Free Cash Flow (FCF) Valuation

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“Free Cash Flow is the cash remaining after making investments in capital assets.”

Free cash flow (FCF) measures a company’s financial performance. It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from its operating cash flow.

FCF measures a company’s ability to produce what investors care most about: cash that’s available to be distributed in a discretionary way. The ways a business can use their free cash flow include:

  • Pay dividends
  • Buy back shares
  • Make an acquisition
  • Pay down debt

Free cash flow (FCF) is the cash that remains after a company pays to support its operations and makes any capital expenditures (purchases of physical assets such as property and equipment.

Free cash flow is related to, but not the same as, net income. Net income is commonly used to measure a company’s profitability, while free cash flow provides better insight into both a company’s business model and the organization’s financial health.

Many analysts believe that FCF is one of the key financial indicators for measuring business performance over the long term and provides useful information regarding how cash provided by operating activities compares to the property and equipment investments required to maintain and grow the business.

In addition to other financial measures, free cash flow (FCF) can be used to manage a business, make planning decisions, evaluate performance, and allocate resources.

There are two definitions of free cash flow:

  1. Free cash flow to equity (FCFE) is the cash flow available for distribution to a company’s equity-holders. It equals free cash flow to firm minus after-tax interest expense plus net increase in debt.
  2. Free cash flow to firm (FCFF) (also referred to as free cash flow) of a company is the cash flow in an accounting period which is available for distribution to the company’s debt-holders and equity-holders.

FCFE differs from FCFF in that the free cash flow to firm is the cash flow that is available for distribution to both the debt-holders and equity-holders while the free cash flow to equity is the cash flow that’s available only for distribution to equity-holders.

Free cash flow to firm (FCFF) valuation model is appropriate when the company do not pay dividends or where the dividends are disproportionate to the company’s earnings.

Free cash flow enables management to decide on future ventures that could improve the shareholder value. Additionally, having an abundant FCF indicates that a company is capable of paying its monthly dues. Companies can also use their FCF to expand business operations or pursue other short-term investments.

When compared to earnings, free cash flow is more transparent in showing the company’s potential to produce cash and profits. FCF serves as an important basis for determining the intrinsic value of a company and pricing its stock.

The formula below is the most commonly used formula for levered free cash flow:

Free Cash Flow = Operating Cash Flow (CFO) – Capital Expenditures

Most information needed to compute a company’s FCF is on the cash flow statement.

As an example, let Company A have $22 million dollars of cash from its business operations and $6.5 million dollars used for capital expenditures, net of changes in working capital. Company A’s FCF is then computed as:

FCF = $22 – $6.5 = $15.5m

DCF Analysis and Stock Valuation

Stock valuation is the process of determining the intrinsic value of a share of common stock of a company. The purpose of stock valuation is to find the value of a common share which is justified by the company earnings and growth potential, identify undervalued and overvalued stocks, overweight or underweight them in an investment portfolio and generate alpha i.e. excess return.

Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC).

The weighted average cost of capital (WACC) is the minimum return a company must earn on its projects. It is calculated by weighing the cost of equity and the after-tax cost of debt by their relative weights in the capital structure.

WACC is an important input in capital budgeting and business valuation. It is the discount rate used to find out the present value of cash flows in the net present value technique.

The absolute valuation approach attempts to find intrinsic value of a stock by discounting future cash flows at an discount rate which reflects the risk inherent in the stock.

Free Cash Flow Models

The free cash flow valuation models can be used to value a majority i.e. controlling ownership based on free cash flows of the company which equals the cash flows from operating activities less any expected changes in working capital less any expected capital expenditure.

The single-stage free cash flow model discounts the expected free cash flows at the end of Year 1 at the weighted average cost of capital.

Stock Value = FCF1 / (WACC − g)

Where FCF1 is the free cash flow at the end of Year 1, WACC is the weighted average cost of capital and g is the growth rate of free cash flows.

Another back of the envelop valuation method is to take product of the five year average of free cash flow and multiply by twenty. Compare the product to the company’s market cap for a quick valuation model.

A business ability to generate significant amounts of free cash flow for years, which will support debt repayments, dividend payouts, share buybacks, and acquisition, is an essential valuation metric. Free cash flow can demonstrate a company’s ability to reward investors. It can provide useful information to help investors better understand underlying trends in a business.

Free cash flow is not perfect and has limitations, but it is more difficult to manipulate than net income or earnings per share.

FCF has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of other financial measures, such as return on invested capital (ROIC) and earnings. One of the limitations of FCF is that it does not reflect future contractual commitments.

FCF, as compared with net income, gives a more accurate picture of a firm’s financial health and is more difficult for a company to manipulate, but it isn’t perfect. Because it measures cash remaining at the end of a stated period, it can be a much “lumpier” metric than net income.

For example, if a company purchases new property, FCF could be negative while net income remains positive. Likewise, FCF can remain positive while net income is far less or even negative. If a company receives a large one-time payment for services rendered, its FCF very likely may remain positive even if it incurs high amortization expenses (like the costs of software and other intangible assets for a cloud computing company). 

In a nutshell, free cash flow is what a company has left over at the end of the year — or quarter — after paying all its employees’ salaries, its bills, its interest on debt, and its taxes, and after making capital expenditures to expand the business.

References:

  1. https://corporatefinanceinstitute.com/resources/knowledge/valuation/what-is-free-cash-flow-fcf/
  2. https://xplaind.com/121791/free-cash-flow-to-equity-fcfe
  3. https://xplaind.com/408436/free-cash-flow-to-firm-fcff
  4. https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-methods/
  5. https://xplaind.com/965210/cost-of-capital
  6. https://www.fool.com/investing/how-to-invest/stocks/free-cash-flow/
  7. https://www.fool.com/investing/general/2007/09/05/foolish-fundamentals-free-cash-flow.aspx

Best Business to Own When Inflation Spikes

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Invest in asset-light businesses with pricing power.

In a letter to Berkshire Hathaway shareholders, the best type of business to own when inflation spikes, according to Berkshire Hathaway Chairman and CEO Warren Buffett, have two characteristics that make a business well adapted to an inflationary environment:

  1. An ability to increase prices easily, and
  2. An ability to take on more business without having to spend too much in order to do it.

In other words, aim to invest in asset-light businesses with pricing power.

Buffett also stated that the best business to own is one that doesn’t require continuous reinvestment of capital because it becomes more and more expensive as the value of a dollar drops.

“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” Buffett said, adding that “any business with heavy capital investment tends to be a poor business to be in inflation and often it’s a poor business to be in generally.”

Businesses like utilities or railroads “keep eating up more and more money” and aren’t as profitable, he explained. He prefers to own companies that people have a connection to. That is why “a brand is a wonderful thing to own during inflation,” Buffett said. Owning part of “a wonderful business,” as Buffett said in 2009, is useful because no matter what happens with the value of the dollar, the business’ product will still be in demand.

Buffett also said that it’s particularly handy to own real estate during times of inflation because the purchase is a “one-time outlay” for the investor, and has the added benefit of being able to be resold.

Inflation quietly eats away at earnings and purchasing power.

When the economy exhibits strong economic growth, there is a higher demand for goods and services, which in effect increases prices of those goods and services; that’s attributed to inflation. Essentially, the rate of inflation increases when demand in the economy is higher than supply, causing an overall price rise.

Inflation also impacts money sitting in the bank. While you may be receiving interest on savings from a money market account, the growth of inflation can outpace that of the savings rate offered by the bank. Keeping all your savings in cash is warranting your liquid assets a definite loss to inflation.

Effectively, your money does not grow at a higher rate, but loses purchasing power over time compared to if it was properly invested in equity assets.

Inflation

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of [all] their citizens.” John Maynard Keynes

Inflation is tracked using the Consumer Price Index, known as the (CPI). This index, reported by the U.S. Bureau of Labor Statistics each month, measures the average change over time of prices consumers pay for goods and services.

The immediate effects of inflation are the changes in the behavior of consumption habits. In the long-term, inflation erodes the purchasing power of your income and accumulated wealth.

“Inflation reduces the ‘power’ of each dollar you have,” says Rob Isbitts, co-founder of The Hedged Investor in Weston, Florida. “A dollar is a dollar, but what it buys can be less in the future than it is today.”

Purchasing power risk – also known as inflation risk – is when the real interest rate, which accounts for adjusted inflation, shows the gain or loss in purchasing power.

“Inflation reduces the ‘power’ of each dollar you have,” says Rob Isbitts, co-founder of The Hedged Investor in Weston, Florida. “A dollar is a dollar, but what it buys can be less in the future than it is today.”

Assets That Protect Against Inflation

Inflation can pose a threat to investments since prices that increase over time can decrease the value of your savings.

And, financial experts agree that there is no way to fully protect your investments against inflation. Nonetheless, there are ways to help protect against this risk. These experts say having a substantial allocation to stocks is important for growth potential while offsetting against inflation risk.

In the long term, the stock market is expected to outperform the inflation rate. Stocks are commonly thought of as an inflation protection asset since, over time, stock performance will outpace inflation. These assets are seen as a hedge against inflation:

  • TIPS, or Treasury Inflation-Protected Securities, which are bonds backed by the full faith of the U.S. government and protect against rising prices, make a very safe asset
  • REITs, or real estate investment trusts, are an organic hedge against inflation. When prices increase, real estate values increase as well. This asset is highly correlated with inflation, which means REIT returns are higher when inflation increases.
  • Gold is an asset that might provide protection against inflation and a good safeguard of inflation over the long run,

Inflation can significantly weaken your purchasing power and the performance of your investments and thus impact their value. That’s why acting to suppress the dangers of inflation is important to preserve the value of your cash flow and wealth in the long run.

References:

  1. https://finance.yahoo.com/news/warren-buffett-says-best-type-195900081.html
  2. https://money.usnews.com/investing/investing-101/articles/how-inflation-and-deflation-impact-your-investments
  3. https://www.cnbc.com/2021/08/19/warren-buffett-inflation-best-businesses.html

Social Security Cost-of-Living Increase

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Social Security Announces 5.9 Percent Benefit Increase for 2022

Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2020 through the third quarter of 2021, 68 million people — including retirees, disabled people and others – who receive Social Security and Supplemental Security Income (SSI) benefits will receive a 5.9% cost-of-living adjustment in 2022, the Social Security Administration announced.

For the average retiree who received a monthly check of $1,559 this year, a 5.9% rise would increase that payment by $91.98, to $1,650.98, in 2022.

The 5.9 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to approximately 8 million SSI beneficiaries will begin on December 30, 2021. (Note: some people receive both Social Security and SSI benefits).

The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

The highest COLA increase was 14.3% in 1980. Inflation hit a peak 13.5% in 1980, dropped to 20.3% the following year and 6.1% in 1982, according to the data from the Federal Reserve Bank of St. Louis.

Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account.

References:

  1. https://www.ssa.gov/news/press/factsheets/colafacts2022.pdf
  2. https://www.usatoday.com/story/money/2021/09/14/social-security-cola-2022-benefit-rise-could-6-most-since-1982/8334935002/
  3. https://www.ssa.gov/news/press/releases/2021/#10-2021-2

COVID Breakthrough: New Pfizer Antiviral Pill

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Pfizer develops COVID therapeutic antiviral pill that cuts hospitalizations and deaths by 89%

Pfizer Inc. said its COVID-19 therapeutic antiviral pill, officially known as PF-07321332, reduced hospitalizations and deaths in high-risk patients exposed to the virus by 89%, a result that has the potential to upend how the disease caused by the coronavirus is treated and possibly end the course of the pandemic.

The drugmaker said that it was no longer taking new patients in a clinical trial of the treatment “due to the overwhelming efficacy” and planned to submit the findings to U.S. regulatory authorities for emergency authorization as soon as possible.

The Pfizer results mean there are now two promising candidates for treating COVID-19 patients early in the course of the disease. Last month, Merck & Co. and partner Ridgeback Biotherapeutics LP submitted their experimental pill to regulators after a study showed it slashed the risk of getting seriously ill or dying by half in patients with mild-to-moderate COVID-19.

A pill that could be taken at home at the first sign of symptoms is a crucial tool for reducing and possibly ending the COVID-19 crisis globally, so long as it’s widely available.

In Pfizer’s trial of 1,219 unvaccinated adults, five days of treatment with its drug dramatically reduced the rate of hospitalisation when it was started within either three days or five days of symptom onset, the company said. The drug, Paxlovid, binds to an enzyme called a protease to stop the virus from replicating itself.

Overall, just 0.8% of people who started treatment within three days of getting sick ended up in the hospital and no one died, while 7% of people who got a placebo in that window were later hospitalised or died. Similar results were found when the drug was started within five days of symptom onset. The result, which hasn’t been published in a medical journal, was highly statistically significant, Pfizer said.

References:

  1. https://www.business-standard.com/article/current-affairs/pfizer-develops-covid-pill-that-cuts-hospitalisations-and-deaths-by-89-121110500783_1.html
  2. https://newsnationusa.com/news/world/uk/covid-breakthrough-as-pfizers-new-pill-slashes-hospitalisations-by-89/

Save and Invest for Retirement

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“No matter how much money you earn, you’ll never build wealth and achieve financial freedom if you spend more than you make.”

Saving and investing for retirement depends on your current age, cash flow, desired lifestyle in retirement and the types of retirement accounts that are available to you. No one is born knowing how to save or to invest. A few people may stumble into financial freedom—a wealthy relative may die, or a entrepreneurial business may take off. But for most people, the only way to build wealth and attain financial freedom is to save and invest over a long term.

The amount of money you’ll need to live on in retirement depends on many personal factors, some you can control (such as when you start saving and how you budget) and some you can’t (including the length of your retirement, inflation and your health during it). As you save for retirement you want to amass the biggest pile of assets possible. More savings and investments equals more confidence and room to breathe. Less savings equals less confidence and more restrictions.

“Investing makes it possible for your money to work for you.”

There are basically two ways to make money.

  1. You work for money. – Someone pays you to work for them or you have your own business.
  2. Your money works for you. – You take your money and you save or invest it. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. Your money can make an “income,” just like you.

In general, experts recommend socking away 10%–20% of your income toward your future. Even if you’re not able to contribute that much early in your career, time and compound interest are on your side. And thanks to the power of compounding, the earlier you start investing, the less capital you may have to save to get you to your financial goal.

With the power of compounding, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount saved and invested can add up to big money.

Start early and pay yourself first

The earlier you start investing and growing your money for retirement the better, but it’s never too late. Regular contributions can keep your portfolio on track. Some strategies include:

  • If you have a workplace 401(k) or 403(b) plan, decide how much of your salary to have deducted from your paycheck and deposited in your retirement account. Ensure you pay yourself first to avoid spending the money you set aside for saving.
  • Budget using the 50/30/20 rule: 50% of your income should go toward essentials, 30% to discretionary spending, and 20% toward long-term goals (like retirement).
  • Start catch-up contributions. This rule allows those over 50 to add more to an IRA or 401(k) (or similar plan), giving you a chance to make up lost time if you’re late to the retirement savings game.

There are many methods to meet your retirement savings goals, including tax-friendly workplace plans and IRAs. Diversifying how and where you save your money can be a smart strategy, especially when considering tax implications and rates of return. Here are some options for where to park your retirement savings.

  • 401(k)s and other workplace plans – A 401(k) is a tax-deferred, employer-sponsored retirement account, typically for corporate workers. Unless you have and opt for a Roth or after-tax option, you don’t pay taxes on the money you contribute or your account as it grows; instead, you’ll owe income tax on withdrawals. 401(k)s, 403(b)s and 457s are “defined contribution” (DC) plans. With DC plans, you contribute your own money, and your employer or organization can choose to contribute as well, typically by matching some of what you save. If yours does, make sure to contribute at least the amount of the match. It’s “free money” and can provide a powerful boost to your savings.
  • Individual retirement accounts (IRAs) – The most common types of IRAs are traditional and Roth IRAs. Which to choose can come down to taxes—that is, whether you want a tax break now or in the future. With a traditional IRA, some or all of your contributions may be tax deductible, but you‘ll owe income tax on withdrawals. With a Roth IRA, you contribute after-tax dollars, but withdrawals (and any investment gains) are tax free as long as you meet certain criteria.
  • Annuities – Another tool to consider is an annuity. Annuities can provide guaranteed income, no matter what your other investments do. You can choose between a fixed or variable annuity. Fixed annuities offer consistent installment income, while income from a variable annuity fluctuates depending on how the stock market performs.
  • Taxable accounts – Taxable accounts are offered through brokerage firms and enable you to invest in stocks, bonds, mutual and exchange-traded funds (ETFs) and a range of other investments. As the name suggests, you’ll owe tax on any interest or dividends earned though the accounts, as well as capital gains on investments you sell at a profit.

Other sources of retirement income

As you consider your budget, it’s helpful to understand other potential income sources during retirement. Though rare, a few companies still offer pension-style benefits. And most workers contribute to Social Security throughout their careers and will be able to receive regular payments when they retire.

  • Defined-benefit plans – With defined-benefit plans, your employer fully manages and contributes to the account. When you retire, you receive a guaranteed income, typically in one “lump sum” payment or at defined intervals. The amount you receive will depend on many factors, including your salary and years of employment.
  • Cash-balance plans – Some companies offer cash-balance pension plans. Like traditional pensions, employers fund the accounts. But, like 401(k)s, employees manage the distributions. Also, the amount an employer can contribute to your account rises with age.
  • Social Security – Don’t forget about Social Security, which you contribute to through FICA taxes. The amount you’ll receive Opens in new window each month from Social Security depends on many factors including your lifetime earnings and how old you are when you start taking payments.

How to save and invest more

It’s one thing to have money to invest. But how to invest is a whole other subject. It can be particular challenge for busy and non financially savvy individuals. Investing your retirement funds in stocks could help give your money a chance to grow over time often faster than the rate of inflation.

There’s always time to save more for retirement while you’re still working. Here are some tips.

  • Make retirement savings a priority: Put your future first by planning for it. Set up automatic investments so the money you put toward investing comes directly out of your paycheck. After all, if you don’t see it, you’re less likely to miss it.
  • Maximize retirement accounts. Saving as much as you’re allowed Opens in new window in tax-favored retirement accounts is a great goal to have. But before you can max out, start small. For example, if your employer matches contributions to your workplace plan, it’s like free money—so make sure to save at least enough to earn every matching dollar.
  • Save in a brokerage account. If you’re able to stash some extra funds in a taxable brokerage account, do so. This money won’t provide tax savings, like a 401(k) or individual retirement account (IRA) can. But it’s a powerful way to build additional funds for the future.
  • Tax planning is an important part of retirement planning. Having a diversified tax approach, with savings in a traditional pretax 401(k) or tax-deductible IRA, plus an after-tax Roth account (which can mean tax-free withdrawals) and/or a brokerage account, can save you now and in the future. A financial planner or tax professional can help with your strategy.

When saving and investing for retirement, four factors are key in determining how much you’re going to have when you reach your leisure years. They are:

  1. Time horizon – The number of years during which you save.
  2. Amount or your retirement number – How much you save per year.
  3. Rate of appreciation – How much your assets can grow through interest and investments.
  4. Rate of depreciation (or loss of purchasing power) – How much you may lose from inflation, taxes, and bad investments.

The best investments depend on when you will need the money, your financial goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

Being wealthy is not about how much money you earn each month but is about how much you’re able to save and invest for the long term. Everyone wants to build wealth and retire well. But investing to grow your money and to build wealth will lower your dependence on your job, giving you more options in life and results in financial freedom. Investing for building wealth may enable you to retire early in life.

References:

  1. https://www.prudential.com/financial-education/how-to-save-for-retirement
  2. https://www.sec.gov/investor/pubs/savings-investing-for-students.pdf
  3. https://www.prudential.com/financial-education/retirement-for-women-and-common-challenges
  4. https://www.thestreet.com/retirement-daily/tools-resources/retirement-remix-chapter-10-investing-for-retirement
  5. https://www.entrepreneur.com/article/332372

Americans in Debt

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“U.S. adults carrying debt hold an average of $23,325, exclusive of mortgages

Most Americans carry some form of personal debt. In fact, 77 percent of Americans have debt, according to the 2018 Northwestern Mutual Planning and Progress study.  And, if you have significant levels of debt, you need a financial plan to manage your debt and get out of it. That’s because debt can cost you money, potentially a lot of money for a long period of time.

In fact, if you take the time to tally how much you’re paying in interest over the life of your debt, it might just be the motivation you need to finally make a big push to pay off your debt so you can spend that money on something you enjoy or can invest in your long term financial freedom.

The Northwestern Mutual’s 2021 Planning & Progress Study showed that among U.S. adults aged 18+ who carry debt, they hold an average of $23,325 excluding mortgages. This represents a downward trend of over 20% since 2019.

While overall debt is on the decline, 30% of Americans’ monthly income on average goes towards paying off debt other than home mortgages.

Far and away, the top source of debt after mortgages is credit cards, accounting for more than double any other source, according to the study:

  • Credit card bills – 19%
  • Car loan – 8%
  • Education loans – 7%
  • Home equity/lines of credit – 4%

Debt under control, or controlled by debt?

“78% of Americans say debt has impacted their ability to achieve financial security.”  Northwestern Mutual’s 2021 Planning & Progress Study

When prioritizing debt versus savings, the interest rate on your debt is a key consideration. The higher the rate, the more you stand to save by paying off the debt.

But also consider the type of debt. A debt can be “secured” or “unsecured”. A secured debt is backed by an asset, also called collateral. Auto loans and mortgages fall into this category: Both allow the lender to repossess the asset if you stop paying the loan. In other words, they can take what you bought with the loan and sell it to get their money back.

With debt consuming nearly a third of monthly budgets on average, many people also say that it has negatively impacted their ability to pursue other financial milestones. Because of Americans personal debt:

  • 29% delayed making significant purchases
  • 18% delayed saving for retirement
  • 14% delayed buying a home
  • 8% delayed having children
  • 7% delayed marriage

Having to pay down debt also carries weight in the way people feel about their long-term financial stability – 78% say that debt has impacted their ability to achieve long-term financial security.

“The latest numbers show steps in the right direction compared to previous years, but we continue to see debt hindering many Americans from having the financial freedom to make other important decisions in their lives,” said Christian Mitchell, executive vice president & chief customer officer at Northwestern Mutual. “Having a plan of action to manage debt and stay on top of payments is critical to achieving future financial goals.”

Although debt is holding some back from major decisions, there are positive indications that people are looking ahead to manage and reduce their debt. Two-thirds (66%) of those with some debt say they have a specific plan to pay it off, and have a timeline for doing so:

  • 45% only expect to be in debt for 1-5 years
  • 20% say for the next 6-10 years
  • 14% say between 11-20 years
  • 9% say for the rest of their lives

The cost of debt can add up quickly. Thus, it’s important to manage the amount and reduce the cost of your debt, and get it paid off. That way you can put that money to work for you financial freedom or toward something more fun, like your next vacation or retirement.

“Rather than lamenting you have too much debt, imagine how much better your life would be with less.”

There’s almost no better way to reduce your expenses and save money than unloading credit card debt. Ridding yourself of this high-interest debt offers returns that few investments can match over multiple years. Even though the S&P 500® has long-run average annual returns of 10%, most people should only expect to earn about 6% a year on average because they’ll hold a mix of assets (including bonds) that lowers their overall risk (and expected returns).

Here are several recommendations to assist you manage your debt and to think through what’s best for you and your money, according to Northwestern Mutual:

  1. COME TO GRIPS ABOUT SPENDING – Debt can pile up for all kinds of reasons. Paying it down should be pretty straightforward — but for that to happen you have to be honest about your spending. Putting your spending into perspective can help you manage and develop a plan to get yourself in better financial shape.
  2. GIVE IT A POSITIVE SPIN – Rather than lamenting you have too much debt, imagine how much better your life would be with less or none. Then set specific financial goals with a focus on debt reduction and elimination.
  3. AUTOMATE YOUR PAYMENT PLAN – Put as many of your credit card and/or loan payments on auto-pay from your checking or savings account. That way, you’ll be sure to avoid any unnecessary late fees.
  4. PRIORITIZE, PRIORITIZE – If you can’t pay all your debts each month, prioritize what you can pay. Give high priority to debts secured by a house or car, necessities like utilities and debts you can’t discharge, including student loans and unpaid federal taxes. Then tackle unsecured debt like credit cards. You’ll want to identify the credit card with the highest interest rate and pay that one off first. That way, you’ll save yourself money by avoiding unnecessary and excessive interest rate charges over the life of your debt.
  5. PAY AS YOU GO – It may seem old fashioned, but avoid paying with plastic and start using cash, check or debit card instead. Sure, it will take a little extra planning to make sure you have sufficient cash in your wallet, but doing so can help you clearly connect to where your money goes each day. It may also help you avoid impulse purchases and other unwise spending.
  6. MAKE MORE OF YOUR INCOME – Many people believe they don’t have enough money to put toward debt reduction. Ask yourself: Do I really need a latte every morning, or special cell phone services? Sticking to a budget isn’t easy, but if you save small amounts, you’ll be able to pay off your debt that much faster.
  7. DON’T LOSE SIGHT OF RETIREMENT – Paying off debt isn’t a free pass to put your retirement savings on hold, especially if your 401(k) at work offers a company match. Even if you’re paying off a high interest rate on your credit card debt, the employer match on your retirement savings makes your retirement plan contribution the better deal.

When it comes to your retirement, you want to make your money work for you. That’s where investing becomes most important. Sometimes, saving and investing makes more sense than paying off debt. With the interest rate on your debt below 6%, you may want to pay off that debt on schedule rather than making extra payments.

As an added incentive, the tax advantages of investing through retirement accounts like 401(k)s and IRAs can help your money go further over time than it would by paying off debt early.

Plus, you can only contribute so much each year to retirement accounts. Every year you don’t contribute is a missed opportunity to save. With many workplace plans, you also miss a chance to earn matching contributions—i.e., free money—from your employer. And thanks to compounding, the earlier you save, the more your investments could grow over time.

Personal debt has its purposes and financial benefits until it becomes unmanageable and you have trouble paying it off. In the worst case scenario, debt can result in you going bankrupt if you’re unable to make your monthly credit card or mortgage payments.

The pandemic has put some Americans behind and has allowed others a chance to gain some ground on their debt. Specifically, 34% say it will take them longer than expected to pay off their debt because of the pandemic, while 23% expect to be able to pay it off sooner.

When it comes to paying off debt or saving money for emergencies, retirement and other goals, your financial priorities will depend on several factors. These include the types of personal debt, their interest rates, your disposable income and your long-term goals. You can weigh your options, depending on how much debt and how much money you already have saved for the future and invested to for the long term.

References:

  1. https://news.northwesternmutual.com/2021-08-25-Northwestern-Mutual-Study-Finds-Americans-Personal-Debt-Has-Dropped-More-than-20-Over-the-Last-Two-Years
  2. https://news.northwesternmutual.com/planning-and-progress-2021
  3. https://www.prudential.com/financial-education/how-to-pay-off-debt-and-save
  4. https://news.northwesternmutual.com/2018-08-14-New-Data-Personal-Debt-On-The-Rise-Topping-38-000-Exclusive-Of-Mortgages
  5. https://article.smartasset.com/financial-advisor-secrets-1/

Financial Planning and Investing

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“Take control of your finances, savings and wealth building with a financial plan.”

Whether you have short-term financial needs — such as planning for an upcoming vacation or holiday spending — or long-term plans like retirement, financial planning can help you organize your finances by evaluating your expenses and income. Yet, a 2020 Northwestern Mutual study found that 71% of U.S. adults admit their financial planning needs improvement.

Futhermore, the Northwestern Mutual research finds a third (32%) of Americans say their financial discipline has improved during the pandemic, and 95% say they expect their newfound habits will stick after the health crisis subsides.

Among the financial behaviors that people say they’ve adopted as a result of the pandemic and expect to maintain going forward are:

  • Reducing living costs/spending (e.g., cancel subscriptions, eat out less, etc.) – 45%
  • Paying down debt – 34%
  • Increasing investing – 33%
  • Regularly revisiting financial plans – 29%
  • Increasing use of tech/digital solutions to manage finances – 28%
  • Increasing retirement contribution/savings – 25%

A financial plan can show if you’re on track to meet your money and savings goals. Financial planning can include strategies for paying off debt, starting an emergency fund, saving up for a large purchase like a house, or building wealth.

Investors who stick to a financial plan have an average total net worth that’s 2.5 times greater than those who don’t follow one, according to Charles Schwab. Financial planning helps you understand where you are today. It also creates a roadmap to get you where you want to be in the future.

Investing is key to building wealth.

Time is on your side and key when it comes to building your wealth. That’s the magic of compound interest. Compound interest is interest earned on interest. Basically, it’s the reason why investments earn more money over time.

But before you start investing, it’s crucial that you’re financially prepared. Consider these four signs you’re ready to invest:

  • Have a long-term financial plan and strategy.
  • Have an emergency fund.
  • Research and prepare to invest.

Investing all depends on tim ane in the market and your unique financial situation. These signs are a good step to getting your finances in order. But consult a financial professional for comprehensive investment advice.

As a result of the personal finance challenges experienced by Americans during the pandemic, the 2020 Northwestern Mutual study found that  there was mounting interest in personal  financial planning that may be here to stay. “Personal finance is a lifelong journey; it’s not something you look into once and say, ‘OK, I checked that box,’ and move on,” explains Matthew Pelkey, OppUs’ director of financial education. “Just the simple act of looking into things you can do to be more deliberate in your financial life will give you that agency over your finances — and create the habits that are really what produce good financial health.”

Financial planning can equip you to handle life’s many unexpected financial twists and turns. Although, it will vary, depending on your stage in life. You don’t need to know everything — but knowing and planning for the essentials will provide a solid foundation. Always remember the adage:  “Failing to plan is planning to fail.”

  • References:
    1. https://news.northwesternmutual.com/planning-and-progress-2020
    2. Strategic Business Insights, MacroMonitor 2018-2019 Report, February 2019.
    3. https://www.opploans.com/oppu/articles/financial-planning/

    Black Wealth Summit

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    Receiving a College Degree Accumulates Wealth for Whites and Not For Blacks

    Wealth managers investing billions of dollars toward racial equity are confronting disparities that are growing worse in some ways even as there are some notable signs of change, according to the Black Wealth Summit. For example, the typical White family has eight times the wealth of the typical Black family, according to the 2019 Survey of Consumer Finances (SCF). The research showed that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016.

    Wealth is defined as the difference between families’ gross assets and their liabilities.

    During the Black Wealth Summit, John Rogers of Ariel Investments cited studies by the St. Louis Fed showing that white households with college degrees tend to build wealth while net worth often declines among Black college graduates. The median and mean wealth of Black families is less than 15% of White households’ wealth, according to the Fed’s latest figures from last year.

    John Rogers launched the nation’s first Black-owned money management and mutual fund firm when he was only 24 years old. His firm has reached nearly $17 billion in assets under management.

    Signs of change amid widening disparities

    The data confirms prior research on the role of parental wealth in the transmission of lasting economic advantage: Less-wealthy parents, mostly Blacks, are less able to financially help their adult children, making it more difficult for the next generation to accumulate wealth.

    In addition, Black college-educated households are far more likely than their White counterparts to give financial support to their parents. These parents may have entered the workforce at a time when their only employment provided no pension or retirement savings benefits, or even Social Security.

    In contrast, parents of White college-educated households have mostly benefited from employment-related retirement benefits. Thus, the pattern among White and Black college-educated households is the opposite: Young college-educated White households are more likely to receive financial support from parents and at considerably higher levels

    The findings confirms prior research, which shows that the typical Black college-educated household does not have the same opportunities to add to their family wealth building as their White counterparts, who report large wealth gains at least up to the Great Recession.

    Understanding factors such as inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals’ savings and investment decisions contribute to wealth accumulation and families’ financial security.

    References:

    1. https://files.stlouisfed.org/files/htdocs/publications/review/2017-02-15/family-achievements-how-a-college-degree-accumulates-wealth-for-whites-and-not-for-blacks.pdf
    2. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm

    Difficult Financial Conversations

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    The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

    Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
    Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

    “Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

    “Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

    References:

    1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing

    Metaverse

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    Metaverse, the next generation of the internet.

    What is the Metaverse, you ask?

    A metaverse, to put it simply, is a space where individuals can participate in a shared virtual universe. Meta’ is a prefix that means ‘beyond,’ and ‘verse’ comes from ‘universe,’ making the word ‘Metaverse.’ The term can refer to digital spaces which are made more lifelike by the use of virtual reality (VR) or augmented reality (AR).

    The Metaverse, with a capital M, is the idea that there will be one single virtual reality that individuals will become avatars in. These individuals will engage in this shared virtual reality space, talk to each other, hang out, play games, watch movies, even browse the web. It will be a new internet.

    The Metaverse will have texture, dimension and color, according to the website cryptonews.com. People will meet, watch shows, hang out, visit virtual museums, ride virtual parks, go to websites all within the same Metaverse.

    Investment bank Jefferies defines the metaverse as “the convergence of physical and digital in a way that is persistent, real-time rendered, and infinite in its ability to offer shared experiences allowing for a total sense of presence to the point where it embodies us.”

    Metaverse might use AI, AR and VR technology to create artificial world

    Think of the metaverse as an artificial world created by new technology like artificial intelligence, augmented reality and virtual reality. It’s a virtual world that looks, feels, tastes and smells like the real world.

    The movie Matrix depicted a storyline where a future society is unknowingly trapped inside a metaverse called the Matrix, which intelligent machines have created to distract humans while using their bodies as an energy source.

    Facebook (FB) founder and CEO Mark Zuckerberg intends to rebrand the FB enterprise with a new name that focuses on the metaverse. And, Zuckerberg expects FB to be seen primarily as a metaverse company and not just a social-media company in the coming years.

    At its heart of the rebranding is the concept that by creating a greater sense of “virtual presence”, interacting online can become much closer to the experience of interacting in person. The metaverse has the potential to help unlock access to new creative, social and economic opportunities.

    No one company will own and operate the metaverse, Facebook reported. Like the internet, its key feature will be its openness and interoperability. Bringing this to life will take collaboration and cooperation across companies, developers, creators and policymakers, Facebook explained.

    Currently, the metaverse is extremely speculative concept. It will take significant time, corporate collaboration, financial and technical resources to create and to make operational.

    References:

    1. https://cryptonews.com/guides/what-is-the-metaverse.htm
    2. https://www.barrons.com/articles/metaverse-facebook-tech-stocks-51634943295?mod=past_editions
    3. https://www.nasdaq.com/articles/best-stocks-etf-for-the-trillion-dollar-metaverse-2021-08-16
    4. https://www.equities.com/news/what-is-the-facebook-metaverse-think-of-the-matrix-movie-jeff-kagan
    5. https://about.fb.com/news/2021/10/creating-jobs-europe-metaverse/