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College Graduates: Build Wealth By Avoiding 11 Common Money Mistakes After Landing Your First Job

College Graduates: Build Wealth By Avoiding 11 Common Money Mistakes After Landing Your First Job

by | Apr 21, 2021 | financial literacy, Managing Money | 0 comments

Congratulations! You graduated from college and landed your first job! It’s an exciting and scary new chapter all rolled in one. You’ll be making some serious money for the first time in your life, but you’ll also be responsible for some serious adult bills.

Before you sign a lease for an apartment or purchase a new car, avoid the most common money mistakes made by college graduates. We have assembled a list of blunders to steer you towards a financially fit future.

 

1. No Emergency Fund

In this next phase of your life, it’s essential to save money, specifically for emergencies. When you least expect it, your car may need a repair, you need expensive dental work, or you perhaps get laid off from your job. These unexpected events happen to all of us, so it’s important to plan for them.

Commit to building up an emergency fund that can cover six months of your basic living expenses. You can open interest-bearing savings account like an FDIC insured money market deposit account (MMDA) just for this purpose. This way, the money is readily accessible and earns a little interest. 

By having this safety net available, you won’t have to reach for your credit card and ramp up debt for emergencies. Instead, you’ll have peace of mind that you’ll be ready for these unplanned expenses.

2. No Monthly Budget

Chances are you were living on a meager financial diet at college, where students find frugal ways to get by. Now that you’re living a more independent life, you need to have a budget and keep your spending in control. Don’t get rid of all your ramen noodles until you have a fully-funded emergency fund set up!

Don’t rush to sign that apartment lease with a breathtaking view without creating a budget first. Figure out your necessary expenses like rent, utilities, food, and commuting expenses. These needs come first before you dive head-on into your wants like a brand new car.

You may be making more money than ever, but your income has to cover your higher cost of living. The temptation to indulge in wants may run high. It’s your money. Yes, but you need to be wise to start on a path to wealth.

Review your spending regularly to see how you’re doing and find potential cost reductions. There are free apps like Personal Capital, Mint, PocketGuard to help you track your daily spending and help you reach your goals.

3. Living Beyond Your Means

Living beyond your means is overspending. When you strike out on your own, you may find your newfound freedom is costly. Put the brakes on large or repeated impulsive spending. Living beyond your income is a recipe for financial disaster.

Your goal is to spend less than you earn so you can save money and invest some of your earnings. While it is easy to justify higher spending, you want to have some money left in your accounts after your year of hard work. This is among the most common money mistakes you can make. 

Overspending can happen when you feel you deserve a high life and seek instant gratification. Or when your friends are hitting up bars and expensive restaurants every weekend. Resist the urge to buy designer clothing for work, an expensive new car, or go on lavish vacations. Don’t fund a costly lifestyle on credit cards when you can’t afford it.

4. Getting Rid of Your Roommate

After graduating college, the last thing you may be thinking about is living with a roommate again. However, your housing costs are going to be a significant portion of your budget. Are you ready to hand over most of your hard-earned paycheck to your landlord?

A roommate may not have been in your plans, but by absorbing all of the costs of rent, utilities, and renter’s insurance, you may be deferring other financial goals that you may have, like paying off your student loans or saving to purchase a place. Sharing expenses with a roommate, you may not see very much may provide you with worthwhile savings.  Those savings can give you the financial flexibility you may not otherwise have.

5. No Student Loan Repayment Plan

One of your most considerable new responsibilities will be to make regular student loan payments. Don’t put off paying these loans or extending the time further into the future. Go for the standard repayment plan with equal monthly payments up to ten years.

There is usually a grace period, allowing you six months to financially settle down before payments are due. If you live at home or have a roommate, why not start making payments right away?  It’s a good idea to schedule automatic debit payments from your bank account and linking your paycheck deposits.

By doing so, you may be able to shave a 0.25% interest rate reduction on certain federal loans over their life. That’s saving money!

Having several loans can be complicated. Organize your payments from multiple sources into a spreadsheet. If you have varying due dates, contact the loan servicers to see if you can synchronize payments, or spread them out across the month, to make it easier. Alternatively, you can automate all your payments so you don’t miss a bill.

6. Ignoring Company Freebies

What’s in your company goodie bag? Many answers to your financial future are in your benefits package, yet some don’t look close enough. There are different types of company benefits that add meaningfully to your compensation. As a new employee, you may overlook some essential features trying to make sense of it all.

Beyond the paid vacation, holidays, and sick time, look for perks like flexible work options, paid gym memberships, professional development grants, paid smoking cession offers, or student loan repayment programs that will directly benefit you.

Some of the valuable offerings in your package may need your immediate attention, like an employer-sponsored 401K plan that you may need to opt into for participation. Look for insurance plans, such as health insurance, to know the details of the plan.

7. Turning Down Free Retirement Money

Why would a 22-year-old be thinking about retirement?  After finding out where the restroom is in your new workplace, your employer-sponsored 401K retirement plan is next. Seriously, it’s that important.

The best time to start contributing to retirement is now, especially if your company is giving you free money for your retirement account. Many employers increase your account by matching part or all of your contributions.

When you make contributions early, even if it is small amounts initially, you can fuel your money through compound growth. Compounding is when you earn interest on interest, which magnifies your growth over 40 or more years.  Automating contributions from every paycheck takes care of it in one step.

Waiting will cost you tons of money in the long run. If your younger brother starts investing $100 a year at age 25, but you wait to invest the same amount until age 35, you’ll have less than half in your bank account at age 65. So even though your sibling only contributed $12,000 more over a ten-year time frame, he’ll have $162,000, and you’ll only have $89,000.

8. Skipping Health Insurance

You’re young and healthy and rarely think about big doctor’s bills. Should you break your leg skiing or hurt yourself playing basketball and require surgery, you may be looking at a very high bill if you don’t have health insurance.

If you’re under 26 years of age, you can continue to stay on your parents’ health insurance plan. Depending on your employer and employment type, you could potentially get your own plan. Ensure you check the monthly premiums and deductibles to truly understand the cost and your new healthcare coverage details.

9. Racking up Credit Card Debt

Credit cards can be beneficial but can tempt college students and recent graduates beyond their means. It’s fun to collect credit card rewards, airline miles, or cash back. However, they can also be financially toxic if you don’t handle them with care.

If you find yourself in a situation where you can’t pay the balance off in full, you should always pay the minimum on time to not dent your credit score with late or missing payments. But if you only pay the minimum amount required, you will be building a mountain of high-cost debt you can’t easily shed.

Say you charge a $1,500 vacation on your credit card that has a 19% interest rate.  If you repay the credit card company only the minimum amount each month, you’ll start with a $60 payment. But to pay the whole amount, plus interest, you’ll have to make a total of 106 payments and pay them $889 in total interest. That’s more than half the amount of your vacation extra!

10. Ignoring Your Credit Score

Building a good credit score may not even be on your radar. But if you want to rent your own apartment, purchase a car, or buy a home in the next couple of years, having a good credit score is crucial.

Be patient about getting your credit to where you would like to be. It can take years and effort to build credit on your own and earn a good score. Good financial habits matter and can help the process along. Monitor your credit report and track your score periodically.

First, you need to build your credit file. Start opening a couple of accounts that report to the primary credit bureaus. Separately, you can become an authorized user on a parent’s credit card so long as they have a solid credit score.

Establish your track record as a borrower over time by handling your payments properly.  Your credit will benefit from paying your bills on time. Don’t carry a credit card balance which can increase costly debt, become a challenge to manage, and may get you turned down for an apartment lease.

11. Delaying Investing

A regret I share with many people is not investing earlier. The best time to start investing is now, even in small increments. When you are young, you have time on your side, so don’t waste it. Having a long-term perspective when investing allows you to ride out the volatility rather than bailing out of the market. Compounding power can fuel our investment returns to higher heights.

Once you have set aside some money for emergencies and automated contributions for your retirement account, use some savings to open a brokerage account and buy a low-cost index fund that tracks the market. These funds provide you with essential diversification from the start. With confidence and learning the ropes, you can expand your portfolio as you turn savings into investments. Understand your risks but avoid being reckless.

Final Thoughts

Avoid common money mistakes that can derail your financial future. You are just starting your professional career and earn a living that will hopefully rise significantly over time. Missteps can become very costly. By handling your money well, you will a clearer path to building your wealth.

Thank you for reading!

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

6 Ways To Raise Your Credit Score

6 Ways To Raise Your Credit Score

by | Apr 16, 2021 | Budgeting, Credit & Debt, Managing Money | 1 comment

Our financial lives depend on our creditworthiness. When we go for a loan, lenders review our credit report and our FICO credit scores to determine our annual percentage rate (APR). Generally, the higher our score on a 300-850 score, the lower the borrowing rate we will pay on our loans for our car, mortgage, or college tuition.

7 Reasons Why You Need To Review Your Credit Report And Score:

 

  • People want to know where you stand before making important financial decisions.
  • I am borrowing for a home purchase.
  • Car loan or lease.
  • Student loan.
  • She is hecking for inaccuracies, identity theft, and fraud.
  • He was getting a job.
  • We are renting an apartment.

 

Can You Improve Your Credit Score?

The short answer is yes, you can!  We will go over tips to increase your scores. First, let’s talk about how the FICO Scores formula is calculated with its five different criteria of the total:

Payment History: 35%

This category carries the most significant weight in your score and is the most critical factor. The longer the credit history, the better. Having a sound track of not missing payments and being on time works in your favor.

So those who are new to being approved for their credit cards need to show a consistently positive pattern.  These are different account types such as credit cards, retail or store accounts, installment loans, mortgages, and finance company accounts.

Credit Utilization: 30%

As a significant influence on your credit score, credit utilization is the ratio of your total outstanding revolving credit balances divided by full available credit. Revolving credit refers to your credit cards and credit lines you may have but does not include your car loan (unless on your credit card) or your mortgage.

The utilization ratio is known as the balance of debt to available credit or debt-to-credit. It measures how much credit you have used for the amount available to you. You don’t want to “max out” your cards. You should not be above a 30% ratio as it will impact your score. I would stay in the mid-20s range so as not hitting the 30% level.

Credit History: 15%

How you handle credit is essential to lenders. The length of time of your oldest credit account and the average age of all of your accounts determine your credit history. The older the account, the better your credit score. If you are new to obtaining credit, it will take time to benefit from showing up in your score.

Credit Mix: 10%

Lenders favor some variety of borrowing in your mix of credit. A borrower handling different kinds of debt products may reflect less risk to lenders. When you don’t yet have a credit card, you may be at higher risk. That said, don’t go out and get different kinds of loans for the sake of improving your mix.

New Credit: 10%

When you apply for new credit, that inquiry is reported on your credit report for up to two years. That is called a hard inquiry and can negatively impact your credit score, particularly if you are making multiple inquiries. However, don’t let it stop you from doing comparison shopping for the same type of loan.

A soft inquiry occurs when you are checking your credit score or report. Soft inquiries do not generate negative hits.

Related Post: Common Credit Mistakes And How To Avoid Them

6 Ways To Increase Your Credit Score:

 

1. Check Your Credit Report For Errors

Reviewing your report for inaccuracies and missing information may be the fastest and easiest way to improve the score. An FTC study reports that 5% of consumers had errors that may carry enough weight to result in getting a lesser favorable loan. One in four consumers had errors in one of three credit reports.

If you find an error, contact each of the credit bureaus (Experian, Equifax, and TransUnion). You will need to give them specific information as to what you believe is incorrect. They must investigate the item(s) you have raised, usually within 30 days. You can do all of this online, but it is a good idea to follow up if you don’t hear back from them.

Fix Errors As Quickly As Possible

Initiate your inquiry as soon as you spot the error by following these steps. The credit bureaus may back burner your issue if they deem it frivolous, so be specific and provide the needed information as part of your inquiry.

Sometimes what appear to be errors are fraudulent charges and scams.

Read our related post: 9 Ways To Better Protect Your Privacy Against Fraud And Scams

2. Pay Bills On Time

The credit bureaus require you to pay the minimum amount required on time. They are looking at your payment history, which counts a lot towards your overall credit score. Missed or late payments are harder to repair and can lead to delinquent payments that take seven years to get rid of on your report.

Automate Payments

Consider automating payments online through your bank portals for credit card companies. Set up online payments with your other loan providers. Stick to a monthly schedule or pay these bills every two weeks to lessen the burden.

If you have missed payments, get current as quickly as possible. Be consistent after that as the creditors look for a clear pattern of timely payments before you see score improvements.

You do not want a collection account to appear on your credit report. Even if you pay that account, it has long-lasting adverse effects. It puts a 7-year stain on your report. Don’t let that be a disincentive from paying off the collection debt as it will stay on longer. You might want to check with the creditor to see if it was “charged off” as lousy debt before making a payment.

Pay Credit Card Balances In Full

Although the strategy of making the minimum payment on your credit balance is good for your score, it will keep you in debt longer. It is far better to pay off your monthly debt balances in full. Otherwise, you are paying those card balances at mid-high teen interest rates.

That makes the credit card companies happy, but, of course, that is not your goal.

3. Reduce Your Debt

The credit utilization ratio is an essential contributor to your overall credit score. Being disciplined about your debt levels is vital for the financial future. This ratio reflects how much of your available credit has been used. Lenders look at debt usage on a per-card basis and total debt relative to total credit available.

Creditors look at a 30% threshold. Ratios above that level may provide negative consequences to your score. Consider targeting a lower percentage in the mid 20’s if you must carry month-to-month balances at all. You may not realize that making sizable purchases such as moving to a new home caused you violated the 30% ratio.

Raising Credit Limits Too Tempting For Some

I have read others recommend that you seek higher limits on your credit cards to lower the ratio. That may work mathematically, but it is too tempting to have more credit available to spend more for some of us. It sort of reminds me of how our elected officials thrash out at each other, then raise our nation’s debt ceiling rather than reducing our borrowings.

Rather than raise limits on your credit cards, make a plan to zero out your debt balances to gain financial flexibility or stop using your cards and spend less.

If you are having trouble making ends meet because of exigent circumstances (e.g., job loss, death in the family), contact your creditors to see if there is something they can do, such as modify your credit terms temporarily. Another recommendation is to go to a financial counselor for some strategies to reduce your debt significantly.

Related Post: How To Pay Down Your Debt For Better Financial Health

4. Little To No Credit History

When you have a relatively “thin credit file,” it means you don’t have much in the way of showing that you are responsible with credit yet. Minimal credit history accounts for about 15% of your credit score. There are a couple of things for you to do.

You can become an authorized user on someone else’s account like a parent. Make sure that they use their credit responsibly, or it won’t be beneficial to you.

Related Post: A Guide To Your Child’s Credit Report: Pros And Cons

Strengthen Your Credit File

You can apply for a secured credit card where approvals are easier to get than unsecured credit cards. Your credit limits will be far lower, usually capped at around $500. You will need to post a refundable deposit as security. Secured credit cards are suitable for those with lousy history and those with little or no track record.

You may want to consider Experian’s recently launched free product, Experian Boost. It allows consumers to include utility and cellphone payments into their credit score calculations using this tool. It may provide an incremental boost for those with thin or poor credit history files. You are connecting your online bank account to your Experian credit report.

5. Don’t Close Any Unused Credit Accounts

If you have credit cards, you no longer use or need it, it is better to cut them up and put those cards in a drawer and forget about them. The exceptions to de-classing them to your sock drawer are you will be too tempted to spend or pay annual fees.

Otherwise, if you call the company to close the account, you will likely lose a few points off your score. Closed accounts, even if they have zero balances, stay on your credit report for ten years.

Keeping the account open and unused benefit your scores at least two ways:

  • your credit utilization ratio will rise because you have removed available credit.
  • Eliminating an account might hurt your credit history if it is an older account.

The impact of closing an unused account may be tougher on young people or someone trying to build up their credit file. I made this rookie mistake by closing a retail store’s account when I was younger. It was an expensive store and not one I found myself shopping at anymore.

I thought I was making a smart move when I closed the account and had my score dinged. I recommend the “scissors approach” and cutting the cards and put it away.

6. Apply For New Credit Sparingly And Only If Needed

Credit mix is a factor in your score, though not as influential as credit utilization. Think carefully before applying for more credit than necessary. It may result in counting as a hard inquiry on your credit report and, therefore, a harmful point reduction in your score.

 

How Long Does It Take To Rebuild Your Credit Card:

 

  • Credit errors or repairs  3-6 months
  • Closing accounts           three months
  • Hard inquiries                two years
  • Missed Payments         18-24 months
  • Car Repossess              seven years
  • Delinquencies                seven years
  • Bankruptcies                  7-10 years

 

Credit Score Ranges Per Experian:

  • 800-850 Exceptional
  • 740-799 Very Good
  • 670-739 Good
  • 580-669 Fair
  • 300-579 Very Poor

 

How Much Of A Difference Does A Credit Score Make On Your Loan?

Using myFICO Loan Savings Calculator,  here are national 30 year fixed mortgage rates with a 400,000 on April 16, 2021, according to the following scores:

Scores      APR                  Monthly Payment

  • 760-850    2.676%                 $1,617
  • 700-759    2.898%                 $1,664
  • 680-699    3.075%                 $1,703
  • 660-679    3.289%                 $1,749
  • 640-659    3.719%                 $1.845
  • 620-639    4.265%                 $1.971

 

If your score is currently at the low end, you can save up to $127,421 in total interest paid over the life of the loan by improving your credit to the 760-850 level. Becoming more creditworthy helps you save money.

 

Final Thoughts

Most of us are in the 620-719 score range. We have several ways we can raise our credit scores incrementally and produce meaningful savings. A better credit score improves our ability to borrow and satisfy those like our landlord who want us to be creditworthy.

We should be more financially responsible by reducing debt, paying our bills on time and zeroing out our costly credit card balances. We need to have greater financial flexibility and make better decisions for our  fulfilling our needs and wants in our lives.

If you are new here, welcome! Subscriber and join our growing community, get our free newsletter, freebies and free Personal finance email course.

Related post: Are You Creditworthy? All About Your Scores And The Five C’s

Have you checked your credit report recently? It is important to review to do so for errors and ways to improve before core ahead of your needs to borrow. Do you have any experience you can share that you dealt with repairing credit errors  or increasing your score?

We would like to hear from you!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A Guide To Owning or Renting Your Home

A Guide To Owning or Renting Your Home

by | Apr 11, 2021 | insurance, Investing, Managing Money, millennials, Retirement | 0 comments

Owning versus renting your home is a longstanding and often passionate debate. The reasons for owning or renting differ according to financial calculations and your personal preferences.

Factors To Consider

If you seek to own a home, do you prefer stability, building equity, control over home and its responsibilities, and tax benefits? Will you enjoy a sense of pride in ownership? On the other hand, does flexibility and freedom appeal to you, 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 declining home values?

I understand the allure of owning your home as I have had with our primary home. We continue to hold a second home which we may one day make our primary spot. I grew up in the Bronx in an apartment building for affordable housing. As a result, my family paid a relatively low stabilized rent. Owning our home as inspired by the American Dream was out of my family’s budget.

My husband, Craig, is a real estate attorney dealing with residential and commercial transactions. When I went to law school, I was fascinated by the real estate field and became an investor in commercial properties for a time.

Before we review the advantages and disadvantages of owning and renting your home, let’s address critical factors to consider in making this critical decision.

Housing Market Trends

When it is the right time for you to buy or rent, it may be worthwhile to be aware of the overall housing market, that is, home prices, interest rates, and mortgage rates in particular. US homeownership had grown from 45.6% in 1920 to 66.2% in 2000. Homeownership rates peaked in 2004 at 69.2% (in both April and October of that year), then retreating to 65.8% in 2020.

Generational Gap In Buying Homes

According to a 2019 Zillow report, the average age of the typical first-time homebuyer in the US is 34 years old. Since the Great Recession, millennials were initially slow to purchase their home as they grapple with high student debt and slower wage growth. However, millennials’ average mortgage debt in 3Q 2020 is $237,349, just below $247,567 held by Gen X according to Experian data.

A major consideration in timing a purchase is the level of mortgage rates. Generally, mortgage rates rise during periods of strong economic growth and decline during weak or recessionary periods. Mortgage rates have been historically low, with current rates for 30 years, the fixed rate at 3.564%, and 15 years the fixed rate at 2.615%.

By pursuing a home purchase, make sure your finances are in order. That means being debt-free and establishing or expanding your emergency fund. When we review the financial costs, you’ll better understand the need to have a solid financial condition.

Substantial Financial Differences Between Homebuying And Renting

Financial costs differ between purchasing a home and renting. Homebuyers’ substantial costs can be divided into one-time payments upfront and at the closing. Purchasers face required one-time upfront and closing costs in addition to the ongoing or recurring expenses.

The process of buying a home through closing may be overwhelming, but each step is well defined.

Upfront And Closing Costs

Homebuyers are usually surprised by the number of required payments to those professionals (home inspector, bank attorney, title closer, appraiser, broker, attorney) who are assisting in their purchase. There are also other costs associated with securing the mortgage and protecting the lenders, as they will effectively own 80% of your home. You will pay mortgage application fees, points, and origination.

Upfront Costs

 

Earnest Money

Earnest money can range from 1%-3% up to 10% of the home price, depending on the locale. This money is a consideration for the mutual acceptance of a deal with the seller. As a credit, this amount reduces the purchase price at the closing. If you default before the closing, the earnest money can be the measure of liquidated damages to the seller.

Home Inspection

A qualified inspector will need to inspect the home for damages.  An inspection can help you decide on a house to buy, but before you put money down. The fee amounts vary based on the type of home, square footage, and locale. It is an essential cost as you may find structural damage or disclose other issues can reduce the price you are willing to pay.

Appraisal fees

These fees are for an independent certified appraiser’s report. The report is essential to protect the bank’s  collateral exposure. They are paid directly to the bank after inspection but before the closing and in conjunction with the mortgage loan agreement.

Escrow Accounts

The escrow account is for the bank’s benefit and the attorney’s.

The attorney escrow account holds your down payment for the house. The bank’s escrow covers prepayments for property taxes on the homeowner’s behalf for up to six months. Additionally, the buyer will be paying a full year’s homeowners insurance premiums upfront and one-twelfth of the premium into escrow. Some borrowers,  if applicable, pay private mortgage insurance (PMI) premiums. PMI is required if the buyer is making a down payment of less than 20% of the home price preferred by the lender.

Closing Costs

The final part of your purchase involves several closing costs associated with formalizing the mortgage processing and concluding the transaction between buyer and seller. They include charges for the loan application, processing, and underwriting. The latter may amount to about 1% of the loan. So if you are borrowing $300,000, you will pay $3,000.

You will be paying for a title search and other title-related costs to ensure you are purchasing a home with “good title” free of fraud and any liens for unpaid taxes, etc. The title company collects a premium and receives recording fees.

You will also be paying an attorney for closing your deal and representing you as the buyer in most states. The attorney’s fee ranges from $750-$3,000 depending on the deal’s complexity and your locale.

Recurring or Ongoing Costs

Your ongoing monthly costs of buying a home are your mortgage payments, utilities, garbage, property taxes, and homeowner insurance. These are predictable or fixed costs.

If you are buying a house (rather than an apartment), maintenance, repair, painting, and appliances may vary depending on the house’s condition and age. The costs are often difficult to estimate and may depend on your DIY abilities. You will also have other expenses for lawn care and snow removal, which differ based on your geographic location.

Costs of Renting Your Home

Upfront costs are far less. Landlords usually require 1-2 months for a security deposit at the time of the lease signing. Some landlords will increase additional security or fees for any pets you have for potential damage to their property.

The landlord may require an application fee for administrative costs and a possible broker fee unless the landlord pays this. There may be a move-in fee depending on the type of home you are renting.

Recurring Rental Costs

Tenants are responsible for monthly rent, all utilities, and renters insurance. While the homeowner has homeowners insurance, that doesn’t cover your personal property, including your furniture, clothing, electronics, computers, jewelry, and anything of value to you or liability insurance. The landlord will require you to purchase renters insurance.

Landlords are required to provide you with at least 30-day notice in most states with an increase in the rent unless stated as part of a multi-year lease.

What Is Your Financial Situation?

Before going house-hunting, if you plan to make a purchase, it is a good idea to check your credit report for any errors or issues. You need to be aware of any errors that you should correct. You should know your credit score and what amount of mortgage you can afford. There are steps you can take to raise your credit score.

By the way, your credit report matters to your landlord also. A poor credit report could be a thumbs down on your ability to rent. If your credit score is fair, it may mean providing your landlord with more security. However, a poor credit score has far more of a negative impact on your ability to borrow.

MyFICO’s loan calculator is handy for estimating your APR, monthly loan payment, and total interest paid. For example, using a $300,000 loan your payments for 30 years and 15-year mortgages as of April 9, 2021, based upon your FICO score will be:

30 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.764%                  $1,227                    $141,702

700-759                      2.986%                  $1,263                    $154,517

680-699                      3.163%                  $1,291                    $164,881

660-679                      3.377%                  $1,327                    $177,583

640-659                      3.807%                  $1,399                    $203,664

620-639                      4.353%                  $1,494                    $237,826

 

15 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.107%                  $1,945                    $50,162

700-759                      2.329%                  $1,976                    $55,736

680-699                      2.506%                  $2,001                    $60,219

660-679                      2.72%                   $2,093                    $65,685

640-659                      3.15%                   $2,093                    $76,822

620-639                      3.696%                 $2,174                    $91,255

 

A Few Observations

Irrespective of your FICO Score, the lower the credit score, the higher your APR, monthly mortgage payment, and total interest paid.

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 15 years, 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 $154,517 equals $529,517.
  • 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%) + $55,776 in total interest equals $430,776 for principal and interest.

Advantages Of Buying Your Home

 

1. Building Equity

Paying your mortgage over time will result in building some equity in your home. You should be aware that your initial payments are predominantly for interest on your loan, especially if you have a 30-year mortgage and equity builds relatively slowly.

On the other hand, you will undoubtedly be owning your home much more quickly with a 15-year mortgage. A mortgage amortization calculator helps compare the principal and interest portions for the 15 and 30-year mortgages. Assume your loan begins in April 2021.

The comparison reveals that more than half of your first monthly payment goes to the principal than interest with the 15-year mortgage. However, only about a third of your payment goes to the principal with 30 years. The amount between principal and interest reaches parity until the year 2032, and equity rises slowly after that until the year 2050, when you satisfy the 30-year loan.

2. Your Home As An Appreciable Asset

Depending on your time frame, US new home median prices reflect appreciable growth. Median new home prices have risen from $17,200 in 1963 to $212,300 in 2011 according to the US Census of Housing. That is a 5.38% compounded annual growth rate. However, adjusted for inflation, the growth rate is 1.8%. On the other hand, inflation-adjusted monthly rent grew from $568 in 1960 to $934 in 2010, according to Apartment List Rentonomics. This 68% hike in rent is well ahead of the 18% rise in household income during the same period.

Your investment in your primary home essentially keeps pace with inflation rather than generating strong investment returns. When calculating returns you need to factor in the interest costs to the total price. That said, you are living in your home and hopefully enjoying a high quality of living which can be priceless for many.

There have broader differences in select markets across the US that exhibit stronger appreciation due to higher population growth, demand, and other factors.

Housing Bubble

The US housing bubble was particularly troubling for homeowners in the mid-2000s. Housing prices peaked in early 2006, then leveled off until record drops of 18% as reported by the S& P Case-Shiller index in October 2008.

While this drop was exceptional, it still provides a warning sign for those interested in purchasing their homes as loss in home values is real. However, some markets have recovered from the Great Recession and recent housing price trends seem more favorable.

3. HELOC As A Source of Funding

Once you have built some amount of equity and have paid your mortgage on time, you may be able to set up a home equity line of credit or HELOC. You can often get a loan more quickly and at lower rates because you are using your home equity as collateral. Part of these funds could go to building a new kitchen or expanding the house.

The HELOC, if not maxed out, can positively help your credit score. This is because the HELOC has increased the available amount of credit, lowering your utilization rate and improving your financial situation. Credit utilization accounts for 30% of your credit score. HELOC increases debt, so make sure you pay this loan on time and in full. To avoid a hit to your credit score, don’t close the HELOC unless you are too tempted to use the money or about to close on the house, as it will then lower the available credit.

4. Possibility of Rental Income

When you live in your primary residence, you don’t often think about renting out your property. However, your family may relocate for your firm for a couple of years, or your kids are moving out, and you want to travel more. You may decide to rent out your home or list it with Airbnb.

5. Stability In Owning Your Home

It is wonderful to raise your kids in one home, become part of the neighborhood and community. There is a certain calm feeling of not searching for a place to live and pack and unpack boxes. (Having just moved to a new home, I can share that I will be thrilled when our family settles in our home and the last box is gone.)

6. Tax Benefits After The Tax Law Changes

The 2017 tax law did impact some of the tax deductions enjoyed by homeowners. If you itemize your deductions on a joint filing, you still claim mortgage interest payments up to a $750,000 face value loan. Qualified loans include your mortgage, home equity loans, and HELOCs. This tax change is a reduction from $1,000,000 before the recent tax law. You can no longer deduct interest associated with home equity debt unless buying or improving your home.

Deductions for state and local taxes (known as the SALT deduction) and property taxes are capped at $10,000. This amount may be appropriate in Ohio but not in high-tax states like New York or California. This is a reduction from unrestricted amounts previously deducted. You can still deduct the proportionate interest associated with your apartment building’s mortgage if it is a co-operative.

Homestead Exemption

Certain states, like Florida, offer exemptions if you meet specific requirements. This exemption may protect a surviving spouse when the homestead spouse dies. A homestead exemption is a law that protects the value of a home from property taxes and creditors. Depending on the state, a property tax can get an exemption in the range of $25,000-$75,000 of a home’s assessed value from property taxes.

7. You Have Freedom To Do What You Want

Are you creative? Your home can be a good option for you. There may be some conformity required, but your wallet limits design and remodeling. You can do gardening and grow vegetables. Owning your pets is more manageable in your home. Your children can listen to loud music with fewer rules of noise after hours. Peace of mind can be precious for you and your family.

8. Sense of Pride In Ownership

For those who have rented for a long time. owning your home feels like an accomplishment. The land is a natural resource, and there is a good feeling of knowing you own the land where you walk and live.

Ask any refugee that has had their home taken away from them what a house meant to them. My mom was a refugee when she came to the US, having lost her family. Her home was taken away illegally and violently. While owning a home eluded her, she always considered owning a home away to wealth.

Disadvantages of Owning A Home

 

1. High Costs To Own

We addressed the one-time and recurring costs a homeowner has to realize, but it bears repeating. In particular, there are unforeseen events that require homeowners to do planning ahead of the purchase. Having an ample emergency fund is essential for all, but homeowners need to expand that fund to avoid borrowing unnecessarily.

Consider the age of the home and its condition when factoring in maintenance and repairs. Are you handy? We are not, and so we rely on a plethora of plumbers, electricians, and those who can help us around the house with shower breaking and leaky pipes. I keep wanting to spend time watching YouTube to pick up some tips but I am always afraid of starting a fire.

Our teens are handier but not always available given their schoolwork, friends, sports, video games, and sleeping late.

It may be worthwhile to watch the 1986 movie The Money Pit with Tom Hanks and Shelley Long. It left an indelible memory of what not to do with your house.

2. Lack of Flexibility

If you are adventurous, you may feel stuck in the same house and environment, especially as your friends may pick up and leave to try life in another place or country. You may want to sell your home and retire to another locale, but the local economy is weak.

We had next-door neighbors who experienced that predicament. They lived in Connecticut and had bought a house in Florida. The market had been terrible for the better part of a decade. They had to stay put in the colder climate they planned to avoid in their later years. They finally sold last year.

3. Your Home Has An Opportunity Cost

A home is usually the most significant asset you own. The mortgage, maintenance, repairs, and property taxes require a lot of capital that may be better invest in a diverse investment portfolio. Many people believe that when they sell their house, they will use the money for retirement. That is true, but there is no guarantee that you will be able to sell your property quickly or not be facing declining values.

Too much concentration on one asset is hazardous. You need to have investments in other assets but saving to invest in other vehicles is difficult when so much capital is in real estate.

One way to avoid this difficulty is don’t buy a house too big for you. The amount of space homeowners have been buying has dramatically increased since 1973. Specifically, median size homes have recently expanded to 2,467 square feet, up to 1,000 square feet. During that time, the average living space per person in the household has nearly doubled to 971 from 505. Do we need all that space and then have to furnish it too?

Advantages of Renting

 

1. Rental Costs Are Less

The lease agreement with the landlord provides your financial responsibilities, which are essentially predictable: monthly rent payments, utilities, lawn care, garbage disposal, and snow removal if applicable. There is a minimum of upfront fees. Finding an apartment may be harder in specific markets and more expensive based on demand.

2. Benefits of Ownership Without The Property Taxes

You may be fortunate to get the best of what property taxes pay for without having to pay these costs when you rent. Families are always willing to pay more money for a house to be located in a nice place with a great school district. Higher home prices and property taxes may put buying a home out of your range.

Our Recent Move To A Rental House

By renting, you can access the town’s beauty, infrastructures like transportation, town pool, and schools. These attributes are a big reason why we moved to a small town (from a big city)  to a house rental (from an owned apartment) and switched our kids from a private school to one of the best public schools in the state, if not the country.

Our son joined the football team, and our daughter is considering other sports not readily available at her previous school. It was a difficult decision, especially for me, having grown up in the city. Although it is early, it feels promising.

Renting may also help you get familiar with the area before purchasing and allow you to get your financials in order.

3. Free Of Maintenance And Repairs

Your landlord has primary responsibility for the care of the property. It is up to you to inform your landlord of the need for maintenance and care. For those not handy or not wanting to spend the money to fix things, renting can be ideal.  Usually, the landlord wants to use their folks (e.g., painters, electricians) for respective issues in the home.

4. Flexibility To Leave

At the end of the lease, you can leave the premises. Many people decide to move around and explore different areas or look for other jobs. You aren’t tied down, and as long as you make payments through the end of the lease, you are good to go. It is challenging to leave your own home as quickly as a tenant can.

Disadvantages of Renting

 

1. Higher Rent Or Sells Property

Your landlord can raise your rent with proper notice or sell the property. Renting has increased faster than household income has since 1960. Apartment List Rentonomics points out that inflation-adjusted rent rose 64% from $568 per month in 1960 to $934 in 2010, while household income grew only 18%.

Many homeowners turn to rent if they are unable to sell their property due to a poor market. Once the market turns, they may ultimately sell the home you are renting.

Markets vary, but in specific markets, there are fewer homes to rent.

2. No Equity Buildup or Tax Benefits

It is common for people to say that renting is throwing money away. Of course, this is not true as you are paying for the living space for some time. You have the freedom to find the best affordable apartment you can to live in an area you prefer.

You are not getting equity or tax benefits from your rent, but you are getting several advantages. You can divert your savings into other assets.

3. A Bad Landlord

It would be a drag if you rent an apartment from a bad landlord, but the good news it is not permanent. Before you rent, check out Yelp to see if there any red flags to know about your landlord. People are always willing to share their bad stories.

I recall some horrifying stories that painted their landlord as a reincarnation of Jack Torrance, played by Jack Nicholson in The Shining. Torrance was the caretaker at an isolated hotel.

If you are having trouble with your landlord, who is not providing services promised in the lease, there are legal actions to take.

4. No Upside From A Strong Housing Market

As a renter, you do not get the benefit of improving house values. It may feel bad when your friends are experiencing some growth in their home value, while you may be getting a notice from your landlord that they are getting ready to sell or raise the rent.

 

Final Thoughts

Hopefully, this guide provided you with good information to decide between buying or renting your home. Frankly, you can look at the calculations related to mortgage costs, building equity, home prices, square footage, but in the end, the choice is a personal one for you and your family.

If there is one point I would like to make, consider how your preferences line up with your long-term financial goals. Make sure that if you find your dream house, it is doesn’t break the bank. You don’t want to be too overladen with debt.  Remain disciplined in your spending and make saving a priority.

 

Thank you for reading! If you rent or own your home, would you kindly share your experiences with us? We always like to hear how you decided which shed light on a home decision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How To Become A Millionaire -16 Dos And Don’ts

How To Become A Millionaire -16 Dos And Don’ts

by | Apr 9, 2021 | Budgeting, Credit & Debt, Investing, Retirement | 0 comments

It’s no longer “Who Wants to Be a Millionaire” but how to become a millionaire. You don’t have to be a contestant on a game show, win the lottery, or receive a windfall from a relative. Just follow the 16 Do’s and Don’t in this article, and you’ll be on the road to becoming a millionaire.

Four Money Mindsets Used by Millionaires

While it might be easy to think that millionaires are just lucky, they think about how their money can work for them, not just how they can work for money.

1. Use Time to Your Advantage

Most people look for concrete paths to becoming a millionaire. But the essential ingredient to becoming a millionaire is intangible. It’s time. The majority of millionaires utilize the compounding nature of time, where growth builds on itself over time.

My favorite imagery to describe compounding is to imagine the growth of a tree. In the first five years of a tree’s life, it will only grow a few feet. Its shrubbery is the size of a basketball. It’s a small, weak plant. In the next five years, will the tree double in size? No! It’s more likely to quadruple (or more) in size. It’s growing in all three dimensions—height, depth, width. It’s not a simple doubling.

We’ve all seen the social media megastar who goes from broke to millionaire in less than ten years. But they are exceptions, not the rule. Most millionaires grow their wealth at a slow pace. Over time, they utilize an explosion of compound growth—like a tree—to become a millionaire.

2. Create Financial Goals

Millionaires develop written financial plans that serve as roadmaps to reach their destination. These plans allow them to make financial decisions based on their goals. A good financial plan means that to reach millionaire status isn’t an if; it’s a when. They know where they are going to get there because their personal finance is all planned out.

If you’re unsure how to create a financial plan, then a certified financial planner (CFP) might be an excellent place to start. They might suggest you start investing or open a Roth IRA retirement account or first fill up your emergency fund. A financial advisor is there to share millionaire wisdom with you.

Becoming a millionaire goes hand-in-hand with retirement planning and retirement savings. For some, reaching the millionaire club will enable their financial freedom or the ability never to work again. Saving money allows a high net worth, and financial independence is the reward.

Big financial success requires big financial goals. A written financial plan sets those goals.

3. Millionaires Increase Earnings

There are a few ways to go about increasing your earnings on your path to becoming a millionaire.

The fact is that most millionaires have a full-time job. And they might work it for a full 40 years. If routine work is how you make money, you could ask for a raise. Easier said than done, sure. But there are sure-fire ways to speak with your management about increasing your base salary. The best part? An increased salary affects your income every year from now until retirement. You aren’t just doing it for your current self, but for your future self too.

You could switch jobs. Self-made millionaire Steve Adcock attributes changing jobs (and getting raises each time) to be one of the critical factors in becoming a millionaire. Steve also focuses on the need to work hard and start investing as early as you can. Or you could find sources of passive income or secure a second job. Surprisingly there are easy ways to generate passive income, tons of side hustles to start, real estate ventures, and other easy ways to earn money and build wealth.

Increased earnings can be invested and grow into future millionaire wealth. A simple rule of thumb is that a dollar invested today will grow into $10 in 30 years. Using this fact, one can quickly see how a few thousand dollars in extra earnings can make significant headway on your path to future millionaire status. The bottom line: increasing your earnings is how to become a millionaire. There’s no “best way” to do this, but it’s critically important to reach your millionaire financial goals.

4. Millionaires Also Decrease Their Spending

Many financial writers point out that the stereotypical “millionaire lifestyle” is antithetical to becoming a millionaire. Why? We think of millionaires as having a big house, a fancy car, the nicest clothes. But if you spend all your money, then you aren’t a millionaire anymore. The truth is that most millionaires find ways to decrease their spending. They don’t buy dumb crap.

This behavior—spend less, save more—is how to become a millionaire. It’s counterintuitive to our traditional thoughts. The people who don’t look like millionaires are the ones who frequently are millionaires. It’s the adage of the “millionaire next door.” The authors of “The Millionaire Next Door,” a worthwhile read, have a target net worth ratio with age added as a factor.

They might drive used or old cars. They wear non-designer clothes. They enjoy low-cost or free activities. They don’t dine out too much. They vacation economically. These are all ways that millionaires decrease their spending without feeling deprived.

There are plenty of counter-examples. We all see millionaires on T.V. who genuinely live the millionaire lifestyle. But for the average reader, the simple path to wealth involves decreasing your spending, not increasing it.

Five Ways to Invest Like a Millionaire

Did you know that millionaires put 44% of their investable assets in stocks? And that 2/3 of millionaires lean on experts by consulting with advisors? Let’s take a look at the most common path to Millionaire Road.

1. Millionaires Do Simple Stock Investing

The stock market is one of the most common methods for people to become millionaires. One investing strategy is simple to describe. Invest a regular percentage of every paycheck into a low-cost index fund. Rinse and repeat for ~35 years. Boom—that’s how to become a millionaire. But let’s take some time to break down those terms and that math.

First, what’s a low-cost index fund? Many people mistakenly believe that successful stock investing involves picking individual winners and losers. But that’s not true, and an index fund helps explain why. An index fund owns every stock in a given stock index. It doesn’t pick winners and losers but buys entire swaths of the market instead.

You’ve heard of some indexes—like the S&P 500 or the Dow Jones. An S&P 500 index fund chooses to own every stock in the S&P 500, regardless of its recent success or failure. Other indexes and index funds are less well-known. For example, some indexes track the energy industry, the automotive industry, or precious metals.

History shows that index fund investing is very successful. One of the key reasons is that index funds charge meager fees. Since there is less expertise required—no “skilled” picking of winners and losers—there is no need to charge high fees.

2. Millionaire Investors Leverage Time

Next, let’s discuss the long-term aspect of stock investing. Many people see the most expensive stocks—like Tesla—and think it’s typical for stocks to grow by 10x in five years. “If only,” they ponder, “I can discover the next Tesla.” Index investing circumvents that wishful thinking. Since brokerages design index funds to be average (they own everything), index funds return average profits.

Over the history of the stock market, that return has been about 10% per year. Once inflation is accounted for, the stock market has a “real return” of about 7% per year. 7% is not a lot until it starts compounding. One year of 7% turns $1000 into $1070. But what do 30 years of compounding do? The average person might think 7% times 30 years equals 210%…turning those $1000 into $1000+$2100 = $3100.

But the truth is that stock market returns compound over time, just like our tree from before! A 7% return compounded over 30 years equates to (1.07)^30 = 761%. Your $1000 investment turns into $8610. But $8610 doesn’t make you a millionaire.

3. Regular Investment, Regular Frequency Is the Path To Millionaire Status

That’s why many experts suggest the average person invest using a regular frequency and a uniform amount. That’s how you reach $1 million net worth. For example, Americans could choose to utilize their 401(k) account. They’d be investing a consistent fraction of their paycheck (uniform amount) each time they are paid (regular frequency). Some people call this “dollar-cost averaging,” although the exact definition of dollar-cost averaging is up for debate.

Let’s look at an example of dollar-cost averaging using a 401(k). Mikey invests $400 out of each of his paychecks. He does this from age 22 until he retires at age 60. Some quick math tells us that Mikey’s contribution is $400 per check * 26 checks per year * 38 years = $395,200. The technical term for this contribution is principal.

But once we account for investing growth (again, using the 7% per year historical average), Mikey ends up with a whopping $2.07 million. Remember, our 7% is the “real return,” meaning that Mikey has $2 million in today’s dollars. He hits 1 million dollars at age 51. That’s the power of consistent stock market investing over decades. In this case, 30 years of simple investing is how to become a millionaire.

4. Millionaires Invest in What They Know

Cryptocurrency has undoubtedly created many millionaires (and even some billionaires). Whereas stocks return an average of 10% per year, Bitcoin has grown by 196% per year since its invention in 2008. Crazy! But your correspondents here suggest the following when it comes to cryptocurrency: invest in what you know.

If you understand how Bitcoin works and feel confident in its long-term growth, then you likely have the constitution to withstand any ups and downs it sees in the future. But if you invest in crypto ignorantly, simply hoping to make a quick buck, then you might be in it for the wrong reasons. If prices dive quickly—which we know can occur—it will scare you into selling after a significant loss.

Investing in stocks—which represent ownership in the companies comprising our economy—is much more tangible for the average investor than the boom in digital currencies.

5. Millionaires Invest in Themselves

While a smaller percentage, another path for millionaires is to “invest in themselves” via starting a business. Most business owners will tell you how this is a high-stress, high-risk, high-reward path.

First, there is stress. Business owners typically work long hours. They often take a little-to-no salary during the early years of the business. Instead, they opt to invest any earning to allow the company to grow. They are responsible to their employees (and those their employees care for) and responsibly for their customers to provide the best service possible. These responsibilities contribute to high stress.

And then there is the risk. Businesses frequently use debt (or borrowed money) to get started. This debt creates financial risk associated with the business failing. Some businesses utilize outside investment capital. In this case, the outside investors trade a share of the risk for a company’s percentage. This trade decreases the business owner’s risk but increases their stress (they now must answer to their investors) and reduces the owner’s reward (they share it with the investors).

After the risk and the stress comes the reward! Perhaps the most satisfying aspect of capitalism is that those who invest their capital (money and time) can later reap huge rewards. Business owners certainly fall into this category. Let’s go over a few quick examples of those rewards.

Bill Gates founded Microsoft with, essentially, zero start-up dollars. The company is worth $1.7 trillion today (though Gates is no longer close to being a majority or plurality shareholder). Elon Musk contributed $6.5 million to Tesla in 2004—yes, he was already a millionaire. But Musk earned his millions from cash-strapped start-ups, most notably PayPal. Jeff Bezos founded Amazon using “a few hundred thousand dollars” as a loan from his parents. The company is now worth $1.5 trillion.

Yes, this data set was cherry-picked in the “worst” way. These are possibly the three most successful entrepreneurs in the past 50 years. But it serves to drive the point home. A business can filter risk and stress to create an asymmetric reward.

Four Personality Traits of a Millionaire

Millionaires and other successful people tend to share similar personality traits. You might already have some guesses as to what those are. Authors Chris Hogan and Tom Corley identified the following characteristics the millionaires share.

1. Millionaires Seek Feedback and Have Mentors

Millionaires don’t exist in a silo. They often seek out external feedback to improve. In particular, millionaires frequently utilize experienced mentorship to help them stay on the path to wealth. Sure, some people strike gold by doing things their own way. But those people are exceptions to the rule.

2. Millionaires Persevere

The road of life is never smooth, whether you’re a millionaire or not. But one character trait that sets successful people apart is their ability to persevere through thick and thin. This perseverance might mean overcoming hardships. It might equate to ignoring critics. They keep pushing on, no matter the obstacle. It’s not guaranteed to make you millions. Plenty of hard-working people don’t end up as millionaires. But it’s even rarer for a lazy quitter to end up a millionaire.

3. Millionaires Are Consistent

Millionaires know that the tortoise beats the hare. Its slow and steady strategy wins the race. In other words, consistency wins in the long run. Consistency can take many forms. It can show up as hard work. It manifests as daily responsibility and intentional thinking. When these behaviors are practice day after week after month after year—consistently—then good results are sure to follow.

4. Millionaires Are Conscientious

Millionaires tend to be responsible and thorough. They follow through. They complete their duties to the best of their abilities. In other words, they are conscientious. Their inner conscience guides them.

Three Things Millionaires Don’t Do

On your journey to becoming a millionaire, it’s important to avoid some behaviors, or you’ll sink your efforts. You’ll be trying to fill your bank account with a leaky bucket. Let’s now discuss the actions that millionaires don’t do.

1.Don’t Accrue Dumb Debt

Debt is a double-edged sword. You can spend more money than you have and achieve wild growth. Or you can stumble into a pit of misery, stuck in debt for decades. Student loans, for example, are one of the most common debt vehicles today. Many current and future millionaires have suffered student debt. Why? Because education kickstarted their growth as nothing else could.

While some student loan debt is dumb, most people find their student loans manageable and worthwhile. Trading education for some debt was a good deal. But credit card debt is rarely worth it. It’s dumb debt. Purchasing consumer products using credit card debt is not a millionaire behavior.

2. Don’t Make Rushed Decisions

Remember when we said that “time is on your side.” That idea applies to more than just long-term investments. Millionaires realize that big decisions require significant time commitments. And how to become a millionaire is a big question to answer! It’s not something to rush.

Millionaires rely on well-researched decisions, rarely succumbing to hasty, irrational choices. What’s one example of a foolish choice? Millionaires don’t follow the crowd. According to author Tom Corely, the millionaires he has interviewed tend to separate themselves from “the crowd.” They don’t make decisions based on popular choices. Why? Because the popular opinion is often wrong!

3. Don’t Be Stagnant

Millionaires seek growth in both their personal and financial lives. They aren’t stagnant. Millionaires are constantly seeking to learn new skills and expand their knowledge set. They don’t settle for the status quo. And in their finances, millionaires understand the balance between risk and reward. They don’t use a savings account other than for their emergency funds.

In general, the most impactful rewards come from the highest risks. But there’s a “risk-adjusted” way to measure those rewards. Millionaires often strike a healthy balance between risk and rewards.

Final Thoughts

Even if (somehow) this advice doesn’t land you in the millionaire club, think of where you’ll end up. You’ll be a reasonably wealthy, high-earning, low-spending, self-invested, self-improving, perseverent, consistent, and conscientious person who avoids debt, doesn’t rush decisions, and never settles.

Not bad, right?

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

How To Adopt An Abundance Mindset

How To Adopt An Abundance Mindset

by | Apr 5, 2021 | career development, Investing, Managing Money | 2 comments

“The mind is everything, what you think, you become.”

Buddha

Are our mindsets predetermined, or can we grow, adapt, and change?

Your mindset matters greatly. You have the power to develop how your mentality. 

How We Think Can Impact Us

How we think influences how we see the world around us and can significantly impact our happiness, success, and prosperity. A scarcity mindset has a more limited and pessimistic view of the world, while the abundance mindset can better enable you to reach your potential. We dive into these opposing mentalities and discuss how you can shift your predominant paradigm for the better.

Carol Dweck, a Stanford psychologist, has done significant research over the past forty years on motivation and mindsets, precisely the fixed mindset and growth mindset.

Dweck found that individuals with a fixed mindset believe their basic abilities, intelligence, and talent are fixed traits and cannot develop further. Those who have a growth mindset believe that you can build your abilities, and through working persistently, can realize success. “Everyone is a mixture of fixed and growth mindset. No one has a growth mindset all the time. You can have the predominant growth mindset in some things but be triggered to a fixed mindset in other things.”

In Mindset, Dweck writes, “Mindsets are just beliefs. They’re powerful beliefs, but they’re something in your mind, and you can change your mind.”

Our mindsets or attitudes stem from our experience and upbringing, influencing our behavior. These mentalities may be enduring, but I believe we can change if we have the motivation and persistence to work hard.

A Scarcity Mindset

Stephen Covey, author of “7 Habits of Highly Effective People,” coined the terms scarcity and abundance mindsets. He wrote, “The key to valuing differences is to realize that all people see the world, not as it is, but as they are.”

On Scarcity Mindset, Covey said, “Most people are deeply scripted in what I call the scarcity mentality. They see life as having only so much, as though there was only pie out there. And if someone were to get a big piece of the pie, it would be less for everybody else. “

In this glass-half-empty prism, we look at a world competing for limited resources to fulfill our basic needs. The scarcity mentality defines much of our society. When those who are struggling for food and shelter, unfulfilled needs can center their thoughts toward negative feelings of low self-esteem.

For many, scarcity is a harsh reality and difficult to change. Juggling your household’s ability to pay rent, late bills, and your loans can deplete your energy and willpower. When you have less money or are poverty-stricken, it impacts your cognitive resources more.

On A Societal Level

I have written about Universal Basic Income as a possible way to reduce economic inequality. It is far more challenging to institute societal change when scarcity for many is about physical needs such as food, shelter, and clothing for those impoverished.

It would be unreasonable to say that a whole community can shift over to an abundance mindset and solve their problems. The government needs to resolve these needs, and people can pledge their votes to make those changes.

 An Individual Level

A scarcity mindset is not limited to those who do not have enough, but I refer to individuals who do not need government intervention. Individuals may require thinking about trade-offs when making decisions. You may need to consider spending time or money to take your car for an essential repair to get to work now rather than going away for the weekend. If your household has several cars, your trade-off is less urgent.

When you have grown up in a modest home, it may perpetuate those feelings of making choices throughout your life, even if you have the resources. It is hard to discard deep-rooted beliefs. Seeing the world as a zero-sum game is commonly felt by those with scarcity mentalities where one person’s gain is another person’s loss.

A Story To Share

I worked with someone who grew up in a “well-to-do” home and was very successful in his career, earning seven figures annually. This individual didn’t have money worries that I could tell. He had a frugal mantra about time and money. He actively saved and was savvy about investing despite stressing about money.

Without a doubt, he likely had a net worth well into the seven figures. Yet, he always felt he was about to lose his job, lived in a studio apartment, and had a raging fear that he would eventually be homeless. His scarcity mentality dominated his life, preventing him from potential happiness and feeling financially secure. From my reading and talking to other people, this is a person not as unique as you may think.

The Grass Is Always Greener Somewhere Else

Those who have a scarcity mentality may feel the grass is always greener somewhere and may rob us of our ability to succeed. Individuals who tend toward scarcity are more often fearful, anxious, and stressed. It is difficult for them to see the good in the world and may suffer from tunnel vision, focusing on what is wrong rather than right.

Many worry about competition for a promotion in their workplace, and they lack self-esteem. People believe they will never have what they deserve and often portray themselves as the victim.

A mindset is an attitude that can help or hinder your ability to make financial decisions, manage stress, social situations, and reach your goals. No one is exempt from challenges, but you can accept and deal with them. If you put up barriers, you will fixate on your losses rather than correcting your mistakes. That is a recipe for sabotaging your finances. There is no shortage of people who are worse off than you are.

A Lesson Growing Up

We didn’t have much growing up in the Bronx, but it was plentiful compared to my mom. She was fortunate to survive the Holocaust, losing all but one family member. It was hard to feel sorry for yourself for what you lack in life. My brother and I never felt as deficient as others; in comparison to us, they had far less. I believe we benefited from my mother’s positive attitude. She felt fortunate she was in America, the land of opportunity.

Corny as that sounds, she fought whatever demons she had left in Europe to raise her family to be thankful and responsible for our success and happiness.

 Can you shift from a scarcity mindset to an abundance mindset? It may be difficult to institute societal change, but I believe individuals can adapt to an abundance mindset.  As Carol Dweck found, we are not of all one or the other but likely a mix.

 Fostering An Abundance Mindset

In his book, Stephen Covey gave us a description for this mindset:

“The Abundant Mentality, on the hand [from Scarcity Mentality], flows out from a deeper inner sense of personal worth and security. It is the paradigm that there is plenty out there and enough to spare for everyone. It results in sharing of prestige, of recognition, of profits, of decision-making. It opens the possibilities, options, alternatives, and creativity.”

In contrast to having a scarcity mentality, the abundance mindset envisions the world as having enough resources to go around. This mentality is the antithesis of the scarcity mindset in virtually every regard. Simultaneously, the scarcity mindset views the world as a glass-half-empty prism, positivity reigns for those with a predominant abundance mindset. Win-win situations for the abundance mindset replace the zero-sum game, which has someone as a loser.

Their perspective sees limitless opportunities, whether in business or life. Such a mindset is desirable for making progress toward prosperity.

Accentuate The Positives

You can recognize people bursting with a positive nature by how they go about their lives at home and work. Reflecting on what they have provides them with the feeling their life is abundant. They have confidence in their skills but will learn what they need to complete the task. They have a “can-do” mentality, won’t forget responsibilities.

You want this person to be on your team because they will take action and meet challenges.

How To Handle Defeat

When someone makes mistakes, it is not an ultimatum in life. For one with an abundance mentality, it is a way by learning how to do better. Losing a job may become an opportunity in the future. Few successful people have not lost a job. It is how you handle such a loss that defines you as a person.

I have never forgotten a comment the head of HR told a group of us just out of college starting a job at an elite cut-throat investment banking firm. After saying that we would have many challenges, she said, “Keep in mind that the average person will lose their job at least three times in this industry, meaning you and the company took some risks.”

It is how you react to that event that will make you a winner or a loser. Many became fearful. Others were motivated by the challenge.

Embrace Change

Change is inevitable and can be exhilarating. Sometimes it can be hard to make a significant life change, leave a job, or recognize a bad habit. It is always easier to accept the difference when you instigate this for the better. When you can’t control the change, uncertainties can arise.

As a result of the pandemic, we had little choice to undertake massive actions–quarantining, social distancing– for health and safety. No one likes changes out of your control but adapting to these measures was unquestionably the way to go.

With any change, determining what is in your control makes it easier to embrace. As the serenity prayer encourages you to accept the things you cannot change, courage to change the things I can, and the wisdom to know the difference.

Investors deal with changing markets all the time. How you react to financial market volatility can make a tremendous difference in your investment returns. A person with a scarcity mentality may sell out of fear, while those with an abundance mindset may see opportunities to purchases stocks that have sold off irrationally.

Plenty of Opportunities

The half-full glass that gears the abundance mindset readily sees opportunities worth exploring to develop ideas and growth. On the other hand, the scarcity mentality envisions limitations or roadblocks. They won’t want to spend the energy on something that won’t be feasible. They hang on to their misery but see others who succeed with resentment.

Challenges and failures for the abundance mentality are merely an integral part of the learning process and will use the feedback as a stepping stone.

Don’t Compare Yourself To Others

Marketers urge us to compare ourselves to others when they show us the comforts–cars, homes, appliances, clothes–we should be buying. Merchants prosper when those with scarcity mindsets feel they don’t have enough. If we cannot afford it, we may borrow more heavily, putting us in a negative financial situation. Social media beckons us to look at others at their best and measure up. 

It is natural to gauge how you are doing by comparing yourself to others.  However, there is a downside to doing that to ourselves. It leads to overspending to keep up with your friends and neighbors. 

Resist the temptation to compete with what your peers, friends, family, or others have. It is a waste of your time, money, and energy as you won’t know all the facts. Fulfill what you want out of your life. We are on different paths to our own goals.

Achieving Goals With Confidence

When setting your financial goals, it is more likely when you can envision what your success will look like in the future.

In his research on Olympic athletes, Dr. Srini Pillay found that mental training was as essential as physical training. He found “visualization” and the ability to picture yourself crossing the finish line can help you achieve your goals. We stimulate the same brain regions when we visualize an action as when we perform.

Achieving Financial Security

Having confidence can propel you to take steps to create a reasonable plan to achieve financial security. When you are in your 20s or 30s, you are likely quite a distance from financial security.

However, organize your finances to spend less than you earn so you can allocate savings through automating deposits to various accounts from your paycheck. Specific amounts can go into your emergency fund, retirement, and investment accounts so you can visualize your money working for you.

Be Open To Varying Viewpoints

Be open and respectful in your conversations with others. Learn from others and share what you know. Visit your friends and make new acquaintances, and have positive experiences. In the past year, we have been cooped up, isolated from people, and have not socialized. At the same time, divisive opinions may have inhibited us from being more open. We don’t all have to agree with each other, but we can learn and appreciate one another.

Expressing Gratitude

When you appreciate what you have, it usually comes with recognizing that others played a role in your success. Expressing your gratitude to them, making you feel as good as the recipient. Feeling grateful has many benefits without any cost factors. It can reduce negative emotions, increase motivation, promotes generosity, and be linked to good health and happiness.

Oprah says this best, “Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough.”

Giving To Others

“No one has ever become poor by giving.”

Ann Frank

People with an abundance mindset are predisposed to engagement and strong relationships. They see life as a win-win situation, where both sides gain rather than a zero-sum game which is more reflective of the scarcity mindset.  Giving produces positive feelings when we enhance the lives of others. By providing others, you are giving back for having abundance in your lives.

It doesn’t have to mean giving money. You can give away material things,  invest your time through volunteering, offering a free service or talent, all of which can be very rewarding.

Adopting An Abundance Mindset Is Advantageous

There are significant differences between having a scarcity or abundance mindset. Having an abundance mindset allows you greater satisfaction without the barriers that will slow your growth. You will better leverage opportunities that can reward you and move you toward success.

Comparing the two mindsets, you can see the abundance mindset is a reshaping of your mentality that can help you choose to have more win-win situations. When you feel better about yourself, making financial decisions may be easier and your road toward wealth more certain. 

Final Thoughts

Given traits of both mindsets, wouldn’t you rather have the abundance mentality? The choice is yours. Our perspectives or attitudes stem from our experience or upbringing and influence our behavior. Mindsets may be enduring, but I believe they can change if you have the motivation to work hard. 

Thank you for reading! Please join our growing community as a subscriber to The Cents of Money and receive our weekly newsletter.

 

How Stock Market Games Can Teach Investing

How Stock Market Games Can Teach Investing

by | Mar 27, 2021 | Generation Z, Investing, Managing Money | 0 comments

“Tell me and I forget. Teach me and I remember. Involve me and I learn.”     

Benjamin Franklin

 

Want to learn how to invest in the stock market without losing money? Stock market games are a great way to practice whether you are a beginning investor or investing for awhile. These games are an example of learning by doing, also known as experiential learning and practical learning tools.

I am passionate about teaching people, especially young students how to invest in the stock market. Playing the stock market game can speed your learning and allow you to make painless mistakes. Investing is one of the best ways of creating and building wealth for your future. It can be your ticket to financial security and can be mastered as a lifelong skill. 

Investing can be daunting for experienced investors, let alone for those who are just starting. On the other hand, virtual games that can ease your entry are free, fun, readily available, and user-friendly. They offer participants a faster learning curve to build investment skills and better financial habits.

A Generational Opportunity?

During the pandemic, we have seen a significant rise in stock volumes in 2020, with year-to-year volumes up nearly 100% in early  2021. Much of the higher volume seems to be coming from retail trading. As a result of rising interest, young people have been opening up a record number of accounts at Robinhood and Webull. Webull has a virtual trading platform for those not ready to invest real money yet.

This trend may signify a generational opportunity of young individual investors participating in the market as a path to building wealth. These new investors can build their future wealth by first learning how to handle risks, market volatility, ensure portfolio diversification, and financial concepts. Engaging in stock market games can help you build your confidence, skills, and knowledge.

Why Investing Early Matters?

You should start investing early in life to have a long time horizon as possible for these reasons:

  • Leverage the power of compound interest  (interest on interest) earned on your initial investment for significant returns in your retirement and investment accounts.
  • Take on more significant risks when you are young and able to absorb the bumps and bruises of downturns.
  • Motivate yourself to save more, spend less so that you can grow wealth.

Investing is a viable means to accumulate wealth and enjoy financial comforts. The earlier you start to save money for investing purposes, the better.  Parents should begin talking to their kids about money when feasible, exposing them to investing basics and developing good financial habits.

Simulated Games Are Suitable For Virtually Everyone

Young people can get a big jump on investing by playing virtual stock market games with parents, friends, investment clubs, classes, or even on their own. Stock market simulated games are an excellent way to practice and gain experience in investing before you commit your own money.

I have used these virtual games for years to teach my college students about stock investing, critical financial concepts, and terminology. The games are fun to learn virtual trading and investment strategies in a realistic setting without risking a dime.

Digital Natives

Generation Zers come from an environment enriched with simulations and games. They are perfect candidates to learn how to invest from virtual stock market games as interactive tools.

As digital natives, they are on always-connected with cloud-based digital technology from birth. They often prefer video and simulated games to traditional modes of learning. However, virtual games are user-friendly and can appeal to anyone, even digital immigrants like me. As a result,  I use Market Watch Virtual Stock Exchange by Dow Jones for my college students and my kids at home.

How The Games Work

At the start, I customize settings. Each player gets $1,000,000 to invest in many US stocks, foreign stocks, mutual funds, and Exchange Traded Funds or ETFs. Some games allow the trading of foreign currencies, cryptocurrencies, options, and other securities. 

 My college students build their $1 million investment portfolio to buy at least $800,000 of stocks and keep $200,000 or less in cash. They can actively trade daily on the game or purchase and hold on to stocks in their portfolio as a long-term strategy. 

Investing Versus Trading

Most games allow for margin trading, short selling, and options trading for more advanced players. From my perspective, I favor the games as a lesson in investments rather than for trading purposes. Returns tend to be better for the long term in retirement and investment accounts.

As much as I applaud young investors in the market, I grew concerned about the market frenzy that pushed GameStop shares to ridiculous levels. So I wrote this letter to young investors concerning the dangers of short-selling and margin trading you can read about here.

They use the stock market game for a wealth of resources about the markets and the economy, but they research all publicly available information.

Why Use A Simulated Game For Investing?

 

1. Active Learning Of Investing Basics

Games are a fun and educational way to learn to invest, a pivotal way to accumulate wealth. There is a greater level of engagement and motivation when you are learning a skill through simulation. Players can quickly fill and modify their portfolios by buying and selling stocks with ease.

Many people avoid investing, believing it is too complicated, and fear losing money. Those are valid concerns. That’s a prime reason why getting your feet wet with the game allows you to get more comfortable. Trying out trading and investment strategies is less intimidating.

There are many articles and videos on the sites to understand differences in risk/reward trade-offs better and measure your tolerance to make more risky purchases. Feeling gains and losses are real enough and allow you to pivot in different ways.

2. Diversifying Portfolios Reduces Risk And Growth

When creating a virtual basket of stocks, players should diversify their portfolios in different industries. For example, in reality, you would not want to hold all fast-growing technology stocks or all safer utility stocks, but rather a blend of different kinds of companies. When building a portfolio, you may favor a mix of growth stocks, value stocks, stocks with above-average dividend yields in different industries. Virtual investors can become attuned to market information that may affect one stock or particular group more than others.

Avoid Concentration Risk

My son Tyler was playing a simulated game in a stock market club and put all of his money in one stock–Amazon–when it was rising significantly. He was so excited that he was doing the best in the club until one day Amazon reported quarterly results that missed analyst expectations.

Apparently, the company announced a rise in capital spending for their data business. Amazon shares crashed and became “dead money,” a term investors use to mean that the stock’s performance will drag for a while.

For Tyler, it was a learning experience about why diversification was important in your portfolio. Concentrating all your money in one stock is a dangerous strategy. It is not good to put all your eggs in one basket.

3. Macro Factors Investors Need To Know

Beginning investors need to understand external or macroeconomic factors that may impact the market. Players should be reading relevant financial news to learn about important events that can sway the market significantly. Learn what makes the market tick. How does the market react when the Federal Reserve takes action on interest rates, economic changes, inflation, and international events (eg. China)? Just understanding what is relevant to your stocks is a big lesson.

4. How To Deal With Market Volatility

From the relative safety of playing a virtual stock market game, players can better understand that market volatility happens regularly. The most experienced investors are often surprised about dramatic changes usually caused by headline risk or recession worries.

By virtual investing, you become more aware of rhythms in the market and prepare for a volatile market. As such, you can explore strategies to deal with turbulence without the loss of real money. Ask yourself: are you better off trading actively in a weak market or sticking to a buy-hold plan? Games allow you to experiment with cash without the fear of losing it. 

Market Volatility During The Pandemic

Many investors quickly baled when the pandemic’s effects hurt our economy, causing a dramatic market downturn in March 2020. However, the market proved its resilience by resurging and reaching record levels later in the year. Those investors who sold their holdings learned a lesson about riding out storms.

5. Competition With Your Peers Is (Almost) Realistic

Never let a chance to compete with your peers go to waste! Students love to compare their rankings. Most games rank players daily and allow you to see each other’s stock purchases, performance, and ranking.

My students tell me that they check their rankings daily, if not more often. If they lose a top-ranking, they often get upset. I need to remind them that it is virtual money. We discuss strategies in class. They can research what stock (or stocks) pulled their performance down and decide if they should buy more with available virtual cash to reduce their cost basis.

You can form teams within the game structure simulating portfolio managers who consult with each other. Young people can engage in collaboration, collegiality, and problem-solving within their group. These are excellent soft skills to build for your careers that employers love to see. 

6. Building Confidence And Self-Esteem

The reality of picking stocks and learning some investing basics is a big confidence booster. Students playing a stock market game say:

  •  It was fun learning how to invest.
  • They plan to open an investment account (eg. Robinhood or Webull).
  • Virtual investing has helped them to become more confident in their abilities.

Investors tend to value savings to deploy for investment purposes. If so, and it provides you with an incentive to save more, that is a worthwhile accomplishment.

Popular Simulated Stock Market Games

There are at least 5 games to choose from that allow for competition, awards, alternative securities, and provide resources for players. Here are some of my favorites.

1. Marketwatch Virtual Stock Exchange

MarketWatch is a top financial and news website owned by Dow Jones. The Virtual Stock Exchange game can be customized by an administrator such as a parent or teacher providing $100,000 or $1,000,000 in private or public mode. The game provides rankings for each player. Administrators like me can customize trading parameters. Participants can trade stocks, global stocks, mutual funds, and ETFs.

Players can find and trade stocks in real-time and build their own portfolios They can create, watchlists and have access to articles, videos, and charts. There are advanced trading options with specific orders such as at the limit price or less or stop order,  meaning an order to buy or sell a stock once the price reaches a specified price. There are nearly 40,000 games currently in play.

Integrating The Game 

For the past 10 years, I have administered several games a year with my finance students, integrating the game with my finance curriculum. As a result, I have an easier time teaching how the Fed influences the financial markets. They update excel spreadsheets for prices, yields, and valuation, learning relevant financial concepts.

  In recent years, the game has become more user-friendly with more resources. Student feedback has been overwhelmingly positive. They have fun watching their rankings relative to their peers, finding out why their stock performance has outperformed or underperformed. They find the game quite realistic and are eager to set up their own investment accounts.

2. The Stock Market Game

Although geared for teachers and students, anyone can participate in The Stock Market Game individually or as a team, including a family. Participants can trade their own $100,000 investment portfolio. The portfolios can be a mix of stocks, bonds, mutual funds, and cash. Players can participate in a competition or in a non-ranked session. This game is created by the educational nonprofit organization, the Securities Industry, and Financial Markets Association, or SIFMA.

SIFMA touts a 2009 FINRA study of The Stock Market Game providing positive results on students in grades  4-10 who played the game, scoring higher on investor knowledge tests.

3. Wall Street Survivor

Partnering with AOL, Seeking Alpha, and The Motley Fool, Wall Street Survivor is among the most popular simulated games available. You can start with anywhere from $10,000 to $10 million in virtual money. There is the option to join a public or private league or create your own league. This site is resource-rich and provides courses, videos, newsletters, starter guides, and articles. I particularly like that they have resources to analyze a business and its financial statements. As a former analyst, the resources make my heart sing.

You can earn badges and vie for real cash prizes of $2,000 monthly. You practice trading and take quizzes to reinforce your knowledge. According to their site, they have over 1 million users. Wall Street Survivor has a cryptocurrency game as well.

4. How The Market Works

This site has been around since 2004 and is good for classes, groups, and individuals. While tailored toward beginning investors, there are advanced resources that participants can use including Wall Street Analyst Ratings, financial news, company financial statements, and technical charts. You can buy global stocks, mutual funds, ETFs, options, and even commodity futures. Customization of games, competitions, and flexibility in cash balances are all available.

5. Investopedia Stock Simulator

The respected financial site Investopedia has its own comprehensive stock simulator. You can start with $100,000 in virtual cash. Participants can join an existing game or create a customized game of their own, trading stocks, options, margin trading, and adjustable commission rates. Players are ranked, can research their investments, and earn rewards for completing various activities. You can connect with over 700,000 traders and investors globally.

 Final Thoughts

If you are new to investing, stock market games are a great way to gain experience in a simulated setting without the risk of losing your own money. These free games are fun on sites rich in resources to learn at your own pace or as part of a team.

You can create portfolios, learn concepts and build confidence along the way. The games have enhanced the investing capabilities of my college students, many of whom are now active investors on their own. It is my passion to teach students how to invest. 

Have you ever participated in a simulated stock market game? If so, what was your experience? I encourage you to try one of the games with your friends or family as a first step to investing for real. Thank you for reading! Please subscribe to The Cents of Money and join our growing community!

 

 

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