Saving

Compounding interest

Compounding Interest, It’s Magic!

Money Maroon

Do you like free money? What about increasing your wealth over time by doing absolutely nothing? I figure that your response to both is yes and yes. Well, I am here to tell you about the so-call eighth wonder of the world, “compounding interest.” It is simple, very logical and does not take much to understand or implement as part of your financial toolkit. In many cases, it is automatic. It is the reason why you should start saving and or investing early, and the reason it is never too late to get on the right financial track. By understanding compounding interest today, you can be financially secure tomorrow.

What Is Compounding Interest

Compounding interest is the addition of interest to the principal sum of a loan or deposit. In the context of saving, this is the reason why it is so important to start saving and or investing early. In its simplest form, it is interest upon interest. It is a beautiful thing when you are saving and investing. However, compounding interest can be detrimental if you are in debt.

Compounding Interest As An Asset

As an example, if you earn 8% return on your savings/investment on a yearly basis, after the first year you will have a total of your initial amount plus 8% of that initial amount. If you began with $100, you will have $108 at the end of year 1. However, look at what occurs over time. At the end of year two, you will have the amount at the end of year 1 plus 8% of that amount. Essentially, you have earned interest upon interest. In our example, you would now have approximately $116 at the end of year 2. At the end of year 3, 4 and 5, you would have approximately $126, $136 and $146 respectively. In 5 years, you would have earned $46 just by saving/investing.

Imagine if over that 5 year period you continued to save and or invest to grow your principal. Your return would be significantly more. Compounding interest is the reason why someone who saves and or invest at the age of 25 to 35 and stop will likely have significantly more for retirement than those who invest significantly more from 35 to 55.  Compounding interest is the reason for a number of sayings, for example “it is not timing the market, it is time in the market.” With compounding interest, time makes all the difference.

To drive this point further home, in our example, in 20 years your $100 principal would turn into $466. If the total after 10 years is not impressive enough, in 50 years, your return would be a whopping $4,690. This total is from having $100 growing without contributing anything additional. Crazy isn’t it? Check out the US securities and exchange commissions’ Compounding Interest Calculator. Play around with the numbers, and see what happens when you not only save/invest, but also continue to do so over time.

Compounding Interest

Compounding Interest As A Liability

In the context of debt, compounding interest is the reason why it is so important to eliminate debt early. It is the reason why your student loan balance increases while you are still in school or in forbearance. It is also the reason why you hear so many stories of folks who have been paying down debt for years and have made no progress. How do you pay minimum payments on a debt for 10 years and still owe more than the original amount? The answer is simple, the answer is compounding Interest. 

The interest rate on your debt matters, and so does the time that you take to pay it off. Compounding interest is why you are typically advised to pay more than the minimum payment on debt. The faster you pay off your debt, the less time there is for the interest to compound, the less total debt you will have to pay.

Your Advantage

Now that we have tackled the issue of what is compounding interest, to have compounding interest work to your advantage, pay down debt and begin saving and or investing today. The sooner you begin to save, invest, and pay down your debt the better financial position you will be in. Compounding interest is often called the eighth wonder of the world because once the momentum begins, it is hard to stop. For better (when you save and invest) or for worst (when you are buried in debt).

Our discussion should give you the imagery of a snow ball building in size. The snow ball begins small. When small, the snowball is insignificant and can easily be stopped and disposed of. However, over time, as the snowball continues to roll downhill and  adds layers, it becomes a monster that cannot be controlled or stopped. That is compounding interest, use it to your advantage and achieve your financial goals.

Begin small, be consistent, and build over time to become financially unstoppable.

Conclusion

We all love simple and beneficial concepts that can be easily integrated into our life. Compounding interest is simple, very logical and does not take much to understand or implement as part of your financial toolkit. In many cases, it is automatic and works like magic. It is the reason why you should start saving and or investing early, and the reason it is never too late to get on the right financial track. By understanding compounding interest today, you can become financially unstoppable tomorrow. Journey to financial independence.

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Summer time

Summer Time Is Money Time

Money Maroon

It is summer time again. While this time of the year is not packed with costly holidays where you risk over spending to impress another with presents, be careful. Summer can easily become a time of the year where you overspend. Summer is the time for grilling, summer vacations and out door activities. In a year of pent up demand for leaving home, the costs of this year’s summer time activities can add up very fast. Stay focus and keep your financial goals in view.

Vaccines And Summer

With covid19, the summer of 2020 was unlike any other. For the most part, we all stayed in and only mingled with those in our household. Not a lot of traveling, and not a lot of vacations. Lots of unintentional savings were made in 2020 as we spent significant time with our immediate families. For some, financial plans were derailed because of loss jobs. However, this year is a bit different when compared to last year. With the roll out of covid19 vaccines, we are moving closer and closer to normal. Mask mandates are relaxed and traveling is picking up.

As we return to normal, so will our spending. Our overspending will also likely return to  normal or accelerate. With more to spend and the deviation from the norm that was 2020, it is only natural for us to want to get back out there and enjoy this summer. But this can get very costly.

Sumer, put your feet up
Summer Time – Money Time

Cost Of Summer

If you are planning to travel, I would encourage you to take a look at airline fares and plan ahead. Travel related prices have increased significantly. While the airline industry lost  billions last year, you better believe that they are looking to profit this year. Further, with increased demand, it is likely that your travel costs will be significantly more expensive than years prior.

Hotels, are operating similarly to airlines. This year, there will be increase demand compare to 2020. Many families will try to hit the road and get out and away from home.  Overall, supply may be lower because of those business who have gone out of business due to covid19, but demand will significantly increase over last year. As supplies decrease and demand increase, prices will also increase. Further, take into account that hotels will try to make up for last year’s short fall and you will be paying a heavy price.

Now, if you are not traveling and want to stay home, the cost of meats for grilling has increased, the price of gas has increased. Again, because a number of business went out of business because of covid19, the supply chain has been disrupted. Again, the law of supply and demand means as we go back to normal, prices will rise as demand rises.

Save This Summer

You have survived covid19 and for the lucky ones, you have saved if you were able to keep employment. As we return to normal, do not forget your financial goals. While your financial goals may have been derailed or accelerated in view of the covid 19 pandemic, do not lose focus. Your actions today will be amplified tomorrow. The financial decisions you make today will affect your finical life in the future. Take steps today to rein in your spending and continue on a journey to financial independence.

If you were able to save during 2020, save during 2021. Do not stop. Maintain or increase your saving/investing rate. Know that  you are in control and if you were able to do it in 2020, you can do it in 2021. You are in control.

Conclusion

It is summer time again. While this time of the year is not packed with costly holidays where you risk over spending to impress another with presents, be careful. Summer can easily become a time of the year where you overspend. Summer is the time for grilling, summer vacations and out door activities. In a year of pent up demand for leaving home, the costs of this year’s summer time activities can add up very fast. Stay focus and keep your financial goals in view.

Life is what you make it. If you were able to take the steps to survive covid19, this summer, take the steps to secure your financial future and achieve financial independence.

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Happy Mother's Day

Have The Mother’s Day Money Talk

Money Maroon

For Mother’s Day, instead of falling into the commercialization trend, let’s make our mothers proud. Have a Mother’s Day money talk with mom. This talk will not only impact your mother and show her that you are thinking about her future, but will also help you organize yourself to better care for her.  Buying flowers, cards, or taking your mom out for brunch is a nice gesture. But having a financial chat with mom is impactful. Be impactful on this Mother’s Day and show mom how much you truly care.

Sacrifice

On this Mother’s Day, remember the financial sacrifices that your mother has made. Think back to how much your mother worked or complained about her job. Yet, she continued on. While you are at it, it should become very clear why some people stay at jobs that they hate. At times, some people will stay at jobs that they hate in the name of love and responsibility. She did it for you.

Financial Education

Many have the luck of having a mom that inspires. For some, this is manifested in financial success or the search for financial success based on lessons learned. For example, save, invest, live below your means. It may be in the form of literal education or an education based on observation. Was it her struggle or was it her drive and position as an authoritative figure who did what was best for the family that motivates you to become financially independent? For some, it was the unfortunate mismanagement of finances that provided the teaching lessons that motivates today. Whatever your reason, I am confident that your mother contributed and continues to contribute to your reasons for reading a financial independence blog and this article.

Love you mom - Happy Mother's Day

Having The Mother’s Day Talk

With all that your mother has done to influence your financial life, it is time to have a Mother’s Day money talk. Check on her current financial situation and her future plans. Although it may be difficult to talk to family about money, it is important to start.

Previous generations had the now acclaimed three legs to their retirement stool: (1) personal savings, (2) social security and (3) a company pension. Over the years, the three legs have been significantly weakened.

First, many have very little to no personal savings; second, as it currently stands, the social security program is teetering on the edge of insolvency; and  third, for the most part, company pensions are a thing of the past. Taken together, the baby boomer generation have little saved for retirement, no pension plan and are dependent on social security. This is the reason for the talk.

The Talk

To have the money talk with mom, there is no reason to be aggressive. Do not forget that it is Mother’s Day. If you approach your mother’s finances aggressively, your mother is likely to get defensive. The point here is to begin a conversation or continue the conversation such that you know where your mom is financially. More importantly, these conversations will aid your financial planing.

We cannot control what another person does, especially our parents. However, if we can make them aware of potential issues that may be on the horizon, maybe they can and will take action to change course. 

The fact is, you as the child may be responsible for your parents during retirement. It is important that you begin taking steps to mitigate the impact on your financial future by talking to your mom this Mother’s Day. 

The Best Mother’s Day Gift

For most of us, as adults, it becomes a struggle to get the perfect gift for mom. Guess what, you have most likely provided a lot of her material wants over the years. There are only so may cruises, trips, massages, flowers or foods that you can gift mom. At this point, the best Mother’s Day gift may be just showing that you care by having an important conversation. Instead of gifting something that will be used for only a day, have an impactful financial conversation.

Conclusion

For Mother’s Day, instead of falling into the commercialization trend, let’s make our mothers proud. Have a Mother’s Day money talk with mom. This talk will not only impact your mother and show her that you are thinking about her future, but will also help you organize yourself to better care for her.  Buying flowers, cards, or taking your mom out for brunch is a nice gesture. But having a financial chat with mom is impactful. Be impactful on this Mother’s Day and show mom how much you truly care.

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Financial Mistake

This Financial Mistake Is Making You Poor

Money Maroon

When asked what their biggest money mistake was, many people will respond that their biggest financial mistake is something they bought. Whether it is a house, a car or their education, the answer typically given is an active financial act that has been taken. But the question is not what is the biggest purchase that you have made that you now regret. The question is, what is your biggest money mistake. The biggest financial mistake that you likely have made and may continue to make is not what you have purchased, it is what you have not yet done.

Lost Opportunity

Your biggest financial mistake is likely not a purchase that you have made. Surprisingly, your greatest financial mistake is typically a decision that you did not make. It is, lost opportunity. 

If the opportunity was taken and worked out in your favor, it is not a mistake and as such the decision would not fall into the category of a financial mistake. On the other hand, if a lost opportunity is a mistake, the size of the mistake only grows. The reason for this is the opportunity cost and the compounding of that mistake. For example, think about not taking a job or not continuing your education. 

If these decisions worked in your favor, it would have been a boon. However, if these decisions were in fact a mistake, when looking back, you will see the opportunity lost in your career earnings, relationships, status and financial security. These losses will only compound over time. The mistake will only grow. 

But do understand that this works in the other direction as well. By doing your research, due diligence and making a good decision, the benefits here only compound. Make a great financial decision today and enjoy the compounding benefits over your life time.

The Financial Mistake Of Not Saving Earlier

Financially, your biggest mistake is likely that you did not begin saving earlier. With regard to saving, consider the opportunities that you have missed out on because of lack of funds. Think of the turmoil that you may have experienced during one of the many financial downturns over the last number of decades. How different would that have been if you had been saving earlier?

Saving is the basis of any financial plan. Without effectively saving, you will not build an emergency fund to ride out the financial bumps in life. Sadly, the importance of saving usually dawns on us during a financially rocky situation. For example, it is only when you lose a high paying job that you think of how much you have wasted on nonsense. Think of professional athletes, lawyers and doctors. The financial regrets only comes after going through a financial rut.

Did you lose a house or other financial possessions? Think of what you could have done with an emergency fund. If you have not yet began saving, do not allow this financial mistake to compound. Begin saving today.

The Financial Mistake Of Not Investing Earlier

Consider if you had only knew then what you know today. What would you have done differently? If there were no time machine, as there current is not, how can you implement your learnings today and benefit going forward.

On average, over the last 30 years, the stock market has given a return of between 7-10%. Imagine if you had place a portion of your money 20 years ago into the stock market and continually did so. You would have most likely been a millionaire at this time.

The fact is, with compounding, it really does not take that much. It only a little money but a lot of time. Use the many financial calculators that they currently have. You will notice that with an average of investing  let us say for simplicity about $100 per month for 20 years, the amount that you gain overtime is remarkable to put it lightly. 

Your biggest financial mistake is not investing earlier.

Financial Mistake
Invest in your financial education

The Financial Mistake Of Not Investing In Your Financial Education Earlier

Knowing that you should save, invest, and reduce debt is the basis of long term financial success. This is in fact the basis of financial education. You must save to have money to invest.  Without saving and investing, your money does not grow. Further, no matter how much you may save or invest, you will not get financially far if your funds are going to interest payments on debt.

Somewhere along the way we all have a financial wake up call. It could be by learning through others or learning a tough financial lesson ourselves. But, at some  point or another, we will realize that we should save more, invest more, and have less debt. I did not say that we will all act upon this realization. Some of us do while others do not.

This is like anything else in life. While we know what is best for us, we may never act. For example, at a certain time in our lives we will realize that we are getting older and need to start thinking about retirement. In this case, many of us continue living it up while others make a change. As another example, at a certain time in our lives, we realize that we should get healthy. Some of us make changes while others continue to have an unhealthy lifestyle. 

Financially, it is the same. We know that the more we invest in our financial education, the more likely we are to succeed financially. Yet, most of us rate having a chat about money as near the bottom of the events that we want to do. Most of us refuse to learn about debt and compounding. Most of us engage in keeping up with the Jones instead of focusing on our financial reality. Yes, a lot of us are stuck in the “fake it till you make it” phase of life. This does not work in the long run.

Take hold of your financial situation and invest in your financial education today. The more you learn today, the greater your potential for tomorrow. Your future self will thank you.

Conclusion

When asked what their biggest money mistake is, many people will respond that their biggest financial mistake is something they bought. Whether it is a house, a car or their education, the answer typically given is an active financial act that has been taken. But the question is not what is the biggest purchase that you have made that you now regret. The question is, what is your biggest money mistake. The biggest financial mistake that you likely have made and may continue to make is not what you have purchased, it is what you have not yet done. Stop making financial mistakes and journey to financial independence.

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Teaching Kids About Money

Teaching Kids About Money

Money Maroon

One of the most important things that you can do in life is teaching your kids about money. Teaching kids about money is a proactive way to ensure that the next generation is financially literate. It may seem like another thing on the list to do as a parent, however, teaching kids about money can be as easy as playing a game or just including them in day to day activities. To teach your kids about money, take your kids on your daily money adventures.

Teaching Kids About Money Must Start Early

Having a financial foundation is all about starting early. While you may quickly accumulate wealth in some instances, the magic of compounding requires time. As such, start saving early. 

The easiest avenue to teaching kids about money is to start saving early. Yes, the good ole piggy bank. This is one of the earliest and easiest ways to get your kids to think about money.  Even kids love to see their money grow.

The piggy bank provides for a lot of teaching opportunities. For example, the piggy bank can be used to teach the concept of saving toward a goal. If your kid wants to buy something, have them understand how long it will take for them to save that amount based on their standard allowance. It need not be a big purchase, for example, if they want to buy candy, you can mention that they will need to save/take an amount from their piggy bank. This will no doubt trigger an internal conflict of money vs candy. They will have to decide whether or not the candy is really worth their money.

But most importantly, the piggy bank forces kids to adapt a habit of saving. Saving is a habit that can be beneficial if learned early.

Teaching kids about money
Our kids are the future

Making Purchases

Your kids like new gadgets, so does everyone. How do you pay for it? Typically with a credit card? Teaching kids about money involves teaching them about your purchases. Show them the bill and how much things costs. Show them how you purchased it, cash or credit. If you are using a credit card, this is the perfect time to discuss interest rates.  You can further venture into the concept of paying off credit card bills early such that you do not have to pay interest payments.  The magic of compounding and how this can work to your benefit in saving but to your detriment on money you owe will no doubt hold their attention. Importantly, the concept of not purchasing things that you cannot afford will be a natural progression.

Going To The Bank

Like many other things as a parent, get your kids involved in your financial decisions. They may not understand, however, the act of going through the process will be built in. When old enough, they will begin to understand. Teaching kids about money is about sparking financial curiosity and planting a financial seed that will flourish and pay dividends in the future.

For example, on each journey to the bank, consider taking your child. Kids are curious creatures and they will ask numerous questions about the bank. Why are you going to the bank? Why are you depositing money? Where did you get the money from? Do you get it back? These are all questions that will spark a conversation with regard to earning money, using money, and saving money.

These early conversations with your 3-5 year old will begin to inform their concept of money. Have you ever taken money from your kids piggy bank and try to deposit it in the bank? If you have not, this process is likely to create a mental break down for any child. They become very attached to their money. However, this process provides the perfect opportunity to have a discussion with regard to the function of a bank, interest rates, and possibly inflation. No kid wants to have their money taken away. By explaining why their money will earn more if it is put to work (in the bank/investment account) will put them at ease and be a great benefit in the future.

Monopoly Money

Teaching kids about money at times can be a simple matter of playing a game. In many ways, monopoly is the perfect game. Monopoly can accomplish multiple things. Monopoly is not only a fun game for family time. Playing monopoly can also help kids learn to add, subtract, and also teach your child to handle or at the very least begin to get an appreciation of money.

Think about it, where else would a kid learn about charging rent, bankruptcy, going to jail, getting paid a scheduled salary, trading property, and transacting with a bank? Monopoly teaches simple concepts in game form. (1) If you own property, you can charge rent. (2) If you invest in your property, by building a hotel, you can charge even more. (3) If you over extend yourself financially, you can go bankrupt. The concepts are all there, and your kids will learn them all without trying.

Conclusion

One of the most important things that you can do is teaching your kids about money. Teaching kids about money is a proactive way to ensure that the next generation is financially literate. It may seem like another thing on the list to do as a parent, however, teaching kids about money can be as easy as playing a game or just including them in day to day activities. To teach your kids about money, take your kids on your daily money adventures. Help your kids get on the journey to financial independence early.

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How to become a millionaire

How To Become A Millionaire

Money Maroon

At one time or another, we have all asked ourselves this question, how to become a millionaire? It may seem impossible, but becoming a millionaire is not. As of December 2020, it was estimated that there are over 46 million millionaires in the world. In the United States alone, there are over 18 million millionaires. To achieve this status, you need to know the steps that will increase your likelihood of becoming a millionaire and consistently apply these steps overtime. 

How To Become A Millionaire?

Whether they realize it or not, every year many individuals take steps to become a millionaire. However, these same individuals also take many steps to prevent  or hinder achievement of this goal. If you are asking how to become a millionaire, consider saving, reducing debt, investing, earning more and repeat.

Save to become a millionaire

Save

On any financial journey, to achieve that goal, you must save. Saving is the basis of any financial plan. If you are wondering how to become a millionaire, generally, you must keep more than you spend. You must save!

Build A Habit

If you are able to save a lot, do so. But if you are struggling to save, start small. Start by saving $50 per pay check if you can. When you can save $75, do so. At first, saving is not about the amount that you save, it is about building a saving habit. Once you build a saving habit, you will be able to easily increase your saving rate. The task is to get use to seeing your money and not spending it.

The Benefits Of Saving

There are plenty of benefits to saving. Not only does saving provide the confidence of knowing that you can handle an unforeseen financial emergency, you can watch your money grow as well. It is a great feeling to see your money grow over time. Additionally, by saving, you are able to contribute to an emergency fund. With a fully funded emergency fund, not only will you have some money on the side, you will have 6 months to a year or more of expenses saved. This will not only serve as a financial back stop, but will also enable you to take advantage of financial opportunities when they arise. 

Take Advantage Of Opportunities

By having a strong savings account, you are able to invest at opportune times (for example when there is a massive sell off in the markets). With money saved, you are able to take advantage of interest rates at an opportune time. By saving, you are able to not only slowly grow your money, you may also be able to turbo charge your money by taking advantage of opportunities because you have the funds available to do so.

Your Buying Power

When saving, also appreciate the rate of inflation and the interest being paid on your savings. Inflation can eat away the buying power of your savings. With regard to interest rates paid, the average brick and mortar bank will provide a very minuscule interest on your savings. Online banks will provide significantly more interest, as such, you should strongly consider having an online saving account.

Pay off debts and become a millionaire

Reduce Debt

One of the fastest ways to lose money is through debt interest payments. By paying off your debts, you are automatically getting rid of this cost.

In some instances, debt financing can be beneficial. For example, if you are in real estate investing, the use of debt can be useful. But most types of debts can be disastrous to your financial health.

If your debts are those of consumer debt, for example credit cards, if you want to be a millionaire, you should pay these off. You should pay off your credit card balance each month. If you cannot pay off your credit card balance at the end of each month, do not use your credit card. Your credit cards are not free. If you do not pay off your credit card balance, you will continue to ask how to become a millionaire because the chances of getting there will continue to elude you. 

The simple fact is, having a credit card balance is expensive, very expensive. The average credit card Annual Percentage Rate (APR) is about 20%.  That is about 20% per year on your credit card balance. Worst than credit cards are typically company cards. Company cards, such as department store cards generally have higher interest rates than that of credit cards. Company cards at times charge 24% APR or more. That is a lot of money.

If you use credit cards, pay them off. Get the rewards, but do not allow your credit card company to charge you. PAY THEM OFF!

Invest to become a millionaire

Invest

Saving alone will not do the job if you are trying to become a millionaire. Saving is the basis of any financial plan, but you must also invest. This could be by investing in the stock market, retirement accounts or investing in yourself. Whatever the route you take, by putting money into a vehicle with the opportunity to get a return on investment that is a multiple of what you put in is one of the best ways to grow your wealth.

Investing does leave you open to losing at least a portion of whatever you invest. As such, ensure that you are comfortable with the possibility of losing at least apportion of your investment. The more risky the investment, typically, the higher the reward. If you are investing in the stock market, note that there are different asset classes that you can invest in, from highly risky to less risky.

When investing, ensure that you do your due diligence. Whether you are investing on your own or using a financial professional. Do your research. Ensure that your financial professional is on the level. We have all heard of Bernie Madoff and others like him. Protect yourself. As always, with any investment or financial opportunity, if it sounds too good to be true, it probably is.

You may also invest in yourself. This may be in the form of your education, financial development or health. Your return on investment may not immediately be financial, but over time it will. Investing in your education may lead to a better job with a higher salary range. By investing in your financial development, you may be able to find ways to keep more of your money. Investing in your health will allow you to keep going, keep learning, less aches and pain, potentially a longer and more rich life.

Earn more and become a millionaire

Earn More

How to become a millionaire? Earn more. This sounds simple and straight forward, but it is not always the case. If you want to become a millionaire, constantly strive to earn more. Whether you are earning more through a promotion at your place of employment or by obtaining a new job, earn more. If you continue to earn more, you will be able to save more, pay off more debt and invest more. By earning more, you significantly increase your chances of achieving your financial goals earlier.

Do not limit yourself to earning more through an employer, you can build one or more side hustles or you can also become an entrepreneur. Be creative in how you earn.

It is important to note that by saving more, you can earn more through interest payments. By investing, you can earn more through a return on investment. The steps of how to become a millionaire are additive and works together to achieve your financial goals.

Repeat

Once you begin to save, pay off debts, invest and earn more, rinse and repeat. You must consistently repeat these actions to achieve your ultimate goal. If not, you may increase your wealth but may not achieve your goal. 

For example, by earning more, you may fall into the trap of lifestyle creep and spend more. The net result may not necessarily be a growth in wealth. However, by earning more, saving more, using the money to pay down debts or invest, the net result is likely to be an increase in wealth.

Conclusion

At one time or another, we have all asked ourselves this question, how to become a millionaire? It may seem impossible, but becoming a millionaire is not. As of December 2020, it was estimated that there are over 46 million millionaires in the world. In the United States alone, there are over 18 million millionaires. To achieve this status, you need to know the steps that will increase your likelihood of becoming a millionaire and consistently apply these steps overtime. Not surprisingly, the steps to become a millionaire are similar to those for achieving financial  independence. 

There are also other ways to become a millionaire, but some are less likely to occur. You may win the lottery or an inheritance from your rich uncle. While possible, these are long shots. Most millionaires became millionaires by saving, reducing debt, investing, earning more and repeating these foundational acts.

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Spend responsibly

How To Spend Your Stimulus Check

Money Maroon

The pandemic has lead to a bifurcation of fortunes. On one hand, a minority of individuals have increased their wealth beyond belief. On the other hand, the pandemic has eroded the wealth of a significant portion of the population. With the clear and far reaching economic effects of the pandemic, the U.S government has employed multiple rounds of stimulus. To those receiving stimulus funds, how you use the funds are as important as obtaining the stimulus funds. If you qualify to receive some stimulus funds, spend responsibly. Take care of your necessities and if possible, take steps toward building and securing your financial future. 

The Year 2020

We all know that we should save for a rainy day, yet, few of us do what we know to be beneficial to us in the long term. If 2020 has taught us anything, it is that life is unpredictable. We are on this rock (earth) for a short period of time and there are no guarantees. To ensure that your family is in a good position financially, building an emergency fund is crucial. Emergency funds make financial disasters routine events.

Financial Disaster 

Financial disaster is always around the corner. In 2020, financial disaster has occurred in somewhat of a snow ball effect that has build momentum as the pandemic has worsen. First came reduce demand for certain work, then came mandatory shut downs, loss of jobs, inability to pay bills including student loans, mortgage/rent and other necessities. Just take a look at your local news and the length of the food lines. People have exhausted the little reserves they had and some have become completely reliant on government stimulus.

Spend your stimulus responsibly
Do not set your money on fire by spending frivolously

Stimulus

If you qualify to receive government aid, whether in the form of stimulus or in another form, how you spend the funds are more important than just receiving the funds. Yes, the amount provided may not go very far, but every little helps. If you are in desperate need for the funds, use the funds to handle your necessities. This includes food, clothing and shelter.  Really think about how you will use your stimulus check. Keep in mind, based on the current political situation, it is unlikely that more stimulus will be on the way. However, If another stimulus bill is passed by congress, it will likely be less than what you have received to this point.

If you happen to be in a situation where you are not in desperate need of the stimulus but have qualified for receiving the funds, it is not time to spend. While some encourage spending to help the economy, to the contrary, it is time to save. Yes, we now have vaccines, however, it is unlikely that life will return to pre-pandemic norms any time soon. As such, the job market will continue to be in flux. Spend time to think of how you can improve your physical, mental and financial health.

Physical, Mental And Financial Health

We have no idea what the year 2021 and beyond holds, but as much as you can, be prepared. Be prepared by taking care of your physical, mental and financial health one step at a time. With the stimulus funds, if you can: (a) save, build or add to your emergency fund, (b) pay down high interest debt, (c) invest and if you are in the position to do so, (d) donate to help your neighbors. 

Generally, it is time to increase your personal safety net. As the year 2020 has shown, it is important to be ready for the unknown. The best way to be ready for the unknown is to be prepare, such that you can mitigate some disruptions that may occur in the future.

Financial stability is not achieved overnight. Financial stability and to an extent financial independence requires small consistent steps over time.

Conclusion

The pandemic has lead to a bifurcation of fortunes. On one hand, a minority of individuals have increased their wealth beyond belief. On the other hand, the pandemic has eroded the wealth of a significant portion of the population. With the clear and far reaching economic effects of the pandemic, the U.S government has employed multiple rounds of stimulus. To those receiving stimulus funds, how you use the funds are as important as obtaining the stimulus funds. If you qualify to receive some stimulus funds, spend responsibly. Take care of your necessities and if possible, take steps toward building and securing your financial future. 

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Optional Spending

Discretionary Spending And Your Financial Future

Money Maroon

Discretionary spending refers to optional spending. Spending for wants and not needs. As we get closer to another holiday, whether religious or market created, you must decide how to spend your income. Will you fall prey to the mountains of commercials advertising different deals, or will you keep your discretionary spending to a limit? Whatever your decision, your financial future depends on it.

Before Discretionary Spending, Wait

It is your money, you don’t have to part with it. Consider that you have worked many hours for what you have. After paying for the necessities, you may have a certain amount remaining. You may even have accumulated a certain amount of money over time. With this backdrop, why would you so easily part with your money because of an advertisement, black Friday, small business Saturday, cyber Monday or another commercial holiday? Why would you part with your hard earned money to impress people who likely do not have a second thought about your financial future?

Stop throwing away your money

When you are thinking of parting with your money, discretionary spending, just remember that the spending is optional. You will be spending on a want, and not a need. You do not have to buy that new TV, shoe, computer or car. Do you really need that new subscription or membership? Do you really have to take that expensive vacation? If you think you do, it is best to wait, press pause and think about that next purchase. 

Give yourself at least a week before you spend your money. Think not only of the cost of the purchase, but the true cost of ownership. What other costs are associated with your purchase. Can you really afford it? Think of how many hours you would need to work to earn the amount that you would like to spend.

Think About Saving

During your week of thinking about your next discretionary spending binge, think of what would happen if you saved or invested instead of spending that money. If instead of spending the money you save it in a high yield saving account or invest the money and receive standard rate of return, how much would this money mean to your financial future?

Now, is your discretionary spending worth it? Is it worth the cost of the purchase and related costs plus the additional lost of return on savings and/or investment?

Further, if you were thinking of discretionary spending to impress someone, think of where that purchase will be in two, three or four years – most likely forgotten. Do not spend to impress others. You are responsible for your financial future. Take control, set  your goals and achieve them.

Your Decision Your Future

After delaying your discretionary spending to reflect, if you choose to go ahead with the discretionary spending, at the very least  you have thought about it and have justified the spending. By delaying the purchase and having an understanding of the true costs associated with a purchase, you will be able to make an informed decision. Whatever your decision, let this moment of financial reflection change your money mindset for the future.

Conclusion

Discretionary spending refers to optional spending. Spending for wants and not needs. As we get closer to another holiday, whether religious or market created, you must decide how to spend your income. Will you fall prey to the mountains of commercials advertising different deals, or will you keep your discretionary spending to a limit? Whatever your decision, your financial future depends on it.

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529 Plan

529 Plan: Contribute Today For Your Child’s Tomorrow

Money Maroon

It is important to secure your financial future first, before turning to your children’s. However, once you turn to the financial future of your children, a 529 plan should be on the top of the list. 529 plans allows account holders to put away funds for a beneficiary, typically a child or other loved one.

529 Plan
529 plan, a plan for your child’s future

Overview: 529 Plan

529 plans are authorized by Section 529 of the Internal Revenue Code and were designed to encourage saving for future education costs. When first instituted, 529 plans were limited to covering the costs of post-secondary education. Overtime, qualified education costs covered by 529 plans were expanded to also cover K-12 education in 2017 and apprenticeship programs in 2019. In view of the rising costs of education, if you have children, a 529 plan should be apart of your financial tool kit.

Types Of 529 Plans

Generally speaking, there are two types of 529 plans. A prepaid tuition plan or an education savings plan. According to the SEC, most all States and the District of Columbia sponsor at least one of the two types of 529 plans. Additionally, some private colleges and university may also have similar plans. Note that Wyoming is the only State that does not offer its own 529 plan.

Prepaid Plan

The prepaid 529 plan allows account holders to purchase units or credits at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices. As such, you are locking in today’s prices. This can be a significant benefit in view of costs savings when taking into consideration the consistent rise in education costs over time.

Savings Plan

529 savings plan allow an account holder to open an investment account to save for the beneficiary’s future. The saved amount can then be used to pay for qualified expenses. Such qualified expenses include tuition; room and board; mandatory fees; and, books, and computers.

With regard to the investment account, in ways similar to a brokerage account, the account holder can chose from a range of investment options (target date funds, ETFs, Mutual funds) that is offered by the respective State or vender used by the State to carry out the 529 program. As such, prior to selecting a fund to invest in, it is important to carefully review the options available and the associated fees.

Taxes

529 plans are often referred to as a tax advantage account because of the associated federal and State tax advantages.

Contributions

Many States offer tax benefits for contributions to a 529 plan. These tax benefits typically include a State income tax deduction up to a certain limit contributed. Usually, these tax benefits are limited to residents of that State. For example, if you are a resident of Maryland and have a Maryland 529 plan, you would be able to deduct a certain amount of your Maryland 529 contributions from your Maryland State income tax. On the other hand, if you are not a resident of Maryland, and have a Maryland 529 plan, you would not be able to deduct your contribution from your home State’s income tax. 

Unfortunately, unlike the State tax deduction, on a federal level, the money you contribute to a 529 plan is not tax-deductible for federal income tax purposes.

Withdrawal

With regard to withdrawals for qualified expenses, 529 earnings are not subject to federal income tax and, in many cases, State income tax. However, if 529 account withdrawals are not used for qualified expenses, the funds will be subject to both State and federal income taxes and an additional 10% federal tax penalty on earnings.

Growth

Another benefit of 529 plans is the tax-free earnings that grow over a period of time. Growth of funds in your 529 account are not taxed. Therefore, the longer your money is invested in a savings plan, the more time it has to grow and the greater the tax benefit. The upshot here is a simple one. Although contributions are not deductible from your federal income tax, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for qualified expenses. 

Conclusion

It is important to secure your financial future first, before turning to your children. However, once you turn to the financial future of your children, a 529 plan should be on the top of the list. 529 plans allows account holders to put away funds for a beneficiary, typically a child or other loved one. A 529 plan is an easy way to get your child off on the journey to financial independence.

For your convenience, we have provided a chart below with links to the related State 529 plan. Continue on your journey to financial independence. 

States of the United States of America
and Washington, D.C. 529 Plans		Abbreviation
AlabamaAL
AlaskaAK
 ArizonaAZ
 ArkansasAR
CaliforniaCA
 ColoradoCO
 ConnecticutCT
 DelawareDE
FloridaFL
GeorgiaGA
 HawaiiHI
 IdahoID
 IllinoisIL
IndianaIN
IowaIA
 KansasKS
KentuckyKY
 LouisianaLA
MaineME
 MarylandMD
 MassachusettsMA
MichiganMI
 MinnesotaMN
Flag of Mississippi ("New Magnolia Flag").svg MississippiMS
 MissouriMO
MontanaMT
 NebraskaNE
 NevadaNV
 New HampshireNH
 New JerseyNJ
 New MexicoNM
 New YorkNY
 North CarolinaNC
 North DakotaND
 OhioOH
 OklahomaOK
 OregonOR
 PennsylvaniaPA
  Rhode IslandRI
 South CarolinaSC
 South DakotaSD
 TennesseeTN
 TexasTX
 UtahUT
 VermontVT
 VirginiaVA
WashingtonWA
 Washington, D.C. (District of Columbia)DC
 West VirginiaWV
 WisconsinWI
 WyomingWY

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Saving Money Starts Now

Saving Money Starts Now

Money Maroon

Saving money begins with first having at least one income stream. Second, saving money requires spending less than your income, not spending in excess and doing so consistently over time. Saving is the first step towards financial independence and while saving money is a simple concept, consistently saving over time is difficult for many.

Assess Your Current Financials

If you truly would like to begin saving money, it is important to know where you are financially. It is important to take stock of your financials right at this moment. It is time to know what your monthly expenses are and how much you are bringing in each month.  By making a list of your monthly income and monthly expenses, you get a clear picture of why you are getting in debt or not saving enough.

Determine How Much You Can Save

When it comes to saving money, the math will never work if your expense are higher than your income. Once you make a list of your monthly income and your monthly expenses, it is time to take a close look at your list of monthly expenses. Now ask yourself, what can be reduced or cut out? It may be: moving to a smaller home to reduce rent/mortgage, moving closer to work to reduce the cost of commuting, bringing your lunch to work, stop/reduce eating out, cut your cable or other subscription costs. Make your list, however, whatever the cost cutting measure may be, it is important to review your list of expenses and be honest with yourself. While it is great to say that you will cut or reduce your expenses, you must be able to actually implement your plan of reducing cost.  

Increase Your Income

Now, turn to the income side of your list. How can you increase your income? This increase need not be immediate, but must be doable. For example, you can request a raise, change jobs, invest in your education and return to school/learn a skill to get a better position or research a side hustle that may provided additional income? The goal is to increase your income such that your income is higher than your expenses.

Begin Saving Money

Once you are able to get your income higher than your expenses, you have done the hard work and you are 90% there. But you must take the next critical step and perform the act of saving money. Now that your income is higher than your expenses, you must save that money. Many fall into the trap of spending their disposable income each month. Do not fall into this trap, remember, your goal is not to simply reduce your expenses and increasing your income. Your goal is to save money. So save your money.

There are a number of tools available that facilitates saving money. For example you can automate your savings by automatically transferring money from your pay to a savings account or you may save in a high yield savings account that provides higher interest rates than the typical brick and mortar banks. Research the options available to maximize and grow your savings. Further, to consistently save, while it is not required, a budget may provide a financial guide.

Saving Money And Your Future

Now that you are saving money, do look towards the future and your financial health. Look to paying off debts, investing, and contributing to your retirement. Saving is only the first step on the path to growing financially and financial independence.

Conclusion

Saving money begins with first having at least one income stream. Second, saving money requires spending less than your income, not spending in excess and doing so consistently over time. Saving is the first step towards financial independence and while saving money is a simple concept, consistently saving money over time is difficult for many. Take your first steps to financial independence today.

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