9 Good Financial and Wealth Building Habits

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Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.

When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.

Below are nine good financial habits.

1. Create a budget.

The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.

When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.

2. Avoid or consolidate higher-interest credit card and personal debt.

Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.

The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.

If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?

3. Understand your financial circumstances.

You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.

With an understanding of your finances, you’ll always know what makes the most sense for you and your money.

4. Learn from past mistakes and failures.

Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.

It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.

5. Set goals and create a plan .

Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?

Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.

According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”

6. Ask questions.

Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.

For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.

7. Save for retirement.

Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.

You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.

8. Automate your savings.

There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.

Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.

9. Pay down debt.

Taking on debt can be a successful strategy as long as you’re comfortable with two things:

  • The monthly payment
  • Your ability (and willingness) to pay down the debt.

The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.

If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.

Creating a wealth plan

A well thought out wealth plan rests on three essential pillars:

  • Save
  • Invest
  • Repeat

These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.

A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.

Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:

  • Clear vision over goals
  • Easily control expenses and estimate savings
  • Automate investments
  • Define a strategy to achieve wealth
  • Adapt your strategy over time

In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.

In essence, a wealth plan acts as a roadmap to financial freedom.

References:

  1. https://www.discover.com/personal-loans/resources/consolidate-debt/good-financial-habits/
  2. https://goodmenproject.com/featured-content/how-to-create-a-wealth-plan-get-started-now/

Successful Investors are Patient

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“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

Patience is ofter referred to as the most underused investing skill and virute. And, learning patience could help you reach your financial goals of wealth building and finacial freedom.

Be extremely patient when investing in assets and wait until you can buy an investment at an entry price when everybody else hates the investment or are extremely pessimistic about the prospects of the investment.

In other words, wait until you can buy the asset at a extremely discounted price.  Keep in mind that every investment is affected by what you pay for it.  The less you pay, the better your rate of return on that investment.  Never, Never, Never…overpay for an investment.

People feel losses twice as much as they feel gains.

Successful investors develop a number of valuable skills over their lifetimes. And many report that patience is the most important skill to learn and master, but often it goes underused.

We’re not born patient. But, patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.

Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the DMV doesn’t mean you’re a patient investor.

Alway keep in mind and retain the mantra that…if there is a good opportunity now, a better one will come in the future.

Yet, patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.

Why Is it so Hard to Be Patient?
Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.

When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

Impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.

Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.

Investment entry point and investor patience are super-important too.

Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.

The importance of being patient when investing can be best summed in this quote by Benjamin Graham…“In the end, how your investments behave is much less important than how you behave.”

“We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” Chuck Akre

Compounding works exponentially for the patient investor. The power of compounding is one of the most important concepts that investors need to learn and embrace. Since, patient and time are better friends to the investor than experience, expertise, and even research.

“A lot of people historically have done fairly well investing in companies they just genuinely like, whether it’s been Starbucks or Nike.” Gary Vaynerchuk, CEO, VAYNERMEDIA

References:

  1. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill
  2. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
  3. http://mastersinvest.com/patiencequotes

Racial Economic Disparity vs. Economic Inclusion

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“The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.” Jerome Powell, Chairman Federal Reserve

Wealth inequality, also known as the wealth gap, is a measure of the distribution of wealth—essentially the difference between the richest of the rich and the poorest of the poor, according to World Population Review. American household wealth—the value of assets subtracted by the liabilities and debts owed—may have increased largely in the form of equity, mutual funds, and similar investments, but not equally among all Americans.

Wealth inequality is closely related to income inequality, which tracks the money people earn. However, wealth inequality includes not just income, but also the value of bank accounts, stocks and investments, homes, and personal possessions such as cars, jewelry, artwork, and other valuables. Wealth inequality is a major cause of unequal living standards in many communities.

The Federal Reserve’s statistics have confirmed the racial inequity gap related to income and wealth disparities. In its 2019 Survey of Consumer Finances, white families were reported to have had a median wealth level of $188,200, substantially larger than the median Black family’s wealth level of $24,100.

“These disparities still stand from a racism that’s systemic. It can be traced from employment to small businesses and wealth and still exist today in ways that still damage our country’s health,” Cleveland-based artist Chris Webb said.

The central bank is studying racial inequities in the U.S. economy. The Federal Reserve says it can only do so much to address earnings and wealth disparities, but feels an obligation to at least research the economic implications of uneven economic outcomes in the U.S.

While the assets of white households are equally split between real estate, equity and mutual fund shares, pensions, and other assets, the assets of other racial groups are less diversified. Almost two-thirds of Black wealth is composed of real estate and pensions, with 38% coming from pension assets alone. Similarly, 61% of Hispanic wealth and 56% of wealth from other races is composed of just these two asset types.

Additionally, according to data from the Census Bureau, 35% of white Americans are 55 and older, whereas only 24% of Black Americans are and only 16% of Hispanic Americans are. Hence, a part of the reason why wealth ownership is much lower among Black and Hispanic Americans may be due to the fact that they are relatively younger on average than white Americans. Black and Hispanic populations may be younger for a variety of reasons, including differences in life expectancy—Black Americans’ life expectancy is 3.5 years less than that of white Americans—as well as immigration trends.

The white population is more likely to be older, has earned more income over their lifetime and hold more wealth than Black and Hispanic populations.

In summary, the causes of wealth inequality in America remains deeply rooted and are systemic. And, the results of wealth inequality in America persists even today.

References:

  1. https://worldpopulationreview.com/country-rankings/wealth-inequality-by-countryhttps://worldpopulationreview.com/country-rankings/wealth-inequality-by-country
  2. https://finance.yahoo.com/news/economic-and-racial-inequalities-are-long-haul-issues-for-the-federal-reserve-220405947.html
  3. https://usafacts.org/articles/white-people-own-86-wealth-despite-making-60-population/

Free Cash Flow

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Free cash flow is the amount of leftover money in a company.

Cash flow is simply the difference between money coming in versus the money going out. It is arguably the most important financial metric for evaluating a person’s or company’s financial worth or intrinsic value.

Free cash flow (FCF) is the amount of cash (operating cash flow) which remains in a business after all expenditures (debts, expenses, employees, fixed assets, plant, rent etc.) have been paid. Free cash flow represents a company’s current cash value.

Cash Flow Versus Free Cash Flow

  • Cash flow is the flow of cash coming in and going out of a business over a certain period of time. It is presented in a cash flow statement.
  • Free cash flow represents the amount of disposable cash in a business (remaining after all expenditures). Sometimes, free cash flow is considered to be a company’s current cash value. Though, since it does not take into consideration a business’s growth potential, it is not normally considered a business valuation.

Free cash flow is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period. It is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

Calculation of Free Cash Flow

FCF is simply a company’s operating cash flow (OCF) minus capital expenditures (CapEx). FCF represents how much money a company has after being free from its obligations.

  • Free cash flow = Net cash flow from operating activities – capital expenditures – dividends

Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

Free cash flow can be used to expand operations, bring on additional employees or invest in additional assets, and it can be put toward acquisitions or paid out in dividends to shareholders or used to buyback company’s shares.

References:

  1. https://strategiccfo.com/free-cash-flow-analysis/
  2. https://www.growthforce.com/blog/free-cash-flow-what-does-it-mean-for-business-growth

Budgeting 50-30-20 Strategy and Cash Flow

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Managing your money and tracking your finances is essential in building wealth, but it doesn’t have to be complicated or painful process. It can be as simple as creating a budget. And, a budget starts with listing of your income and your expenses.

One simple strategy for tracking your personal cash flow (income and expenses) is the 50-30-20 budgeting strategy. With this budgeting strategy, you divide your income into three broad categories: necessities, wants, and savings and investments, according to those ratios.

—- 50% of your income should go toward things you need

This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments.

If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

—- 20% of your income should go toward savings and investments

This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account.

Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses. Some also suggest building up your emergency savings first, but, you don’t just want to save this money.

You want to invest it and make it work for you. That means contributing to your employer’s 401(k) plan if they offer one or saving in other retirement accounts, such as a Roth IRA or traditional IRA.

—- 30% of your income should go toward things you want

This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun.

This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

But think about what matters to you before spending this money. As research shows, how you spend is oftentimes more important than your overall income or the amount you spend in total.

Money experts suggest you spend on experiences, such as trips or classes, rather than things. “All of the best psychological research on money and happiness tell us that spending money on experiences brings more (and more lasting) happiness than spending money on material objects,” says Ron Lieber, New York Times columnist and author.

There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

References:

  1. https://www.cnbc.com/2021/06/25/best-free-budgeting-tools-2021-how-to-make-your-own-spreadsheet.html
  2. https://www.cnbc.com/2021/05/11/how-to-follow-the-50-30-20-budgeting-strategy.html
  3. https://www.cnbc.com/2019/07/22/use-the-50-30-20-formula-to-figure-out-how-much-you-should-save.html

Being a Patient and Wise Investor

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“You don’t make money when you buy a stock, you don’t make money when you sell a stock, you make money by being patient and you make money by waiting.” Charlie Munger

Successful investing in stocks and building wealth does not have to be a complex or difficult personal financial enterprise. Focusing on a few “tried and true” investing rules and behaving rationally is effectively what it takes. And, keep in the forefront that, “Every investment is the present value of all future cash flow.” The rules or universal investing laws to follow are:

  1. Think and hold for the long-term, view investing as a compounding program
  2. Create and follow a plan
  3. Invest early and consistently, be discipline
  1. Buy what you understand and do your research
  1. Understand that when you buy a stock, you’re purchasing a portion of an existing business
  1. Maintain an emergency fund
  2. Save more than you spend
  3. Track your income and expenses, and calculate your net worth regularly
  4. Pay attention to how much you pay for assets, buy with a margin of safety
  5. Have a healthy contrarian view and don’t follow the crowd
  6. Don’t predict or time the market
  7. Behave rationally and ignore the financial market noise
  8. Practice investing risk management
  1. Be patient, Be patient, Be patient.

Given the above investing rules, many successful investors repeatedly proclaim that the most important virtue with respect to long term investing is ‘patience’. As a tree takes time to grow, similarly investing will also take time to grow and build wealth. So, stay patient! Essentially, you should think of investing as a long term compounding system.

In contrast, impatient investors let anxiety and emotion rule their behavior and decision-making. They often succumb to the ever present tendency towards “doing something”.

Investing is the practice of leveraging one’s patience and exploiting the market’s impatience when it comes to seeking long term value. As Warren Buffett explained, “The stock market is a device for transferring money from the impatient to the patient.”

“Investing is one of the only fields where doing nothing — sitting, being patient — is a competitive advantage.” Motley Fool

Nothing should be a rush or expedited with respect to investing. If there isn’t a good investment opportunity now, there will be a better one in the future. It’s just a matter of believing that there is a great investment around the bend.

Thus, it’s essential that you have patience and inherently understand that opportunities exist as long as you’re not buying assets just for the sake of being in an investment or succumbed to the “fear of missing out”.

Here are three quotes that express concisely the sentimant of a being patient investor:

“We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” — Chuck Akre

“The single most important skill set that you can bring to value investing is patience. You have to have a temperament where you’re very happy watching paint dry. I would say that is the most difficult thing for investors and you can trade lot of IQ points for patience. You don’t need a lot of IQ points but you need a lot of patience. That’s the piece that usually gets missed.” — Mohnish Pabrai

And finally…

“The key rules are don’t swing the bat unless it’s a slow pitch right down the middle of the plate, and don’t be bullied by the market into doing something irrational, whether buying or selling. This may sound obvious or clichéd to some, and perhaps confusingly ironic to others, but the ability to sit and do nothing may be the most rare and valuable investing skill of all. Inevitably, extreme price dislocations occur that create real opportunities for action, and only the patient and prepared investor can recognize such ideal situations and take full advantage.” — Chris Mittleman

Patience and discipline are the keys to successful investing and building wealthy through the magic of compounding. Thus, a key takeaway…investing in stocks is a long term game of patience, patience, patience!

References:

  1. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
  2. http://mastersinvest.com/patiencequotes
  3. https://pranav-mahajani.medium.com/richer-wiser-happier-how-the-worlds-greatest-investors-win-in-market-and-life-by-william-green-c907a3396faa

Building Wealth and Reaching Financial Freedom

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Change your life. If you want something different, you are going to have to do something different.

It has never been easier to make more money, manage your own money, and live a life financially free from the typical nine-to-five. It would take an early start to saving and log term investing gives your money more time to grow over time.

Many people dream of being free from the rat race and desire to spend their time indulging in leisure, volunteering, hobbies and traveling.

The concept of your ‘number’ (the money you need to have to be financial free). Your number is the amount of money that you need to have invested so that you can live off the income from your investments for the rest of your life.

Net worth is the most important number in personal finance and represents your financial scorecard. Your net worth includes your investments, but it also includes other assets that might not generate income for you.

“Spending money to show people how much money you have is the fastest way to have less money-” Morgan Housel

Financial freedom means different things to different people, and different people need vastly different amounts of wealth to feel financially free. Maybe financial freedom means being debt-free, or having more time to spend with your family, or being able to quit corporate America, or having $5,000 a month in passive income, or making enough money to work from your laptop anywhere in the world, or having enough money so you never have to work another day in your life.

Ultimately, the amount you need comes down to the life you want to live, where you want to live it, what you value, and what brings you joy. Joy is defined as a feeling of great pleasure and happiness caused by something exceptionally good, satisfying, or delightful—aka “The Good Life.”

It is worth clearly articulating what the different levels of financial freedom mean. Grant Sabatier’s book, Financial Freedom: A Proven Path to All the Money You’ll Ever Need, states that there are Seven Levels of Financial Freedom, which are:

  1. Clarity, when you figure out where you are financially (net worth and cash flow) and where you want to go
  2. Self-sufficiency, when you earn enough money to cover your expenses
  3. Breathing room, when you escape living paycheck to paycheck
  4. Stability, when you have six months of living expenses saved and bad debt, like credit card debt, repaid
  5. Flexibility, when you have at least two years of living expenses invested
  6. Financial independence, when you can live off the income generated by your investments and work becomes optional
  7. Abundant wealth, when you have more money than you’ll ever need

Trading your time for money, you can make only so much money because you have a limited amount of time. There’s risk in any investment and your full-time job is an investment of your time. Even if you make a high salary, it’s still worth diversifying your income streams so you can walk away from your nine-to-five if you ever determine it’s not worth it.

Income from investments is the ultimate passive income. It is the main strategy the wealthy use to accumulate wealth and achieve financial freedom. By diversifying your income streams, consistently looking for new ways to make more money, and investing as much money as possible as early as possible.

Building wealth relies on four basic principles:

  1. Savings rate: Your savings rate is directly correlated with the amount of time it will take you to hit your number. The higher your “savings rate,” the faster you can retire. Saving a high percent of your income might sound challenging for most people, but if you are willing to make both saving and making more money a priority, it’s possible. “It’s not about deprivation, it’s about optimization.” For every 1 percent more you save will decrease the amount of time you’ll need to work to reach financial independence.
  2. Enterprise mindset: Purchase assets that appreciate and generate income. To make as much money as possible, you want to combine and maximize as many moneymaking strategies as possible. The wealthy look at money not as a fungible tool that can be used for any purpose. Focus on making as much money as possible per minute and hour of their time. There are four general types of ways to make money:
    1. Full-time employment—working for someone else.
    2. Side hustling—making money on the side.
    3. Entrepreneurship—scaling your side hustle and/or,
    4. Making it your full-time job Investing—growing your money in the market
  3. Maximized the value of your time through a combination of personal finance, entrepreneurship, and investing. Find a side hustle: Investing is the ultimate passive income, and this is the main strategy the wealthy use to both get rich and stay rich. Multiple income streams give you options, flexibility, and more control.
  4. Spending less than you earn and learning to contently live with less has the same effect as growing your income and increasing your feeling of being wealthy. And it’s easier and more in your control. The price of building wealth isn’t just the trouble of earning money; it’s avoiding the post-earnings urge to spend what you’ve accumulated.

Earning more will do little for building wealth if every extra dollar is offset by a dollar plus of new spending. Thus, wealth, at every income level, has less to do with your increased earnings and more to do with your ability to leave the increased earnings alone and save more.

“Wealth is what you don’t spend.” Morgan Housel

References:

  1. https://www.reading.guru/financial-freedom-by-grant-sabatier/
  2. https://millennialmoney.com/wp-content/uploads/2019/02/Financial-Freedom-Grant-Sabatier.pdf
  3. https://www.collaborativefund.com/blog/gains/

The next financial crisis | Economist

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Over the past 15 years power and risk in financial markets have shifted radically, according to the Economist.

New investors have flooded into the stock market and, buoyed by pandemic stimulus, most have had an incredible and volatile ride.

But as policymakers are putting the brakes on loose monetary policies, global financial markets are starting to wobble.

The message from the Federal Reserve is that interest rates must rise soon to tackle high inflation. Due to fear of rising interest rates and the current impact to consumers experiencing the highest inflation in four decades, there has been a rocky start to 2022 for investors.

The day-to-day numbers for the broad indices do not do full justice to the jumpiness of markets, reports the Economist. Much of the drama has been beneath the surface, at the stock or industry level. Technology shares in particular have fared badly.

Below is an Economist podcast to discuss…”How might this new high-tech, bank-light system fare under a serious stress test?”

References’

  1. https://www.economist.com/podcasts/2022/02/09/the-next-financial-crisis
  2. https://www.economist.com/finance-and-economics/the-reasons-behind-the-current-stockmarket-turmoil/21807379

Wealth Building and Dividends

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“Systems are the vehicles that are going to take you to your goals—your goals are simply the destination.” James Clear

“We don’t rise to the level of our goals; we fall to the level of our systems.  Don’t share with me your goals; share with me your systems.” James Clear

Are you prepared for your financial future and to build wealth? There are many benefits of investing for the long term and to building wealth. Here is a simple and straightforward checklist to get started:.

  • Start early!
  • Investing starts with a plan
  • Investment plan starts with defining and identifying your financial goals.
  • Create a savings and investment plan based on your goals.
  • Two primary goals must be creating an emergency fund and building wealth for retirement
  • Develop good financial habits
  • Pay off high-interest debt first.
  • Participate in your company’s 401(k) plan and max out any employer match.
  • Understand your risk tolerance.
  • Understand investment fees and their impact on returns.
  • Research all investments thoroughly.
  • Check your investments regularly and maintain a diversified portfolio.
  • Avoid investment opportunities that sound too good to be true.

40% of stock market returns come from dividends

It’s interesting that most investors don’t know how powerful stocks that pay dividends are. Dividend stocks are stocks of companies which pay out a portion of their earnings to the shareholder in the form of dividends. Between January 1926 and December 2004, 41% of the S&P 500’s total return owed not to the price appreciation of the stocks in the index, but to the dividends its companies paid out.

An additional benefit is that, under the current tax laws, qualified dividends are taxed at lower rate instead of your standard income bracket rate which translates into more money in your pocket.

Investors know that the best dividend stocks aren’t those with a high yield, but rather are quality businesses that can grow over time and pass along profits to shareholders through the dividend, by repurchasing shares and reinvesting in the business.

Bottomline is that dividend-paying stocks have outperformed in the past and that they have a good chance of doing so in the future. The secret is to reinvest those dividends, and put the power of compounding to work in your portfolio.

To build wealth, investors need to account for a range of significant, real-world challenges, including:

  • Longevity
  • Inflation and rising costs
  • Fixed income vs. equity valuations
  • Low yields

With tens of billions of dollars trading hands every day on the New York Stock Exchange alone, it’s easy to lose sight that when purchasing a stock investors are effectively purchasing ownership interest in a business. Assume for a moment that you don’t get a quote every day for your shares in that business and that you can’t sell your ownership interest for several decades. Your focus would likely shift from price to value.

And the value of that business, whether publicly traded or privately held, is the present value of all future cash flows. After all, what is the point in owning a business – or any investment – if you’re never going to receive any cash from it? When a company generates positive free cash flow, it has several options; the company can hold cash in reserve, fund organic growth, make acquisitions, pay down debt, or return it to shareholders through dividends or stock buybacks.

Using dividends to pay your expenses and allow you to reinvest to get more income. You can achieve this by investing in excellent dividend-paying securities now and letting those dividends reinvest as you work towards your retirement.

References:

  1. https://www.investor.gov/sites/investorgov/files/2019-03/OIEA_Financial_Capability%20Checklist.pdf
  2. https://www.fool.com/investing/dividends-income/2006/09/19/the-secret-of-dividends.aspx
  3. https://advisor.morganstanley.com/christopher.f.poch/documents/field/p/po/poch-christopher-francis/WhyDividendsMatter.pdf

Long-Term Planning

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“In preparing for battle I have always found that plans are useless, but planning is indispensable.” General Dwight D. Eisenhower. U.S. Army and Supreme Allied Commander

Dwight Eisenhower once said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” In simple terms, great investors, same as great leaders, are proactive in building wealth and they follow a plan.

Most retail investors don’t plan and just react to market volatility and events. Instead, investors should engage in long-term financial planning from the beginning with the intent to anticipate problems and come up with solutions.

“Nobody ever created a plan to be broke, bankrupt, behind in monthly payments, drowning in insurmountable credit card debt, or a financial failure. Those things are what happen when you don’t create or follow a plan.”

Planning helps you prepare for the potential challenges and keep you on track. And with an effective action plan, you can boost your productivity and keep yourself focused. The benefits of an action plan are:

  • It gives you a clear direction. As an action plan highlights exactly what steps to be taken and when they should be completed, you will know exactly what you need to do. 
  • Having your goals written down and planned out in steps will give you a reason to stay motivated and committed throughout the project.  
  • With an action plan, you can track your progress toward your goal.
  • Since you are listing down all the steps you need to complete in your action plan, it will help you prioritize your tasks based on effort and impact.

Failing to plan means planning to fail. That’s why you should create a action plan before making any financial or wealth building decisions, and then stick to the plan.  Whether you are deciding on investing in cryptocurrencies or acquiring real estate for your business,  it’s smart to do so with a list or plan of action that has your budget in mind.

“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” – Pablo Picasso

A well-designed action plan can make it easier for you to track and realize your goals. For your personal goal, you can use an action plan to create a clear path to success.

An action plan is a document that lays out the tasks you need to complete in order to accomplish your goal. It also breaks up the process into actionable assignments based on a timeline. A good action plan will outline all the necessary steps to achieve your goal and help you reach your target efficiently by assigning a timeframe—a start and end date—to every step in the process.

Step 1: Define your end goal 

If you are not clear about what you want to do and what you want to achieve, you are setting yourself up for failure. Start by defining where you are and where you want to be. Analyze the situation and explore possible solutions before prioritizing them. 

Then write down your goal. And before you move on to the next step, run your goal through the SMART criteria. Or in other words, make sure that it is 

  • Specific – well-defined and clear
  • Measurable – include measurable indicators to track progress  
  • Attainable – realistic and achievable within the resources, time, money, experience, etc. you have
  • Relevant – align with your values and other wealth building goals 
  • Timely – has a finishing date or deadline

Step 2: List down the steps to be followed 

Once the goals are clear, the next step is to list all the tasks that you must perform to realize your goals and due dates. 

It’s important that you make sure that each task is clearly defined and is attainable. If you come across larger and more complex tasks, break them down to smaller ones that are easier to execute and manage. 

Step 3: Prioritize your tasks and add deadlines

It’s time to reorganize the list by prioritizing the tasks. Some steps, you may need to prioritize as they can be blocking other sub-steps. 

Add deadlines, and make sure that they are realistic. Consult with the person responsible for carrying it out to understand his or her capacity before deciding on deadlines. 

Step 4: Set Milestones 

Milestones can be considered mini goals leading up to the main goal at the end. The advantage of adding milestones is that they give you something to look forward to.

Start from the end goal and work your way back as you set milestones. Remember not to keep too little or too much time in between the milestone you set. It’s a best practice to space milestones two weeks apart.  

Step 5: Identify the resources and time needed

Before you start working on your tasks, it’s crucial to ensure that you have all the necessary resources at hand to complete the tasks. And if they are not currently available, you need to first make a plan to acquire them. 

This should also include your budget, any advisors and determine the cost of each task if there are any.  

Step 6: Visualize your action plan

The point is to create something that you can understand. Make sure that your action plan clearly communicates the elements – tasks, deadlines, resources, etc. This should be a working document that is kept updated and adjustable. 

Step 7: Monitor, evaluate and update

Allocate time to evaluate the progress you’ve made. You can mark tasks that are completed on the final action plan, bringing attention to how you’ve progressed toward the goal.

An action plan can also make it easier for you to monitor your progress toward your goals, allowing you to keep your projects on schedule and, if applicable, within budget.

“Have a bias towards action – let’s see something happen now. You can break that big plan into small steps and take the first step right away.” – Indira Gandhi

References:

  1. https://www.lifehack.org/900263/reactive-vs-proactive
  2. https://resources.franklincovey.com/blog/paradigms
  3. https://creately.com/blog/diagrams/how-to-write-an-action-plan/
  4. https://www.indeed.com/career-advice/career-development/how-to-write-an-action-plan