Tag Archives: Finance

Evaluating Companies

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A way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC).

Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business.

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders.

Discounted Cash Flow Analysis

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Discounted cash flow model can be used for financial valuation of a project, company, stock, bond or any income producing asset.

Discounted cash flow is a financial valuation method that calculates the value of an investment based on the present value of its future income or cash flow. The method helps to evaluate the attractiveness of an investment opportunity based on its projected future cash flows.

Free Cash flow to the firm (FCFF) means the amount of surplus cash flow available to a business after a it pays its operational expenses like inventory, rent, salaries etc. and also invests in fixed assets like plant and machinery, property etc. Cash is an important element of business. It is required for business functioning; some investors provide more value to cash flow statements than other financial statements.

Free cash flow is important metric as it tells about the company’s ability to deploy capital in future projects. Without cash, it’s tough to develop new products, make acquisitions, pay dividends, buyback shares and reduce debt. Also, as cash is difficult to manipulate compared to other variables, FCFF is more reliable indicator of a company’s performance than net earnings.

DCF model can be used for valuation of a project, company, stock, bond or any income producing asset. The DCF method can be used for the companies which have positive Free cash flows and these FCFF can be reasonably forecasted. So, it cannot be used for new and small companies or industries which have greater exposure to seasonal or economic cycles.

To use the Discounted Cash Flow Model to Value Stock:

Step 1 : Calculate the Free Cash flow to the firm

Step 2 : Project the future FCFF – You need to project the future FCFF for the next couple of years. You can analyze the historical data to understand the past FCFF growth trend. However, relying on historical data only won’t give you the right result, so consider the present financials as well as future potential of the company while projecting the growth rate. When conducting a DCF analysis, investors and businesses must make estimations for future cash flows and the future value of the investment. For instance, a company considering a new business acquisition must estimate the future cash flows from expanding its processes and operations with the acquisition. The estimates the company makes can help determine if the investment is worth the cost of the acquisition.

Step 3 : Discount the FCFF — Calculate the present value of this cash flow by adjusting it with the discount rate. Discount rate is your expected return %. The discount rate is one of the most important elements of the DCF formula. Businesses need to identify an appropriate value for the discount rate if they are unable to rely on a weighted average cost of capital. Additionally, the discount rate can vary depending on a range of factors like an organization’s risk profile and the current conditions of capital markets. If you are unable to determine a discount rate or rely on a WACC value, an alternative model may be more beneficial and accurate.

Step 4 : Calculate the Terminal Value — It is the value of the business projected beyond the forecasting period. It is calculated by assuming the constant growth of a company beyond a certain period known as terminal rate.

When valuing a business, the annual forecasted cash flows typically used are 5 years into the future, at which point a terminal value is used.  The reason is that it becomes hard to make reliable estimates of how a business will perform that far out into the future. There are two common methods of calculating the terminal value:

  • Exit multiple (where the business is assumed to be sold)
  • Perpetual growth (where the business is assumed to grow at a reasonable, fixed growth rate forever)

Step 5 : Add discounted FCFF with Terminal value and adjust the total cash and debt.

Step 6 : Divide the Figure calculated in Step 5 by the outstanding number of shares to find out the DCF Value.

Step 7 : Adjust the Margin of Safety to find out the Fair value. Margin of Safety provides discount for uncertainties in the business.

When assessing a potential investment, it’s important to take into account the time value of money or the required rate of return that you expect to receive.

The DCF formula takes into account how much return you expect to earn, and the resulting value is how much you would be willing to pay for something to receive exactly that rate of return.

  • If you pay less than the DCF value, your rate of return will be higher than the discount rate.
  • If you pay more than the DCF value, your rate of return will be lower than the discount.

The DCF formula is used to determine the value of a business or a security.  It represents the value an investor would be willing to pay for an investment, given a required rate of return on their investment (the discount rate).

When using the DCF analysis, determine the discount rate and have estimates for future cash flows. Apply these values in the DCF formula to create a future outline that details expected returns. If the results appear at or above a company’s initial projections for future cash flows, then investing can be beneficial. However, if the discounted cash flow formula results in a value below a company’s projected future returns, it may consider alternative investments.

References:

  1. https://www.finology.in/Calculators/Invest/DCF-Calculator.aspx
  2. https://corporatefinanceinstitute.com/resources/knowledge/valuation/dcf-formula-guide/
  3. https://www.indeed.com/career-advice/career-development/discounted-cash-flow

16 Rules for Investment Success – Sir John Templeton

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“I never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.” ~ John Templeton

Sir John Templeton’s “16 rules for investment success” remain relevant in today’s volatile economic environment as they have for several decades.

Sir John Templeton was an investor and mutual fund pioneer who became a billionaire by pioneering the use of globally diversified mutual funds. He is known for searching far and wide for investments across countries and not restricting investments to UK or USA.

One of Templeton’s most noteworthy examples of investment success occurred when he bought stocks in 1939.

During the opening weeks of World War II and in response to the stock market crashing, Templeton bought 100 shares in stocks which were selling for $1 or less. Four out of the 104 companies in which he invested turned out worthless while he realized significant returns on the other companies.

John Templeton’s 16 rules for investment success include:

  1. Invest for maximum total real return. Templeton advises investors to be aware of how taxes and inflation erode returns and to avoid putting too much into fixed-income securities, which often fail to retain the purchasing power of the dollars spent to obtain them.
  2. Invest – don’t trade or speculate. Templeton warns that over-action and too much trading can eat into potential profits and eventually results in steady losses.
  3. Remain flexible and open-minded about types of investment. No one investment vehicle, whether it’s bonds, stocks, or futures, works best all the time. That being said, Templeton notes that the S&P 500 has “outperformed inflation, Treasury bills, and corporate bonds in every decade except the ’70s.”
  4. Buy low. While this advice might seem obvious, it often means that you’ll have to go against the crowd. When equities are popular and in demand, their prices are generally higher. Opportunities to buy low usually only come when when people are pessimistic about the market’s performance.
  5. When buying stocks, search for bargains among quality stocks. Templeton advocates identifying sales leaders, technological leaders, and trusted brands when selecting stocks to ensure a company is well-positioned and well-rounded before purchasing its stock.
  6. Buy value, not market trends or the economic outlook. Templeton emphasizes that individual stocks determine the market and not the other way around. The market can disconnect with economic reality.
  7. Diversify. In stocks and bonds, as in much else, there is safety in numbers. There are several advantages to portfolio diversification: you’re less likely to endure a major loss due to a freak event that devastates one company, and you also have a larger selection of investment vehicles from which to choose.
  8. Do your homework or hire wise experts to help you. Sir John insists that you must be aware of what you’re buying. In the case of stocks, you are either buying earnings (if you expect growth) or assets (if you expect an acquisition).
  9. Aggressively monitor your investments. Templeton notes that “there are no stocks that you can buy and forget.” Markets are in a state of perpetual flux, and change instantaneously. If you’re not aware of the changes, you’re probably losing money.
  10. Don’t panic. Even if everyone around you is selling, sometimes the best idea is to take a breath and hold on to your portfolio. In the event of a sell-off, only divest if you have identified more attractive stocks to pick up.
  11. Learn from your mistakes. The stock market is a lot like university: it can cost a lot of money to learn a few lessons. So don’t make the same mistakes twice. Learn from them, and they’ll turn into profit-making opportunities the next time.
  12. Begin with a prayer. Templeton believes this helps a person clear his or her mind and make fewer errors during a trading session or in stock selection.
  13. Outperforming the market is a difficult task. This rules, in effect, is a reality check. The largest hedge funds produce some extremely volatile returns from year to year, and some have produced negative returns. And those are the experts!
  14. An investor who has all the answers doesn’t even understand all the questions. “Pride comes before the fall.” Likewise, overconfidence or certainty in one’s investment style or knowledge of the market will inevitably end in failure. 
  15. There’s no free lunch. Never invest on sentiment, on a tip, or on an IPO just to ‘save’ commission.
  16. Do not be fearful or negative too often. While there have been plenty of bumps along the road, Templeton acknowledges that for “100 years optimists have carried the day in U.S. stocks.” In his opinion, globalization is bullish for equities, and he thinks stocks will continue to “go up…and up…and up.”

His lessons are the end result of a lifetime of knowledge, and include advice on stock selection, going against market sentiment, keeping your cool, and putting investing in perspective.

References:

  1. https://www.caporbit.com/16-rules-for-investment-success-john-templeton/
  2. https://www.businessinsider.com/templetons-16-rules-for-investment-success-2013-1
  3. https://www.gurufocus.com/news/157687/sir-john-templetons-16-rules-for-investment-success

Start Early to Build Wealth

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The single most important thing you can do to build wealth is to start early. Getting started is more important than becoming a financial expert and the easiest way to manage your money is to take one small step at a time.

You, like most people, do not need a financial adviser to help you build wealth. Instead, you need to set up accounts at financial institutions, such as Fideltiy or Vanguard, automate the day-to-day money management (including bills, savings, investing and paying off debt). And, you need to know a few things to invest in, and then be patient and wait thirty years for your money to grow.

But, that’s not cool or exciting. Instead of listening to the noise of the financial entertainment media, instead you want your money to go where you want it to go in accordance with your goals and values. You want your money to grow automatically, in accounts that don’t nickel-and-dime you with excessive expenses and fees.

It’s essential to start today to learn about building wealth and take small steps to save, invest and manage your money. You don’t have to be a genius or financial expert to build wealth. Successful wealth building takes time, discipline and patience.

What do I want to do with my life–and how can I use my wealth to do it!

Investing early is the best thing you can do; ‘doing nothing’ ranks right up there with trying to drive a car without tires; it’s a bad idea and it won’t get you anywhere.

The single most important thing you can do to build wealth is to start early.

Here’s a great example of why investing early matters, that puts it in numbers:

  • If you invest $5,000 every year (which is $417/month) for 10 years, from age 25 to age 35 and then never invest again, you’d still have more money at retirement, than someone who starts at age 35 and invests $5,000 every year until they retire.
  • The 25 year old starter invests $55,000 and ends up with $615,000 (given an 8% annual return, which is close to the average return of the stock market per year). The 35 year old invests $130,000 and ends up with $431,000.

So, remember the adage “The best time to start building wealth is twenty years ago. The second best time is today.” You can save and invest modest amounts, like $20 a monty, and over time realize thousands of dollars in gains.

There are a lot of societal problems, but it’s important to focus on what you can control. Don’t be a passenger in life. It’s a lot more fun to be a captain of your own ship, even if you go off course a few dozen times. Building wealth does require some work. But, the benefits and rewards will surpass the effort.

Take a long term view. The economy grows and contracts in cycles ( business cycle). Fear is no excuse to do nothing with your money. You cam automate your saving and investing, thus you can continue to save and invest whiles others respond to emotions of fear.

Investing for average stock market returns (8% to 9%) is great since most retail and so call smart money fail to beat the average returns of the stock market. Moreover, theses investors tend to do the things that guarantee their failure: trade frequently, make outlandish investments, incur high taxes and pay unnecessary fees. The single most important factor to building wealth is getting started.

The challenges and opportunities with building wealth, and the corresponding solution, are you. Your mindset, behaviors and actions are the number one problem.

  1. You’re the only one responsible for your financial problems.
  2. Know how much money you have coming in and then automatically direct it where you want it to end up.
  3. It’s essential to start early and to start investing today, even if it’s just $1.

References:

  1. https://fourminutebooks.com/i-will-teach-you-to-be-rich-summary/

Credit Report Information 101

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Your credit history is one of the factors that lenders use to assess your creditworthiness so it is important to understand what information has been reported to your credit file. 

Ancient Greek playwright Sophocles wrote, “Wisdom outweighs any wealth.” While this statement certainly rings true, it’s also true that wisdom can play a major role in building wealth—particularly when it comes to effectively managing your finances and credit.

Consumers with excellent credit scores  tend to pay less for major purchases. In short, your credit is your financial calling card, it can both open and close doors. Credit reports have also become essential tools beyond the financial world. Nowadays, your housing or employment status could be decided by your credit history; and maybe even your love life.

Thus, it is important to be prepared for anything on your horizon by understanding how your credit and credit score can impact financial progress and wealth building. The three major credit reporting bureaus — TransUnion, Equifax and Experian — maintain credit reports. The reporting companies issue credit reports to creditors, insurers and others as permitted under law for the purposes of evaluating your financial responsibility.

Tablet - 3 Bureau Reports & Scores

Here is an example of how the system works:

Apply for a Credit Card – When you apply for a new credit card, the creditor requests a copy of your financial history, or credit report, from one or more of the credit reporting companies.

The Creditor’s Assessment – The creditor may use your credit report, a score, and other information you provide (such as income or debt information) to determine whether to approve your application and what rates to offer.

The Creditor’s Decision – If you are issued a card, the creditor reports that account to the credit reporting companies, and then updates it, including your balance and payment activity, about every 30 days.

Your Credit Profile Updated – The credit reporting companies update your credit report as they receive new information from creditors and lenders. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.

Managing Your Credit Report

Your report is divided into six main sections. When you open a new account, miss a payment or move, these sections are updated with new information. These sections are:

  • Identifying Information (name, address, birth date and Social Security number)
  • Employment
  • Consumer Statement
  • Account Information
  • Public Records
  • Inquiries

Negative records – Late payments create a negative record. Generally, negative records will stay on your report for up to 7 years (up to 10 years for certain bankruptcy information). Positive records can remain on your credit report longer.

Your Credit Report is updated in most cases every 30 days – Your credit report is updated with new information reported by your creditors. Most creditors report new information approximately every 30 days, to reflect your account balances and payments you make.

Check every 6-12 months – Not all creditors report to all three companies; the companies obtain their data independently, so your credit reports from TransUnion, Equifax and Experian could substantially differ. That’s why it’s important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.

Check Your Credit Report regualarly…checking your own credit will NOT harm it.

Correcting inaccuracies – Under the Fair Credit Reporting Act, consumers are protected if there is inaccurate information on their credit reports. If you find inaccurate information on your credit reports, you can contact the associated creditor or lender directly. You can also dispute the inaccuracy with the credit reporting companies.

Know the system – Managing your credit and maintaining a good credit history can lead to better rates on major purchases. It’s recommend that you check your credit reports every 6-12 months, or at least 3 months before a major purchase, in order to identify potential inaccuracies and any signs of identity theft.

Routine check-ups, along with paying your bills on time, keeping your credit card balances below 35% of their limits, and correcting any inaccuracies will help ensure your credit reports are viewed in the most favorable light.

Finally, if you believe you’re a victim of fraud, you can activate automatic fraud alerts and the credit bureaus will place an initial alert on your credit report. This alert encourages lenders to take extra steps to verify your identity before extending credit.

References:

  1. https://www.creditonebank.com/articles/10-famous-quotes-about-finances-credit

Inflation…the Enemy of Savers

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Inflation is the enemy of those who save.

For most of the 21st century, savers and investors have experienced a favorable period of relative low inflation stock market growth. In fact, the average annual inflation rate from 2000 through 2021 was 2.31%. Even with that “low” inflation rate, the proverbial uninvested dollar hidden under one’s mattress in the year 2000 would be worth a mere $0.62 today.

With inflation approaching 7% in late 2021, we’re on the precipice of witnessing the rapid erosion in the value of the dollar which will create substantial risk for ordinary savers and ultra conservative investors. Keeping your money in a savings account, money market or CDs is failing to protect it from inflation.

Instead, the best place to invest is in the economy. While large sums of money are generally required to purchase real estate or a small business, the stock market allows those with limited capital a means to invest regularly in a wide variety of businesses and benefit from the strength of the economy.

The equity markets have a history of robust returns over the long run. Over the last one hundred years, the average annual stock market return is 10%. That means investors who stay invested are nearly doubling their investments every seven years.

Some individuals view the stock market as too risky and they literally view investing in the market as “gambling”. But, when you choose to use less “risky” investments like bonds rather than investing in stocks, the results vary great.

A study by NYU’s Stern School of Business gives insights into historical returns provided by an investment in U.S. Treasury bonds as opposed to corporate bonds and the S&P 500.

Assume an investor received a $300 inheritance on the day he was born. On that date, his parents invested $100 (the inflation-adjusted equivalent of $1,630 today) in several asset classes in 1928.

As of September of 2021, the above investor would have $8,920.90 in U.S. Treasury bonds, $53,736.50 from corporate bonds, and $592,868 in returns from an index fund that tracked the S&P 500.

Obviously, the stock market beats “safe” investments. While bonds might play an important role in a balanced portfolio, a 100% bond portfolio will fail to achieve the investment goals for most.

Investing a little now is better than a lot later

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

A strong argument can be made that the amount of time one is in the market is of more importance than the sum invested in stocks.

Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

Over time, this would result in an ever-falling income stream. You spent your life buying stocks because they are a great source of return, that doesn’t stop just because you retire! The market is still the best source of future returns, you should be continuing to buy more, not sell!

If one largely invests in stocks with yields of 5% or more, you can receive a substantial annual income without cannibalizing your portfolio. Furthermore, if the average annual market return is 10%, a stock that yields in the high single digits does not need to appreciate markedly to provide market-beating returns.

Higher yield stocks outperform more often. They distribute cash on a recurring basis, whether share prices are up or down. Prices are volatile, and at the whims of emotional investors, dividends are the profit generated by the business and distributed to shareholders.

Any investor with an employer with matching contributions should take full advantage of that opportunity. Any investor with an employer with matching contributions should take full advantage of that opportunity.

By investing in dividend-bearing stocks and resisting the temptation to time the markets, you can be well on your way to building wealth and achieving financial freedom.

References:

  1. https://seekingalpha.com/article/4484316-retirement-what-novice-investors-must-know

BNPL – Buy Now, Pay Later

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According to Worldpay’s 2020 Global Payments report,“buy now pay later” is the fastest growing e-commerce payment method.

The idea of buying a product now that is beyond your budget and that to pay for that product later in many ways sounds too good to be true.   However, this is possible by an innovative digital online payment option called Buy Now Pay Later (BNPL).

BNPL is a form of short-term financing the helps consumers make purchases with a small down payment and wait to pay for the rest of the balance at a later date.

Buy now, pay later is becoming an increasingly popular way for people to shop, particularly online, since oftentimes these plans don’t charge interest and are much easier for consumers to get approved for than traditional loan methods.

Customer gets the flexibility to choose suitable installment payment options, which will spread over a certain span of time. Absence of any interest cost and strict approval requirements makes BNPL a sought-after, convenient payment option, especially for millennials .

In North America, “buy now pay later” market share is expected to triple to 3% of the e-commerce payments market by 2023.

In other regions, such as Europe, the Middle East and Africa (EMEA), “buy now pay later” already accounts for almost 6% of the e-commerce payment market and is projected to reach nearly 10% by 2023.

Win-Win Bid for all Parties

BNPL is a win-win proposition for all the parties involved in a transaction, such as the consumer, merchant as well as the issuing bank:

  • The consumer gets the option to buy stuff that was his layaway target.
  • The merchant gains from more customers and better conversion, higher order value, rise in the repeat purchase rate and more benefits.
  • The issuing bank profits from elevated spending.

The major BNPL players are U.S. PayPal, Canadian Affirm Holdings, Swedish Klarna, and Australian Afterpay.  Each of these companies already boasts a big customer base comprising millions of merchants and customer accounts.

References:

  1. https://www.nasdaq.com/articles/buy-now-pay-later-solution-catching-up-fast%3A-3-stocks-to-gain-2021-05-20
  2. https://www.marketbeat.com/originals/add-these-buy-now-pay-later-stocks-to-your-shopping-list/

Growing Your Money

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When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

Stock’s Value vs. Price

Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,

References:

  1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

Take Control of Your Finances

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There are ways to feel more in control of your financial situation–and make the money you have go farther. The key is to take a close look at your current budget and to better manage your cash flow. You can best do this by finding expenses you may be able to pare back or eliminate, and by potentially finding new sources of income.

Smart spending and saving strategies, according to FinTech company SoFi, to follow are:

Create a Budget and Manage Your Cash Flow – Take a close look at your monthly spending to get a full picture of your spending, and start tracking your spending (every cash/debit/credit card transaction and every bill you pay) for a month or so.

Once you understand your average monthly spending, compare it to what’s coming in. You can look at your bank statements for the past few months to get an idea of much after-tax income you are taking in on average per month.

Comparing what is coming in vs. going out will help you know exactly where you stand financially.

Uncovering Places to Save – Once you understand your monthly spending and group your expenses into categories, the next step is to list your expenses in order of priority, starting with the essentials and going down to the “nice to haves.”

Once you’ve established which expenses are the most important, you can start looking for places to cut some of your unnecessary spending. For example, if you are spending a lot on restaurants and take-out, you might consider cooking at home a few more nights a week.

Negotiating with Service Providers – You may be able to negotiate for a lower rate from many of your providers, especially if you’re dealing with a company that’s in a competitive market.

Before you call or email a business or provider, it is important to know exactly how much you’re paying for a service, what you’re getting for your money, and how much the competition is charging for the same or similar service.

It’s also a good idea to make sure you are communicating with someone who actually has the power to lower your rate and, if not, ask to speak with someone who does.

You may also want to let providers know that if they can’t do better, you may decide to switch to another company.

Cutting Back on Bigger Expenses – Look at the big items in your overall budget. For example, if your car payment too high, you could buy a less expensive to cut monthly payments.

If rent is eating up too much of your income, you might want to look into finding a cheaper place to live that’s still nice, taking in a roommate, or moving in with friends.

The lower you keep these costs, the easier it will be to live well within a tight budget.

Knocking Down Debt – Having too much debt can hamper your chances of achieving financial security down the line.

That’s because when you’re spending a lot of money on interest each month, it can be harder to pay all of your other expenses on time, not to mention grow your savings.

Reducing debt may seem like a tall mountain to climb, but choosing the right debt reduction strategy may be able to help you chip away and slowly improve your financial situation.

Since credit card debt typically costs the most in interest, you might consider tackling these debts first, and then move on to the debt with the next-highest interest rate, and so on.

Starting an Emergency Fund – Start putting a little bit away into an emergency fund each month a priority: An unexpected expense—like your car breaking down or a visit to an urgent care clinic—could put you over the financial edge.

If you start putting just a small amount aside each month into an emergency fund, it won’t be long before you have a decent financial cushion that could prevent you from having to run up high interest credit debt the next time something unexpected rolls around.

Spending Only Cash for Everyday Expenses – Using plastic that can make it feel like you are not really spending money. Thus, switching to cash (and leaving the credit cards at home) for other expenses can be a great idea when money is tight.

The reason is that using cash places a harder limit on your spending and helps you become more aware of your choices. When you can literally see your money going somewhere, you may find yourself becoming much more intentional in the way you spend it.

Another benefit of cash is that it’s more difficult to get into debt since you can’t spend cash you don’t have.

Starting a Side Gig – Once you’ve done some basic budgeting, it may be clear that additional income could help ease things while money is tight.

Sometimes all it takes is some extra time and energy, but taking on a side hustle, or using your talents to pick up some freelance work can bring in additional income.

Some ideas for generating extra income include:

  • Selling things on eBay or Craigslist
  • Hold a garage sale
  • Creating an Etsy store and selling homemade goods
  • Driving for a rideshare or food delivery service
  • Giving music lessons
  • Renting out a room on Airbnb
  • Walking dogs
  • Cleaning houses
  • Babysitting
  • Handling social media for small businesses
  • Selling writing, photography, or videography services to clients

Start saving and investing, immediately – Your first financial goal should be to create an emergency fund and to establish the discipline for saving by “Paying yourself first”. To take advantage of compound interest, start investing early and regularly.

Takeaways

You can gain control of your finances by calmly sitting down, creating a budget, and determining your cash flow. This entails looking at your monthly income, as well as your average monthly spending, and seeing how it all lines up.

To create a monthly budget, you must allot funds for expenses such as rent and other bills, then sets aside a small amount directly for savings and uses the rest to live off for the month

Once you have a sense of your cash flow, you can take steps to reduce unnecessary spending, negotiate to lower monthly bills, chip away at expensive debt, and even start building a financial cushion.

References:

  1. https://www.sofi.com/learn/content/what-to-do-when-money-is-tight/
  2. https://www.usatoday.com/story/college/2012/04/25/7-steps-to-take-control-of-your-financial-future/37391767/

Auto Enrollment Retirement Plans are Here

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“Americans aren’t saving enough for retirement and nearly half of people 55 and older have nothing saved for when they stop working. Government Accounting Office

Nearly one in four working-age Americans aren’t saving for retirement, and those who are say they aren’t saving enough, according to a PwC analysis. Further, a majority (55%) said they either are not participating in a workplace sponsored retirement plan like a 401(k) or they don’t know if they are in a plan.

The Government Accountability Office reports that nearly half of people 55 and older have nothing saved for when they stop working, meaning there is a building retirement-savings crisis and a wave of future retirees threatens to overburden an already fragile Social Security Administration. Consequently, this can upset a balanced economy that relies on older Americans spending money in the housing and health-care sectors.

Auto-enrollment retirement plans

Auto-enrollment and auto-escalation programs implemented by a few states have proved successful at closing that gap, particularly for workers in retail and service sectors of the economy. These sectors in the past have rarely offered retirement benefits to low-income staff.

In fact, plans that used automatic enrollment had a 92% participation rate in 2020, compared with 62% for plans with voluntary enrollment, according to Vanguard’s “How America Saves 2021” research. And, employees who worked for firms with automatic enrollment saved more than 50% more for retirement in 2020 than those employed at firms with voluntary enrollment.

Further, research shows that participants enrolled in a plan with automatic increase save, on average, 20% to 30% more after three years in the plan, compared with participants in an automatic enrollment plan that does not automatically increase participants.

As a result, Congress is proposing a Federal mandatory framework for workplace retirement plans. Starting in 2023, the retirement saving plan would require employers with more than five workers to automatically enroll new hires for retirement benefits, the contributions to which would automatically increase over time.

In short, businesses would automatically deduct 6% of new workers’ income into a low-cost retirement plan and automatically escalated that contribution to 10% over time, unless workers themselves opted for something different.

It’s mandatory for employers, but not their employees, who can choose to opt out of the savings plan or change their contributions. But the default choice would always be to signup, essentially making retirement funds a statutory benefit like unemployment or workers’ compensation insurance.

Failure to provide a low-cost retirement option such as a 401(k) or individual retirement account would cost a business an excise tax liability of $10 for every worker per day of noncompliance, which would add up.

Over the last two decades, continued adoption of automatic solutions has increased employee savings and the use of professionally managed allocations. Thoughtful retirement plan designs are helping people save and invest for retirement.

References:

  1. https://news.bloomberglaw.com/daily-tax-report/retirement-savings-and-democrats-latest-tax-plans-explained
  2. https://www.pwc.com/us/en/industries/asset-wealth-management/library/retirement-in-america.html
  3. https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/21_TL_HAS_InsightsToAction_2021.pdf