which can vary by bank

If you can get by those two hurdles, this could be a great option because it’s free. There are typically no monthly fees associated with checking accounts and debit cards, and you don’t have to worry about “reload” fees either.

Pros and Cons of Getting Your Kid a Debit Card

Kids Debit Card Pros

Teaches Kids to Budget: As mentioned at the beginning of this article, giving a kid a debit card can be one way to teach them about budgeting and enforce good money management practices.

You Can Set Spending Amounts: Most prepaid cards put the parent in the driver’s seat to set spending limits and monitor accounts. You can start to let your kids spend money on their own without completely letting them loose.

Avoid Overdraft Fees: Using a prepaid card, you eliminate the risk of having a kid overdraft a debit card and rack up hefty fees.

Multiple Other Features: From setting interest rates in “savings accounts” to incentivize savings to rewarding kids for doing chores, many of the best prepaid debit cards for kids come with additional useful features.

Kids Debit Card Cons

The Cost: There is no getting around it; whether it’s a monthly fee, reload fee, ATM withdrawals fee, or another type of fee, kids’ debit cards are expensive. The high price you have to pay takes away the risk of overdraft fees, and in some cases, the cost is offset with fun features to help you manage the card and teach your kid(s) about money at the same time.

No Rewards: Unlike traditional credit cards, most debit cards do not offer the ability to earn cash back or rewards.

Age Limits: The age limit to open a card tends to vary by company. This is another thing to keep in mind and look up before moving forward with a card.

How to Choose a Debit Card for Your Kid

Choosing a debit card for your kid is easy once you know your options.

In general, I think there are three questions you should answer to make the decision.

1. Do You Want a Prepaid Card?

If you want the safety and security that comes with loading money onto a prepaid card, then you have started to narrow down your options in the direction of the six cards listed above.

If you are okay with taking the risk of overdrafting an account or are familiar with a bank that stops overdrafting in the first place, going the route of a traditional debit card might be a good fit for you.

2. Do You Want Added Features?

If you want a card and app that comes with many bells and whistles, then opting for the FamZoo, Greenlight, or gohenry card (or something similar) is probably a good choice.

Each card’s website details exactly what it can and can’t do (such as monitoring spending). Before signing up, it’d be wise to read those details over carefully.

3. How Often Will You Reload the Card?

If you plan to reload the card monthly or even weekly, you’ll want to pay extra close attention to the reload fees and methods for reloading a card.

If you only plan to load up the card once a year, the monthly fee associated with the card is the cost you will want to keep lower.

Final Thoughts: Best Free Kids Debit Cards

Getting a debit card for your kid to use can be a great way to help teach them about money and budgeting.

Though it can also be a great way to simplify your finances, instead of doling out an allowance in cash, you can manage money digitally, just like most of us do when paying our own credit cards or monthly bills.

The key when choosing a card is to make sure the benefits outweigh the costs. As you saw reading through this list, these cards are not cheap, and the monthly costs and fees can add up quickly!

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

Money Isn’t Everything! These Values Matter

Money Isn’t Everything! These Values Matter

by | Feb 10, 2021 | career development, Generation Z, Managing Money, millennials, Retirement | 0 comments

According to my grandmother, “Poor or rich, money is good to have.” We need money to pay our living expenses and support who and what we care about most. Raising a family or taking care of our parents requires funds for health care, education, and the opportunity to enjoy the beauty of life. It can help us make a difference in the lives of others through giving.

Without money to pay our bills or invest, we may fall short of achieving our life’s goals and having financial security, independence, and freedom.

Money Isn’t Everything!

Money isn’t everything. It has its limitations. Obsession over money and wealth is unhealthy, mainly when it controls your life. It may prevent us from ever being satisfied with our life by continually needing to compare ourselves to others. Money matters because it is the tool we need in the absence of bartering. However, many things are more valuable and can help us achieve our full potential. Focus on those values that make you content. Review the values listed on Maslow’s hierarchy of needs. Self-actualization is the pinnacle of our self-fulfillment needs.

As individuals, we each have our list of personal values that give meaning to our lives. These values shape our personality, behavior, and attitudes. How often do we reflect on those traits that make us who we are? It is an excellent exercise to do to make sure you are going in the right direction. Since we serve as role models for our children, we need to be sure we send the signals we want them to see. They are worthy of us doing a check on our values and beliefs, which make us tick.

What We Value, Besides Money

 

1. Time Is A Precious Resource

Time is money, but it is so much more. If there is inequality in money and wealth, we have the same limited time. You can’t borrow or lend time at any cost. Anyone who loses family and friends knows the tragedy of time running out.

You can’t buy time unless you can pay someone to do a task for you, which may temporarily free you to do other things. But you can’t buy time in a permanent sense, no matter how much money you have.

Time is our most precious resource. As such, spend your time with people you most enjoy being with or doing what you most desire. Don’t waste your time; use it in productive ways.  Think in terms of daily accomplishments and whether you have achieved what you wanted to do. Like money, invest your time meaningfully. Find ways how to improve your time management skills here.

2. Manage Your Energy Wisely

Somewhat related to time is how we manage our energy. Energy affects our physical, mental, emotional, and spiritual well-being. We all have limits to what our mind and body can do. What is personal energy or power? It is the amount of effort or strength you are willing to devote to people, things, or challenges in your life.

There are people in our lives who are delightful. We get a good boost from spending our time and energy with them. Other people may deplete our energy through negative behavior or attitudes. In this challenging year, the pandemic has weighed on our lives by making it difficult to see our friends and families. We may have saved time and energy by working remotely, but we lost the uplift from seeing people in the office. Indeed, driving to work may give us the power of the bridge, separating our home from our jobs.

3. Your Health Is Our Vital Asset

We can’t take our health–physical, mental, and emotional-for granted. Yet, we often do this by not taking as good care of our body and mind as we can.  What is your health worth? Like time, it is priceless and precious. Eating healthy, daily exercising, and getting a good night’s sleep shouldn’t be hard to do. They are good habits to incorporate into your mindset. Even short daily movements have helped me loosen up considerably.

Recently, I complained to a friend about being more stressed about more things lately. He recommended several meditation sessions to try out. A few of the sessions were particularly helpful, so I work on those. Changing up your routine with good habits can be stimulating. 

I look forward to reading at night, playing music that fits my mood, and understanding my emotions better.

4. Family,  Friends, And Community

“First be a person who needs people. People who need people are the luckiest people in the world.”

Bob Merrill, lyricist Sung by Barbra Streisand

We need our family and friends for their love, affection, companionship, and to validate us. I come from a tiny family where friends were family and family were friends. The pandemic experience has required us to social distance for safety reasons. However, we have grown tired of this pandemic and staying apart from people we love. Human beings just don’t enjoy isolation. We thrive when we are with other people who are essential in our lives. They contribute to our sense of belonging, comfort, and self-worth and add to our lives’ meaning.

Community And Colleagues

Apart from family and friends, it is your community and your neighbors. Community is where you live and your colleagues at work. Work and community are spheres where you may meet new friends. We recently moved from a big city to a small town. We changed communities just before the pandemic is the ideal time for you to meet new friends. Our kids are fortunate to have met and formed relationships with good friends when they were at school. Those relationships have carried over to online and social media.

5. The Right Life Partner

Choosing the right partner you want to spend your life with is easier said than done. Only after years together can you look back and say you are fortunate to find someone to be with until you are old and gray. When you are in your 20s, how do you know if you both have the same interests, intellect, and standards?

You don’t. However, by loving one another and finding someone with who you can connect easily, learn from, trust, respect, and grow, you have the making of the right life partner.

My Life Partner

Speaking of myself, Craig and I connected instantly in what feels like a lifetime ago. We have similar interests, enjoy each other’s company. Challenges are in every relationship but knowing how to deal with each of them matters. Craig has always been my incredible support, and we both learn from each other when we have different interests or opinions. I feel lucky that we have built a tremendous enduring bond that has remained strong through the high demands of having active teens and two dogs.

6. The Virtues of Work

“Choose a job you enjoy doing, and you will never have to work a day in your life.”

Mark Twain

It has been my great fortune to find meaningful work most of my career. Every individual should explore what kind of work they most enjoy doing. For some, it is working with their hands to craft a tangible product. Many feel rewarded by helping others, while a significant number prefer making lots of money to afford a luxury lifestyle. To each, their own goals and road to success.

I have always found challenging work to be enterprising and energizing. Working has allowed me to grow my knowledge and skills outside of my home. With so many people unemployed these days, I feel blessed to have a job that will enable me to teach remotely. The virtues of working are plentiful. Work adds meaningful dimensions to your life besides compensation. I have learned new skills, expanding my knowledge, cultivating my career and reputation. Read more on the virtues of work here. 

7. Love of Learning

“Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young.”

Henry Ford

By being a lifelong learner, you can look at the world with fresh eyes. Learning can be formal, informal, or casual. You don’t have to learn in the classroom to pick up knowledge. Most of our education comes from outside of an academic setting. Picking up new information or realizing an original thought can give new highs and optimism. Whether you are learning for a career, hobby, or personal growth, never stop learning. There are only benefits to be found in lifelong learning.

Keep your brain healthy by find activities you enjoy and challenge yourself. There are so many resources and ways to learn. I have overcome some of my anxiety by improving how to cook, updating my tech skills, working on crossword puzzles, writing better, reading books I may have shied away from, and more. Chess is one of those games that I have genuinely wanted to learn how to play.

The Queen’s Gambit

I was fascinated by watching The Queen’s Gambit recently. Netflix’s series is a story of an orphan, Beth Harmon, who aspires to play chess in the male-oriented competitive world of the 1950s and 1960s. I played chess (poorly) with anyone who would play with me (only my brother) when I was in grade school. However, I would watch these intense chess players while strolling through Washington Square Park in New York City. It was so cool! Playing chess may have eluded me, but it has always sparked my interest in learning.

8. Protect Your Reputation

“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Warren Buffett

Buffett’s quote on reputation is priceless. Your reputation is your brand, whether it is for a business or you. I cannot understate the importance of how you are regarded by your social circles, at work, and in your family. Reputation is your character and quality as judged by people. It forms the basis of respect and the currency of your worth. Cultivate traits like honesty, integrity, honor, and strong morals that should be in the workplace and your life. Manage your online presence for the quality of your character you are conveying.

The ruin of your reputation usually comes more quickly and efficiently than its establishment. It can be due to a lapse of ethical conduct or doing something legally questionable. Don’t post on social media without considering potential negative ramifications.

Rule of Thumb For Questionable Posts

If you are unsure, use the rule of thumb for questionable posts. That means first considering what others–friends, family, colleagues, your current or future employers–may think.

Words, photos, videos, or anything that are reflections of you and your values may last in cyberspace for all time. Protect your reputation carefully but not at all costs, which may make it harder to restore. Even now, you may already have some questionable items that may cause harm to you in the future. For example, you may want to pull that drinking contest you won with a trophy filled with bourbon, even if it is a relic of your past.

9. Experiences Over Possessions

Having experiences top buying things most of the time for me. Unique experiences tend to be more memorable and pleasurable. Traveling by camel in the desert, ziplining, and whitewater rafting bring tremendous rushes to our adrenaline. 

Studies have shown experiences bring people more happiness than do possessions. In their 2014 study, psychologists Matthew A. Killingsworth and Thomas Gilovich found it wasn’t just the experiential purchases (money spent on doing) that provided more joy than material possessions (money spent on having). The joy of waiting in line for the experience gave participants enduring pleasure as well as consumption. Millennials are known for their preference for spending on experiences, but boomers also favored experiences in this study. 

In a 2018 study with the Center For Generational Kinetics, Expedia found 74% of Americans prioritize experiences over products. Travel tops the list of experiences that make us happy the most. Of course, these results were before the pandemic when we were able to take trips. As a result of the pandemic, experiential purchases such as traveling, concerts, and movies, have declined. No doubt, the experience economy and sharing it with others has suffered as well.

10. Find Your Passions

Passion is a powerful emotion defined as a strong feeling of enthusiasm or excitement about doing something. Your passionate interests maybe those areas of topics, skills, or activities that excite you. Being passionate is often beyond a mere interest in something and can be an internal energy source. Like experiences, you are more engaged and engrossed in the activity or learning more about it.

Finding your passion in your job or career can motivate you to improve your performance. You don’t need to work in a position that directly aligns with your interests, but there could be an overlap between your work and other activities. Being excited about interests outside of work has its benefits. It allows you to develop new skills, meet new people, and expand your personal growth in a more balanced way.

For many years, I collected coins as a hobby, starting with Indian Head pennies, which led to my interest in the history of Native Americans, which I still am engrossed in today. Later, my husband and I became serious collectors of 18th Century American furniture and art, learning about American history.   I am always fascinated to know what passions other people have in their lives.

11. Gratitude and Empathy

“He who receives a benefit with gratitude repays the first installment on his debt.”

Seneca

Expressing our thanks to all those we love and appreciate can help us live better lives—both the givers and the receivers of our gratitude experience many advantages. Our happiness rises, we feel healthier, stress declines, and it helps us cope with a range of negative emotions. Gratitude is our moral barometer and, when genuinely given, boosts our energy. Expressing gratitude is good for our finances as well.

Gratitude has been studied extensively in the past two decades. As such, gratitude is a “gateway’ to other positive emotions– joy, pride, motivation, and wonder.

A Shared Role In Our Brain

Gratitude is on par with empathy. Empathy, a relatively new term, is defined as the ability to understand and share another’s feelings. Having the ability to understand and share the feelings of another is empathetic. Scientists have linked gratitude and empathy because there is an exact role played by each in the medial prefrontal cortex  (MPFC) part of the brain. That part of the brain helps people set and achieve goals and contributes to a wide area of functions.

Feeling grateful and empathic are enduring values that produce benefits for the giver and receiver.

12. Financial Security

Sooner or later, I wanted to get back to money as the value we share with those mentioned earlier. Achieving financial security provides peace of mind when your income can cover your expenses; after having saved for emergencies and your retirement. Financial security requires adopting good habits that can support your lifestyle while you work toward financial goals. Becoming financially secure means not worrying about credit card debt because you pay your bills in full and will not pay interest charges. 

The importance of feeling financially secure allows you to have flexibility and freedom to control your life. Financial security means different things for different people. For me, it means working at a job for less pay but feels more rewarding when teaching college students. I feel fulfilled at the prospect of sharing what I know with others. Being able to schedule my time better helps me to face the needs of my family better.

Final Thoughts

Money isn’t everything, but it matters when you don’t have enough to pay your bills. Besides money, there is much to value in our life. We should protect, honor, cherish and nurture these values for giving meaning to our lives.

Thank you for reading! If you found this of interest, please share it with others. Consider subscribing to The Cents of Money and receive our weekly newsletter.

 

 

 

 

 

 

Why Liquid Net Worth Matters

Why Liquid Net Worth Matters

by | Feb 9, 2021 | Budgeting, Credit & Debt, Investing, Managing Money, Mortgages, Retirement | 0 comments

“Liquidity is a good proxy for relative net worth. You can’t lie about cash, stocks, and bond values.

Mark Cuban

Understanding your net worth and how to calculate it is hugely important for measuring your financial health at a particular point in time. It is simply the difference between assets and liabilities. However, it doesn’t consider the liquid nature of your assets.

For example, stocks and bonds tend to be more liquid than other assets as they can be quickly and easily converted into cash. Other assets like your house or car take time and negotiation to sell if you need money. Net worth remains a helpful benchmark but depending on the type of assets you have it may be a less accurate picture.

Liquid Net Worth Is A Realistic Snapshot Of Your Financial Condition

Liquid net worth is what really matters. It is a far more realistic reflection of your financial condition should you face an immediate need for money such as a medical crisis or a business opportunity. While liabilities remain the same for both calculations, your liquid assets have more significance when unforeseen events occur.

Those assets for readily available as cash with little or no loss of value to be counted in liquid net worth. Having liquid money provides a sense of financial security for disasters and opportunities alike.

Asset Rich Cash Poor Can Be Uncomfortable

To a great degree, when you need to take money out to pay for an unforeseen event, would it be easier to take $15,000 out of your savings account or sell your land? Depends if you have $15,000 in the bank. The expression “asset rich cash poor” comes to mind. Often, people have economic assets like land or other economic interests but are not able to easily liquidate them for money.

Land and antiques are assets we have owned and enjoyed. However, you can’t count on those assets to pay for a costly emergency in your life. When I think about mistakes I have made, those purchases stand as major regrets. You sleep easier with access to liquid assets.

What Is Net Worth?

Your net worth is your personal balance sheet that provides a snapshot of your financial position at that time. Net worth is all that you own less than all that you owe. For an expanded explanation, see 10 Reasons Why You Need To Know Net Worth.

The  Formula: Net Worth =  Total Assets less Total Liabilities

Using an excel spreadsheet with different assets/liabilities is an excellent tool for you to put all of your categories in one place that can be periodically updated. You should do it on at least a quarterly basis. However, if you are true to your monthly budgeting, reviewing your monthly net worth is better.

Try putting it on a spreadsheet first. You can use Personal Capital’s net worth app for tracking your investments. Frankly, any way you can keep on top of your net worth with an eye towards building the amount will work.

Knowing Your Net Worth:

  • is a crucial benchmark and report card at a particular time.
  • will allow you to set near-term and long-term goals.
  • track its changes for better money management.
  • highlight your liquid asset balances.
  • helps you to get a loan for a house, car, college tuition, or new business.
  • pay down high-cost debt.
  • refinance your mortgage loans.
  • encourage you to save and invest more.
  • buy your own home, rather than pay high rent.
  • is a great road map to building your wealth.

 

What Is Liquid Net Worth?

Although net worth provides a view of your current financial condition, it doesn’t differentiate the assets that can provide you with liquidity quickly and easily. When facing a medical crisis or an opportunity to buy a business, getting access to your money matters. Sure, you can sell your car quickly but likely for less than the estimated value. Understanding what assets are more liquid means they can be readily converted into cash with little or no loss in value.

The Formula = Liquid Assets Less Total Liabilities

You can either remove non-liquid assets from your total assets or discount their values from their appraisals. Additionally, you need to recognize that tapping certain assets too early such as retirement accounts could result in paying penalties and taxes. More than that, you lose momentum when you withdraw assets that were benefiting from compounding growth.

 

Your Liquid Net Worth:

  1. Understand the differences between your net worth and liquid net worth. Liquid net worth is what you need to count on for immediate funds.
  2. Liquidity varies among our assets which have different growth rates. Money market accounts are liquid but typically have lower returns than stock investments long term.
  3. Consider costs involved in the transactions such as penalties, taxes, fees, and such

 

How To Calculate Your Liquid Net Worth?

Liquid Assets:

  • Cash
  • Cash-Equivalent Securities
  • Brokerage/Investment Accounts

The most liquid assets are cash, cash-equivalent (or money market) securities, and investment or brokerage accounts. These are either already in cash or are those financial or monetary assets that can easily turn into cash with little or no loss in value.

Cash is the best form of liquidity but of course, doesn’t grow unless it is invested.  This category broadly consists of cash on hand, prepaid cards, savings accounts, checking accounts, money market accounts, certificates of deposit (CD), savings bonds, and emergency funds. If your CDs are in a fixed term like 6 months or a year, you may need to pay a small prepayment penalty but this is fairly accessible money. Separately, you need to have an emergency fund earmarked for unforeseen expenses.

Brokerage/Investment Accounts

All types of financial securities can be bought or sold in your brokerage account. Typically, they are stocks, bonds, REITs, mutual funds, and ETFs that are in these taxable investment accounts. While these accounts are liquid in a matter of three business days, you do pay taxes on price appreciation based on the time you held the security. Holding the securities for over one year is taxed at a lower 15% capital gains rate. Otherwise, you pay taxes at the same rate as ordinary income.

Less Liquid Assets

The cash value of your life insurance policy is fairly liquid but you may have to absorb small fees. Depending on the company, it can take more time (eg. 10-20 days) than access to financial securities. On the other hand, access to pensions and investments in real estate such as multifamily homes are less liquid.

Retirement Accounts

When withdrawing money from your retirement accounts before you turn  59.5 years,  you will likely be hit with a 10% penalty and immediate payment of taxes, losing the deferred benefit on that amount. Generally, if you withdraw early from a 401K plan or IRA account you will pay taxes at your marginal tax rate. The marginal tax rate is the tax rate paid on the dollar of earnings (eg 22%-24%).  On the other hand, Roth IRAs are treated differently. For those accounts, so long as you have had this account five years or more, you may withdraw contributions you made to your Roth IRA anytime tax-free and without penalty.

While you may have access to your retirement savings, these are not considered to be liquid. You should not dip into your retirement accounts unless needed as a last resort. By withdrawing these funds, you lose the compound benefit on this money for your future when you are less likely to earn money at your job.

A Temporary Exception

The federal government had waived the 10% penalty if you made a withdrawal between January 1 and December 31, 2020, for those impacted by COVID. Qualified individuals that put back this withdrawn money within a three-year time frame will be excused from paying taxes on the money.

If you are including retirement accounts in your liquid net worth, you should discount your retirement balances by 25% to be conservative.

529 College Savings Accounts

Like retirement accounts, withdrawal of money saved in a 529 college savings plan may be subject to a 10% penalty and you will have to pay taxes. The exception to this rule for 529 savings is withdrawals made for qualified education expenses such as tuition, fees, books, computer, and related costs.

If you are including 529 accounts into the liquid net worth, I would use a similar discount of 25% off the account balance.

Other  Assets

The cash value of your life insurance policy is fairly liquid but you may have to absorb small fees. Depending on the company, it can take more time (eg. 10-20 days) than access to financial securities. On the other hand, access to pensions and investments in real estate such as multifamily homes is less liquid.

Tangible assets

These assets are real and personal property that reflects your lifestyle and is harder to liquidate for funds.

Your Primary Home

If you own the primary home you live in, this may be your largest asset. While the home is an investment, it is not a liquid asset like financial securities you invest in. You cannot count on liquidating real property for quick conversion to cash. You need to figure out how the real estate market is faring in your area using Zillow Zestimate and other sources.

Selling your home is a complex process that can take several months or more to accomplish. An appraisal value is not necessarily your sales price which is often lower. Also, to complete your sale, you are responsible for fees and costs including broker fees of 5%-6% on the sales price, closing costs of 1%-2%, and attorney costs.

Most likely you are carrying a mortgage that is picked up in total liabilities. Upon the sale of your home, you will pay off your mortgage in full from the proceeds of the sale of your home, reducing your liabilities.

Your primary home as an asset should be discounted about 25%-30% off its estimated value for purposes of liquid net worth.

Other Real Estate

Besides your primary home, you may own other types of real estate, including vacation or second home, timeshares, land, and rental property. Having just sold a plot of land, I can tell you that we took a 30%-35% hit from our cost basis in an ugly market after putting it on the market over a year ago.

Use current conservative market values for real estate. Appraised values may not reflect actual sales or liquidated values. You should not be inflating your liquid or net worth unrealistically.

You would need to approximate the value of your home, cooperative, condominium, cars, boats, and any other large items. To approximate real estate values, you can look at Zillow Zestimate, Redfin, Chase Home Estimator, or real estate websites for your zip code.

Your Business(es)

If you own businesses outside of your primary income, it is tricky to calculate a value let alone consider it to be a liquid asset. While you may want to include in your net worth statement a discounted multiple of annual revenues, it doesn’t make sense to include for purposes of liquid net worth unless you had the business appraised and a ready buyer.

Personal Property Is Tricky To Value

Unless you have a meaningful fleet of cars and boats, you should not add these to your assets for your net worth or liquid net worth.  These assets depreciate too fast and sell too slowly to add fairly to your liquid net worth. If you do have that fleet, for cars, you can look at Kelly Blue Book, Edmunds, or AutoTrader. Similarly, for boats, you can consult Boat Trader.

What Else Goes Into Total Assets?

Art, rare books, rugs, and antiques may be a large part of the net worth of wealthy households handed down to the next generation. Unless they are highly desirable or rare, these assets tend to be wildly low liquidated values to count on if you needed money in a pinch. Musical instruments have their value, but again, they are very difficult to peg and their sales are less predictable to raise capital.

This category has a lot of sentimentalities but its value may be very difficult to ascertain. In my opinion, these assets should not be counted on unless you work with an estate professional steeped in knowledge and who has a terrific network to help you sell the items.

My Own Personal Experience Provides A Valuable Lesson

When I worked on Wall Street, I was restricted from making investments in financial securities. If on that rare occasion I was able to buy certain securities, I was often not allowed to sell that security when I wanted to. So, on either side of the trade, I was burned and finally abandoned investing until I left my career as an equity analyst.

So what did I invest in?

A large part of our assets was in art, rugs, rare books, and antiques. What was I thinking?

These assets are on our walls (art), in our bookcases (rare books such as the first edition of the Federalist Papers), on the floors (ancient rugs), and antique furniture (signed in the mid-1760s by the cabinetmaker).

Ever try to sell an 18th-century Tiger Maplewood card table? We have! And we are still waiting for that sale.

Beautiful stuff, but they can’t pay the bills! So I don’t include these personal assets. The few pieces we have sold were at prices 70% below what we paid for them.

I digress but a worthwhile lesson for those who are collectors.

List all your Liabilities By Current Balances

 

Mortgages

  • Your mortgage loan balance is probably your largest liability.
  • The home equity loan balance.
  • Separate mortgage loan balances for the other real estate property (listed above in assets)

Other Loans

  • Student loans at the current balance.
  • Loans associated with the business(es) even though you aren’t including the value of the businesses.
  • Personal loans
  • Credit card account balances (you should break these out individually).

Related Post: Pros And Cons of Credit Cards

Total Liabilities

As mentioned earlier, the formula is fairly easy:

Total  Liquid Assets minus Total Liabilities = Your Liquid Net Worth

Depending on the composition of your assets, it is possible that your liquid net worth may be negative, especially when you are conservatively discounting large assets like your home but including the full mortgage balance. It is important for you to consider whether you need to adjust your investment strategies, spend less, save more, and make sure you have money for emergency purposes.

 

How Can You Build Up Your Liquid Net Worth: Make Good Trade-Offs

Track changes in your liquid net worth statement as early as possible to make sure you are making progress towards your goals.

Track your spending, review for areas you can reduce and produce savings

Have an ample emergency fund of 6-12 months for unexpected events like a lost job. Invest this fund in a liquid account like money markets.

Put more of your money into investment assets like stocks that can expand wealth rather than in personal possessions.

Add to your retirement accounts to the contribution limit. Avoid withdrawing money from these accounts which trigger penalties and taxes. The same goes for 529 plans.

Making more money at your job or a side gig to boost income.

Consider buying recently used cars than luxury fast-depreciating vehicles.

Choose to invest based on your appetite for risk and where you are in your life cycle.

Related Post: How To Make Better Trade-Offs

Where Should I Invest My Money To Maximize My Liquid Net Worth

Stocks are riskier but generate higher returns than keeping your savings in bank accounts at low returns.

According to Bankrate, the best annual percentage yield (APY) which is your effective annual return as of August 28, 2020 ranges from  0.60%- 0.91% for the top ten banks. Those paltry rates which do not provide much in the way of income. Typically, banks may require a minimum balance from $1 to $25,000 and have monthly fees up to $15.

The younger you are, the more able you are to ride out the greater risk found in stock investing, with the benefits of compounding effects.

Homeownership remains a worthwhile investment with currently low mortgage rates. But your home is less liquid than financial securities.

Decreasing your loans or debt liabilities will increase your liquid net worth.

Your Mortgage Loan Deserves Your Careful Attention

Look into refinancing your mortgage if you carrying a mortgage with more than 5% loan rates. You may realize savings.

Target carefully what you borrow, for how long, and at what rate. Look at taking out a 15-year mortgage loan versus a 30-year mortgage loan. While your monthly payments will be higher for the 15-year loan, total borrowing costs will be lower.

Taking on a mortgage loan is a big cost but home prices have generally kept pace with inflation until 2008-2009 when subprime mortgages played a huge factor in declining home values.

Lower Your Debt Where Possible

Pay off your credit card debt in full. It’s likely your highest cost debt so use extra savings, bonus, or tax refund to lower this amount. Otherwise, slow your spending.

Pay off your student debt as soon as you are able.

Final Thoughts

While net worth is a more common benchmark, refining your assets for liquidation purposes gives you a more realistic picture. Tracking liquid net worth helps you to understand your ability to deal with a crisis or an unexpected opportunity. When facing an immediate need for cash, you don’t want to withdraw funds that are earmarked for retirement.

Thank you for reading! If you found this of value, consider reading other articles on our blog, and join us by subscribing to The Cents of Money. Please let us know your thoughts!

Saving For Retirement In Your 20s

Saving For Retirement In Your 20s

by | Feb 4, 2021 | Credit & Debt, Investing, Managing Money, Retirement | 0 comments

Saving For Retirement Yet?

Savings, investing, and retirement are very related, yet the topic of retirement planning gets pushed off to the side.

We fear dealing with the unknown, or we are neglectful.

Instead, planning early and often for retirement will empower you to control for a stage of life that could quite exciting if done right.

It is always an excellent time to start thinking about saving some tax dollars long term.

Start As Early As Possible

You can start planning for retirement at any age, but the earlier, the better. Start in your 20s to take advantage of tax benefits, compounding interest, and peace of mind when you are older.

According to a 2017 study, 12% of Generation Zers are already saving for retirement. Another 35% of the participants plan to start saving when they are in their 20s. Gen Zers, also called iGen and Post-Millennials, seemed to have gotten the strong message that controlling your destiny, including retirement planning, should be in your hands.

A Mini Case Study 

As a college professor, I teach Gen Zers, but I learn so much from them. Recently, I opened up a discussion on marketing, lifestyle, and status with a question about how millionaires live.

Not surprisingly, many students volunteered with images of luxury cars, mansions, yachts, but one student yelled out, “They have lots of savings and invest more.”  Suddenly, the class took a turn, and others shared how they had “put some money away” while another had opened a retirement account.

One of my quieter students hesitated and then forcefully shouted out, “Professor, I am 18 years. There is no *#!^$ way I am saving now for retirement !” A hush came over the room, some students giggled, and suddenly several students started sharing their thoughts about saving, investing, and starting early on retirement.

My students said that their parents hadn’t saved much “for anything.” The students wanted to do better for themselves by planning for retirement early. They intend to put money into their retirement accounts. They don’t think Social Security will be there for them.

I always recommend books to my students and offer points toward their grade if they write a short essay. They seemed eager for points, so I suggested: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy: Thomas J. Stanley, William D. Danko. If you haven’t yet read this book, it identifies the key traits of those who accumulate wealth by emphasizing that putting away money for your future is paramount.

By the way, a surprising number of my students have taken up the offer, read the book, and submitted an essay for their extra points.

 Why You Need Retirement Planning Early

  1. Life expectancy has increased significantly since 1960. Recent forecasts point to further increases to 83-86 years for men and 89-94 years for women in 2050. Assuming you retire at 65-66 years, you will need 20 years of savings at a minimum.
  2. There could be challenges for Social Security retirement income benefits. About 65 million, or nine out of ten Americans, aged 65 or older received $1 trillion in social security benefits in 2020.  These income benefits represent 33% of the income of the elderly.
  1. Defined pension benefits have a long history but were a 20th-century cornerstone for retirees. A defined benefit pension plan promises a specified pension payment or a lump sum payment from your employer when you retire. It is a particularly desirable compensation perk but declining in use like rotary phones (a now antiquated way to dial a telephone). Today,  only 4% of private-sector workers only participate in pensions, a significant decline from 60% in 1980.

 Retirement Goals You Should Consider

  • Start saving early in a retirement account even if they are initially small amounts. 
  • Raise your contributions accounts as you receive salary boosts and bonuses.
  • Put up enough dollars to earn your employer’s match.
  • Aim to contribute up to the limit allowed for your 401K employer-sponsored 401K and your Roth IRA plans. 
  • Borrow from retirement accounts only as a last resort. 

 

Retirement Accounts are Really Investment, Not Savings Accounts 

By saving early in your retirement, you are investing for the long term. Through the benefit and magic of compounding, you can have substantial funds by contributions, even if you begin with a relatively small amount in your 20s. 

 For example, Emily is 35 years old and puts 6% or $4,200 of her annual salary into the plan. Her account balance would be $279,044 with a 5% yearly return and 30 years until she retires at age 65. That amount would jump to $397,000 if she opted for a more aggressive fund at a 7% return along with higher risk. These amounts do not reflect an employer’s potential matching contribution.

Have Tax Advantages 

There are different retirement accounts, but they have a few things in common: they have tax advantages with varying growth scenarios depending on your preference. They have contribution limits set by the IRS that have increased over the years.

The best known of all retirement plans is the traditional 401K.  They have primarily replaced the defined pension benefit plans.

Most, but not all, employers provide the 401K plans for recruitment and retention purposes.

Small companies, which typically have resisted offering these plans because of cost concerns, often have many part-time or contract employees. They have been slower to adopt these plans and can choose to provide SIMPLE 401 K (see below).

Varying 401K  Plans

If you consider employment between two companies, examine the competing offers based on their sponsored plans for employer matching of your contribution.

Typically, a company will match 50% of every dollar you annually up to a percentage of your gross income, usually around 6%. Some companies match on a dollar to dollar basis but at a low rate of your salary.

Your contributions are on pretax dollars up to $19,500 in 2021, with an additional $6,500 contribution allowed if you are over 50 years as a catch-up measure.

Using pre-tax dollars, defer your federal and state taxes paid upon withdrawal, beginning age 59.5 years. Withdraws before that time will usually result in a 10% penalty. If you are retired, you must begin withdrawing required minimum amounts (RMDs)  by age 70.5 years. 

Greater Participation In Retirement Plans Can Happen

About 70% of all US workers have access to employer-sponsored plans, including 401K, 403b, 457, and the federal government’s Thrift Savings; 55% are participants. As more companies offer automation of contributions directly from paychecks, more employees will likely participate. 

If your company offers a 401K plan and will give you some kind of employer match contribution to add to your own, you are robbing yourself of that gift, and the compounding benefits for the many years you have until retirement. You are just leaving money on the table! 

Surveys have indicated that some employees say they don’t participate in their employers’ 401 K plans because they get overwhelmed by the possible choices they have and then postpone signing up for the program. Employers have encouraged employee participation by providing more information about investment choices and transitioning to opt-out offerings, rather than opt-in.

You can make changes in your selections if you think you picked a too aggressive or too conservative investing approach. Pick one and read your statements, familiarize yourself with the other choices if you want to make a change. Just make sure you start your plan and put in enough to qualify for and trigger your employer’s contribution. 

Roth 401K is similar to the traditional 401K but uses already taxed dollars, so your withdrawals are tax-free.  Roth 401K’s began in the retirement lexicon in 2006 after the introduction of Roth IRA.

Other 400 Plans For Different Organizations

403(b) plans are for employees of non-profit organizations.

The 457 plans are for state, local government employees, nonchurch, and other tax-exempt organizations. No employer contributions are allowed for this plan.

Employers with 100 or fewer employees offer Savings Incentive Match Plan for Employees or SIMPLE 401 K. Employers must choose between making matching contributions up to 3% of each employee’s pay or nonelective contributions of 2% of employee’s pay.

Traditional IRA

If you don’t have access to a 401K plan, or even if you do, you can personally set up your retirement account with a traditional IRA or a Roth IRA.

Your contribution to a traditional IRA is in pretax dollars. You defer tax payments until you make withdrawals at age 59.5. If you take out money from your IRA before age 59.5, you will pay taxes and may trigger a 10% penalty plus tax. You may contribute $6,000 in 2021, or $7,000 if you age 50 or older.

IRA withdrawals begin at age 70.5 as required minimum distributions or RMD.

The logic behind paying taxes at an older age is that you may be in a lower tax bracket. However, the reason may be in reverse, and that’s why Roth IRA’s have increased in popularity. Of course, your tax brackets will reflect how well you do in your career, and it is not likely you know that in your 20s.

Roth IRAs

With Roth IRAs, you contribute after-tax dollars, and your money grows tax-free. Your withdrawals are tax-free after 59.5 years. 

Roth IRAs have no required minimum distributions like their older IRA counterpart. You may be able to withdraw your contributions, not your earnings, before age 59.5 years without penalty if your Roth IRA has existed for five years or more.

In many ways, Roth IRA has been the preferred vehicle for personal retirement accounts and are more tax-friendly longer term.

Arming yourself with both 401K and IRA retirement accounts is the minimum planning you can do when you are in your 20s and 30s.

Borrowing Money From Your Retirement Savings Is The Last Resort

There are times when you face financial hardship and consider borrowing from your retirement plan.  Your 401K plan (not your IRA plan) allows you to borrow from your retirement assets and repay the amount with interest to your account rather than to a financial institution.

One of the most significant drawbacks of using your retirement assets is the loss of tax-deferred compound growth for the loan duration. Taking assets out of a retirement account should be a last resort. We discussed withdrawals, and if you do so too early, you pay taxes and penalties.

Final Thoughts

You have long years in front of you. Starting early in your planning, even with small amounts, allows you to benefit from compounding growth through the years. Earning interest on interest adds significantly to your retirement fund. 

Do it early so you can avoid the real angst of not planning. Procrastination is not an answer for anything! You’ll be glad you are getting a headstart!

Thank you for reading! 

 

 

 

Credit Card Alternatives Have Benefits

Credit Card Alternatives Have Benefits

by | Jan 25, 2021 | Budgeting, Credit & Debt, Managing Money | 0 comments

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

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

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

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

 

Convenience

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

Building Credit History 

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

Perks

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

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

Borrowing Capacity

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

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

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

Fraud Protection

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

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

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

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

11 Alternatives To Credit Cards

 

1. Debit Cards

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

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

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

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

It Won’t Help Your Credit History

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

2. Prepaid Debit Cards

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

3. Charge Cards

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

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

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

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

4. PayPal

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

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

5. Secured Credit Cards

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

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

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

6. Become An Authorized User

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

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

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

7. Store Credit Cards

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

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

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

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

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

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

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

8. Gift Cards

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

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

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

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

9. Apple Pay

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

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

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

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

10 Cash And Checking Accounts

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

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

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

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

Overdrafts

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

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

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

 Final Thoughts

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

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