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New Social Security Legislation

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We finally have a little movement on Social Security reform! Sometime this fall, the House will introduce legislation and hold a vote in order to keep the Social Security Trust Fund solvent through this century.

What is Social Security?

Social Security is a benefit program introduced during FDR’s presidency. You pay into the program via payroll taxes, commonly referred to as FICA, and then receive a specified amount during retirement.

Social Security also provides disability payments for those who can’t work, as well as spousal benefits for widows/widowers.

The calculation that determines your monthly benefit takes into account your 30 highest-earning years, with at least 10 years, or 40 quarters, needed to qualify.

If you are short a quarter, a year, or more, SSA uses $0 for that period of time, which can drastically reduce your monthly benefit.

That’s enough about the nuts and bolts, let’s dive into the current program, followed by the new legislation.

How healthy is the current program?

It depends on how you define healthy. Currently, the Social Security Administration is paying out more than it’s taking in.

Social Security has a reserve fund that they go to in order to make good on payments. That reserve fund is set to run out in 2035. Now that does not mean that Social Security is doomed!

If nothing is done, the reserve will run out and then benefits will have to get cut. Most calculations are saying a 15%-25% reduction.

The current set up for Social Security is like this:

  • People born before 1946 – Full-retirement age (FRA) is 65.
  • People born between 1945 and 1965 will see a 2-month increase in their FRA each year with the cap at 67.
  • Anyone born after 1964 – FRA is 67.
  • Current FICA taxes are 6.2% for employees and 6.2% for employers.
  • Maximum taxable earnings – $132,900 – Anyone who makes more than that does not pay FICA taxes.

Full retirement age (FRA) is the age you must attain in order to receive your full benefit. If you apply early, your benefits are reduced, and if you put off receiving those benefits, you’ll get more.

With that said, let’s get into the new legislation.

Proposed legislation

There are four parts to this new law, which is called the Social Security 2100 Act.

  • First change – FICA is going up to 7.4% for employees and 7.4% for employers
  • Second – Maximum taxable income is going up to $400,000
  • Third – Benefits will see a 2% increase
  • Four – SSA will use a new index to adjust benefits for the cost of living

My thoughts

This has been a long time coming. The Federal Government desperately needed to act in order to ensure Social Security would be here for the coming generations.

While I like the changes that have been proposed, I have two things I want to gripe about.

One, the 2% bump in benefits was not necessary. Though the Cost of Living Adjustment (COLA) has been minimal in the last few years, it still exists. Benefit recipients will continue to see an increase in benefits.

Two, they did not address the retirement age. As I mentioned, the current FRA is 67. With current life expectancy nearing 80 and improvements in medicine coming every day, this should have been increased, as well as the age cap for collecting benefits.

You have to take benefits when you turn 70, whether you want to or not. If we are living longer, FRA and the age cap should go up. Either way, I’m glad we’re starting to see movement on this front.

Here are some sources and some related reading:

Social Security 2100 Act

Social Security History

Future Financial Status of the Social Security Benefit Program

When Should I Take Social Security?

Will Social Security Run Out Of Money?

Tips for Avoiding Social Security Disability Denial

Impeachment And The Stock Market

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The talk of impeachment is flooding the headlines, so we’re going to explore it, how impeachment proceedings took place in the past, what happened to the market with each instance, and what you should do with your money/investments while these events transpire.

What’s the process?

The first step in any impeachment proceeding begins with a formal inquiry. This is done by the House of Representatives, and that’s where we are at this point in time.

During the inquiry, the evidence is gathered by the house to help make their case. Once they’ve gathered everything they needed, they take a vote.

If that vote passes, it goes to the Senate. They, like the House, review the evidence and take a vote. If the Senate’s vote doesn’t pass, then the President may be acquitted, and things end there.

What history tells us

There have been three impeachment inquiries, with only one actual impeachment.

The first was Andrew Johnson in 1868. The second was Richard Nixon in 1973. The third was Bill Clinton in 1998.

Which one was impeached? Bill Clinton. However, the Senate acquitted him and he was not removed from office.

When Andrew Johnson went through the impeachment process, the stock market (yes there was a stock market back then) really didn’t do anything, finishing that year up 1.5%.

During the impeachment proceedings with Nixon, the United States was in the middle of a recession. From the initial inquiry to the day he resigned from office, the S&P 500 fell about 30%.

With Clinton, however, the economy and the stock market were in the middle of an expansion. From beginning to end, the S&P 500 gained about 28% during his impeachment process.

What history tells us is that the period surrounding the impeachment will lead to greater volatility, but the long-term direction of the market is determined by fundamentals.

Be mindful of the headlines

The current impeachment inquiry with President Trump is dramatically different from the other three.

  • The internet makes updating the public instantaneous
  • Algorithmic trading can be programmed to execute orders when publications mention Trump, impeachment, etc.
  • We’re in the middle of a trade war with China, so uncertainty at home (U.S.) puts Trump in a weaker position to negotiate. What’s more, if impeachment looks more and more likely, Trump may be inclined to make a deal to help his case…even if it’s a bad one.

What should you do?

That depends. If you have 15+ years until you need to access your investments, I would tell you to do nothing. If you’re in retirement or it’s right around the corner, however, I would think about being a little more conservative.

When you grow more reliant on your retirement savings, your primary objective must move from capital appreciation to capital preservation.

I’ll link to several resources that should give you more guidance about retirement planning by age, investing in volatility, and more information about what’s been discussed here.

Related Reading:

Why Asset Allocation Matters

How To Invest In A Volatile Market

How Does Trade Policy Affect Me?

The Questions You Need To Ask Yourself

Our New Low(er) Interest Rate Environment

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With the talk of interest rates and recession in the headlines, I figured it was a good time to check-in, and give a little update on interest rates and how lowering them can impact the economy, issuers, and investors.

Why is the FED cutting?

Basically, the FED is cutting to extend the current economic expansion we are in.

The fundamental reason behind that is lower interest rates encourage corporations and consumers to spend more.

For two reasons.

One, they get paid very little, in interest, to put their money in the bank. And two, they are able to borrow money at lower rates.

Current income needs

People who need income, retirees, for example, invest their money in income-producing securities. Often times, those securities are fixed income instruments, like bonds.

Bonds pay interest on a semi-annual basis. The higher the credit quality of the issuer (company or government entity) the lower the payout. The inverse is true for a low credit quality issuer.

It’s the ever-present adage in investing, more risk equals more potential for reward.

When interest rates continue to creep lower, then those people start to make different choices.

What people are doing now

People are getting paid less, in interest, to invest in high-quality debt issuers, so they’re getting riskier. Meaning, they are investing that money with low credit quality companies and/or government entities.

Their risk of not receiving interest payments and getting their principal (the initial investment) back goes up.

The FEDs tool kit

I’ve touched on this point a few times in the past, but I’m going to hammer it home.

The Federal Reserve, essentially, has two tools. Lowering interest rates and buying Treasuries. Lowering interest rates promotes spending and buying Treasuries provides liquidity.

Because they are lowering interest rates during an expansion (whether we are still in one or not is debatable, but let’s say we are for the sake of argument), they are, effectively, removing the number of tools they have available.

When the next recession comes, my fear is they won’t be able to do enough to help us out of it.

Corporate debt

Currently, the amount of corporate debt in the market is the largest in history. Additionally, the amount of debt that’s rated BBB is also the highest in history.

BBB is the last rung on the investment-grade scale. Investment grade is anything BBB and above.

That’s a problem for basically one reason. When a BBB rated issuer gets downgraded (to BB) they are classified as junk (high-yield). When that happens, they need to tighten up their debt and improve their balance sheet. This means less borrowing and less spending.

It’s a dynamic that feeds itself. The issuer is downgraded, they spend less, GDP gets weaker, more corporations follow suit, and here comes the recession.

Investors

Once the corporate (high-yield) debt pops, issuers of debt will have trouble meeting their obligations. They’ll start to default, and their investors will be left high and dry.

Conclusion

This post is not intended to scare people, it’s to inform.

One last point. Because interest rates have been so low for so long, there are economists/academics that think the lowering of interest rates won’t actually help.

Related Reading:

Interest Rates And Trade

What Is A Bond?

Why Do Interest Rates Matter?

 

 

*The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

What To Do About Debt Collectors

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Debt collectors can be a real pain in the rear. They’re relentless, they can be rude, and they can be scamming you!

In this article, we’ll learn what to do when faced with debt collection.

Background information

It’s not really important to know how debt collection works, so I’m just going to give you a brief summary.

Wherever your debt originated from, they will get to a point where they’ll no longer “chase” after you for payment. They will sell the debt to a collector. That collector will try to get you to pay, and you might pay some, but whatever is leftover, they’ll sell to the next debt collector, and so on.

Get information about debt

Debt collection agencies have to send you a report, on paper, listing how much you owe and to whom. They have to send it to you within 5 days of speaking to you. Before you exchange any kind of information, have them send you that report.

Odds are, if you don’t get that report, you probably don’t owe the collector for the particular debt they were calling about.

Keep records

Whatever system you use, whether it’s paper or paperless, keep good records. Especially, anything finance related. If you have documents that show what debts you owe, then you know a call from a collector is a scam.

If you do get a call from a debt collector, take copious notes. When they called, what their name was, to what debt they are referring to, and so forth. If they pursue legal action, having notes and records at your disposal should help your case.

Fight the claim

If you think a debt collector is trying to scam you, write them a letter explaining yourself. You can also write a letter asking them to stop calling you. By law, they need to stop if you ask (see below).

What they can’t do

  • Using rude or threatening language
  • Continuing to call even after you told them to stop
  • Calling before 8 a.m. or after 9 p.m. unless you agree
  • Calling you at work if you have asked them to stop
  • Talking to anyone but you or your attorney about the debt
  • Misrepresenting the amount of your debt
  • Falsely claiming to be an attorney or law enforcement
  • Falsely claiming to be a credit bureau representative
  • Threatening to sue unless they actually plan to take legal action
  • Threatening to garnish wages or seize property unless they actually intend to do it

Negotiate your debt

If it turns out the call from a debt collector is legitimate, negotiate with them. Start off the negotiation saying you’ll pay a low percentage of what the debt is. For example, 15%. They’ll inevitably come back with a higher number.

I’d advise you to have a “ceiling” in mind. A number you are unwilling to go above. In the end, they’ll take something rather than taking you to court (which, honestly, they still could).

Share very little

Don’t give out your information. Upon doing research for this post, one source said that it’s okay to give them your address. I guess this can be up to the person on what information they give out, but I’d tell you not to give them anything.

If the debt they are calling about is legitimate, they should have all of the necessary information. They got a hold of you after all, right?

As they say in poker, keep the cards close to your chest.

Conclusion

At some point in your life, hopefully not, you’re going to get a call, email, or text from someone trying to scam you.

In this day and age, a lot of the people that do this are “good”. When I say good, I mean skilled. They know what to say and what tricks to play.

Similarly, if they continue to do something, as to say they continue with a particular schtick, it’s because it works. That’s why that Nigerian Prince tactic still exists. Because people fall for it.

Trust nobody is a pretty dramatic statement. I’d rather use trust, but verify. Another way to look at it is being skeptical. If it sounds fishy or too good to be true, it usually is. Trust your gut.

Related Reading:

What You Need To Know About Bankruptcy

Filing a Chapter 13 Bankruptcy

How To Pay Off Credit Card Debt

How Does Trade Policy Affect Me?

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With talks of trade and tariffs filling headlines, I thought it fitting to explain what these terms actually mean and how they affect our economy.

Trade

In its most basic form, trade is the exchange of goods and services. What we’re talking about, however, and why this article is so relevant, is global trade.

The current “trade war” between the U.S. and China is about “unfair” trade (so President Trump says). Now I’m not debating as to whether trade between our two countries is fair or if I agree with his use of tariffs, I’m going to explain why this all matters.

China and the U.S. are complete opposites when it comes to trade. China is a net exporter and the U.S. is a net importer. China exports more than it imports and the U.S. is the reverse of that.

China is able to produce goods at a much lower cost because their cost for labor is so low. The U.S., on the other hand, is more costly to employ workers.

Tariffs

President Trump is utilizing tariffs to do two things. One, he’s trying to keep people employed domestically, instead of companies shipping jobs overseas.

A tariff increases the overall price of a good. By doing this, it gives employers an incentive to keep jobs in the U.S. because the money they save by shipping jobs abroad is reduced or taken away.

Two, he wants to reduce our trade deficit. Remember the U.S. is a net importer. By slapping tariffs on Chinese goods, it encourages U.S. consumers to buy products from U.S. manufacturers. Thus, fewer imports from China.

Theory vs. Practice

In theory, this sounds like a great plan, but in practice, however, it’s the consumer that pays the price.

When a tariff is used, the exporting country doesn’t see any taxes or penalties. The end result is an increased cost for each product.

For example, if you bought a pair of headphones for $100 and the electronics that make up those headphones are the recipient of a 15% tariff, those same pair of headphones now cost $115.

Now here’s where things get a little more complicated.

China’s Response

China has retaliated with tariffs of their own, but what they’ve also done is manipulate their currency.

You may have seen that in the news a few weeks ago when President Trump labeled them a currency manipulator.

When Trump put tariffs on Chinese goods, China reduced the value of its currency compared to the USD (U.S. Dollar).

This counteracts the effect those tariffs have.

Why It Matters

One, the markets hate uncertainty, so the more this is dragged out, the less likely we are to see an agreement between the two countries. Uncertainty leads to volatility, volatility leads to selling, and selling leads to declines.

Two, through the use of technology and more efficient supply chains, our planet has become very interconnected.

Global trade is a great thing. Each country has its strengths and weaknesses. When countries can focus on their strengths, we can produce more of something for less cost, and then trade with each other. Everyone wins.

Protectionism

This trade war does the opposite. It’s reducing everyone’s willingness to work together by creating a protectionist environment.

A protectionist mentality favors home country and doing business only in your home country. That restricts global trade and the exchange of goods.

The goal here is creating a fair trade agreement that benefits the global economy and (now) minimizes damage to individual economies.

What You Can Do

The most challenging part about this whole situation is we don’t know what’s going to happen. If a deal gets done, the market will like that, but if a deal doesn’t get done, I see a stock market decline in our future.

How do you prepare then? My best advice is the same as the advice I usually give, allocate according to your risk tolerance and time horizon. Those two things should dictate your investment strategy and whether or not you should be concerned with the outcome of this trade war.

Further reading:

Interest Rates and Trade

Why Asset Allocation Matters

Trade, Interest Rates, and Australia

Questions You Need To Ask Yourself

My Thoughts On The Market

 

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.” 

Inexpensive Fall Activities

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With Fall quickly approaching I thought it’s fitting to write an article about the (inexpensive) activities you can partake in that won’t break the bank.

Below you’ll find a large number of fun things you can do when the leaves start to change.

  1. Go for a hike – Depending on where you go, this can be free! If the hike takes place in a state park, there might be a small fee. Regardless, a hike is a great way to spend time, get exercise, and experience nature.
  2. Pick pumpkins – This is an autumn staple! Go to your local pumpkin patch and pick out your favorite pumpkin. Then figure out what design, pattern, or face you’ll carve into it and go to town!
  3. Have a picnic – Ingredients for sandwiches, potato salad, chips, and a dessert item. What else could you need? Through in an item from below (scenic drive) and a nice spot to set up, and you’re good to go! Inexpensive and relaxing.
  4. Apple orchard – Go apple picking! Gives you a great excuse to go outside, walk, and hand-pick some healthy food for yourself. A typical orchard operation will charge you $1.25-$2.00 per pound.
  5. Local festivals – Most of these are free or cheap to attend, with most of the cost coming from the games and events you participate.
  6. Maze – Many of the fall festivals will have a maze. These are typically made from hay bales. Additionally, farms that have pumpkins to be picked sometimes have a corn maze and/or hayrides. I have one of those near me and it was a ton of fun, and cheap too.
  7. Football games – Local high school games are really exciting to watch. They’re inexpensive to go to, they usually have good food, and you get to show off some hometown pride. Added bonus, you could have a promising player on your team or one on a visiting team to watch. I don’t know about you, but watching a special talent is…well..special!
  8. Haunted house – I’m partial to the scary stuff because I’m into things that frighten me, but haunted houses are awesome. Yes, some are quite lame, but when they’re done right, it’s exhilarating!
  9. Sit around the campfire – This is an incredibly relaxing activity. Sitting around a fire with your family and/or friends, roasting marshmallows, and making smores – can’t get much better. Costs nothing more than marshmallows, graham crackers, and chocolate!
  10. Scenic drive – For me, there aren’t many things that can beat a scenic car ride (the previous item does). Especially in the fall. Trees change colors, there’s a slight nip in the air, and it just smells like autumn.
  11. Scary movie marathon – I understand that scary movies aren’t for everyone, but if you have a few and invite people over that bring additional movies, you can make a long and scary evening out of it. If you don’t have scary movies, go to your local library and check some out. It’s free!
  12. Make collages with leaves – This could be a nice, little craft you can do as a family. Especially if you have young kids. They love getting messy and creating with their hands. They can also have a ton of fun jumping in leaf piles before you pick the leaves out for your collage.
  13. Ghost hunting – Seriously. In doing research for this post, this actually came up, and it surprisingly checks out. There are a number of apps available. 

All-in-all, autumn is my favorite time of year. I love the weather, the leaves changing, and all of the fun things you can do. I recommend doing at least one of these activities in the next few months!

Different Ways To Think About Money

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Your money philosophy and how you think about your finances make a big difference in the decisions you make.

Whether you’re just starting your financial journey or you’re well into it, it’s a good idea to take a step back and define that philosophy.

Money is a tool

Sure, there are monetary goals you would like to achieve. For example, $1 million nest egg has long been touted as the number you need to hit for a comfortable retirement, but hitting, somewhat, arbitrary numbers aren’t everything.

Money is a tool. If used properly, you really can achieve financial success. Taking the money you’ve saved and putting it to work for you is a very simple, yet effective way to use it.

Another monetary tool is a credit card. Credit cards offer a variety of reward programs, like travel miles, cashback, among others. Additionally, it enables you to build and strengthen your credit report.

It is important, however, that if you are using a credit card, you must do so responsibly. Accumulating credit card debt can really set you back, financially.

Related reading: A Deep Dive Into Credit Cards

Focus on the solution, not the problem

Often times, we focus too much on the issues with our finances. I have too much debt, I have too little saved for retirement, or my expenses are killing my ability to save.

Instead of focusing on the problem, focus on what can be done to fix it.

If you have too much debt, develop a plan to pay it down. If your retirement savings are low, figure out how you can increase your savings rate. Expenses hurting your ability to save, cut your expenses.

“Whatever the problem, be part of the solution. Don’t just sit around raising questions and pointing out obstacles.” Tina Fey

Related reading: How To Cut Spending

Money using emotional bandwidth

It is true that money is relatively important. I say relatively to try and redirect to my first point when I mentioned that money is to be used as a tool.

It affords you food to eat, clothes to wear, and a place to live, among other things. If your basic needs are met and future goals are being worked towards, you have to try and stop worrying that you don’t have enough.

This is extremely challenging to do because we, as a society, are so fixated on money and material items that money can buy. It also doesn’t help that comparing ourselves to others is essentially baked into our DNA.

Believe me, I know that learning to stop worrying is incredibly difficult, but retraining your brain to view your finances differently can be extremely liberating.

Related reading: The Psychology Of Money

Think long-term

To be a successful investor or to be able to financially plan effectively, you have to think long term.

The market is going to have its ups and downs. As an investor, it’s important to ride out those down periods and continue to invest. If you have 15+ years until you need that money, you should be able to recoup your losses.

With regard to saving, I typically take the “bucket” approach. I have three buckets, short-term, medium-term, and long-term. Be advised: the following is how I define these time horizons.

  • The short-term bucket is for items under 5 years away. For example, when I want certain debts paid off or a down payment for a house.
  • Medium-term is anything 5-15 years away. The main one in this category is my son’s college savings.
  • Long-term is retirement savings, exclusively.

Related reading: How To Make Long-Term Investing Decisions

Buying experiences versus buying stuff

Money to a certain extent can buy happiness. As long as it’s being spent on experiences rather than stuff.

Memories with family and friends, visiting different destinations and attractions are the things we’ll cherish most.

Stuff breaks and toys are outgrown. What people won’t forget, however, is the time you spent with them.

Make that a priority. I know, as a fairly new parent (my son is almost 2), that I am constantly aware of how finite time is and that I need to make the most of those moments I spend with him.

The way you think about money pulls weight in how you use it. When creating a financial plan, I would prioritize figuring that out. How you think can lead to how you act.

The Questions You Need To Ask Yourself

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Questions are a fantastic way to understand things better. They are vitally important in our everyday lives.

One area where I think they are underutilized is personal finance.

You NEED to ask yourself questions on the regular so you can discern if you are doing the right things and taking the correct steps for YOU.

In the following article, we’re going to explore the various questions you need to ask yourself in order to be financially effective.

What is my goal with money?

This is a fairly general question, so we’ll break it down into three buckets: short term, medium-term, and long term.

  • Short-term (Under 2 years) – If you are saving for a short-term goal, what is it? A vacation? Down payment on a house? No matter the goal, that money will be used soon so the best place for it is in a savings account.
  • Medium-term (2-10 years) – This could be anything from a down payment for a house to saving for your kids’ college education. What you do in the interim depends on when you’ll need it and the goal you are saving for. If it’s less than 5 years, I’d still recommend a savings account or short-term bonds. Something that can earn you a little interest, but is still relatively safe. That 5-10 year period depends on the goal. If there’s a particular dollar amount you need to it (down payment, for instance) I’d go no more than moderately aggressive. You want to earn a little, but you don’t want that saved amount to go under what you need.
  • Long-term (10+ years) – Most often, a goal that’s over 10 years away can be invested in the stock market, though the percentage of your assets that’s actually in the market depends on the risks you are willing to take and when you need to access those funds.

Related reading: Financial planning for all ages

How much am I willing to lose before I sell?

I almost always propose this question to new clients because it gives me a good understanding of their risk tolerance.

If they are only comfortable with losing 10 percent of their portfolio, they’ll be invested pretty conservatively.

On the other hand, if they can tolerate a 50 percent drawdown and not bat an eye, then we can “put the pedal to the floor”, excuse the expression.

Determine how much of a loss you can stomach and that will give you a good idea of how to allocate your assets.

Related reading: Are you taking on too much investment risk?

How long will it take to adjust my allocations?

Questions regarding asset allocation, typically, pertain to risk and time horizon. For example, if you start saving for retirement when you’re 25, the majority of your portfolio will be in equities (stocks).

This allocation, generally speaking, is suitable for you for a couple of decades. At which point, you’ll probably (again, speaking generally) want to shift a little more of your portfolio to bonds.

Your allocation will, and should, shift over time, and once you get within a few years of your goal, the primary objective of your portfolio becomes capital preservation.

Related reading: Why asset allocation matters

Are my actions suitable for my current financial situation?

Financial situation takes everything into consideration (income, debt, spending, savings, etc.) Actions can be anything related to those items.

Specifically what I’m talking about is how much you are saving, how much you are spending, and how much $ you’ve dedicated to paying down debt.

If you have a sizeable amount of debt and not a whole lot of savings, it’s time to cut your spending. Conversely, if you’ve paid down your debt and are ahead of the game with your savings, it would be alright if you loosened up a little and enjoy yourself.

Like everything in life, your personal finances are a delicate balancing act, and when you ask questions, you can figure out how to shift your priorities.

How is my money being spent?

Kind of related to the last point. Tracking your spending to find out exactly where all of your dollars are going is an important step.

Another recommendation I usually make is to create a financial playbook. Here’s a brief outline of how I create a financial playbook:

  1. Big picture – List all assets and liabilities. How much you have saved and how much debt you have.
  2. List your necessary expenses – These are things that you have to pay (rent, utilities, transportation, food, minimum debt payments, etc.)
  3. List your monthly income
  4. Total up your monthly necessary expenses and your monthly income and see how much you have leftover. What’s leftover will help you discern what to do with it.
  5. I would list another line item for “fun,” though I would keep it to a minimum.
  6. What’s left after fun should be saved and used on debt.

Related reading: How to cut your spending

Conclusion

As I said in the beginning, questions help us understand the world, and ourselves, better.

Having a better grasp on why and when we make certain changes or do certain things is a must if we are to be more effective in managing our finances.

Your Wealth: What You Shouldn’t Do

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Establish an emergency fund, pay down debt, save for retirement, and grow your wealth! Much of your financial life is focused on the things you should do.

However, what I think to be more important are the things you shouldn’t do!

Educational Debt

There’s been a lot of literature/news over the last few years about how much of a problem student loan debt is. As of 2018, total student loan debt was $1.47 trillion. With a T! (Source)

That said, here are some things you should avoid.

  • Taking on too much – Some degrees/professions require a lot of schooling, which can lead to large amounts of student loan debt. And I don’t mean to speak ill of any degrees/professions, but if your desired career requires a “basic” 4-year degree, it’s probably best to find an in-state university to cut costs. Better yet, start at a local 2-year university or tech school until your Gen. Eds. are complete, then transfer.
  • Not having a plan for after – I think this is a common fear for Millennials and Gen Z, but you have so much time to figure things out. Don’t just go to college to get a degree. If you need time, take time. Once you figure out what you want, determine what you need to do to get there.
  • Not researching options – There are SO many student loan options. Depending on what type of loan you choose (private or public), you could have a wide range of payback methodologies. I wrote about student loan options and payback options in two previous posts. Check them out!

Credit cards

There are two BIG problems with credit cards. People who use them irresponsibly and people who don’t use them at all.

  • Using irresponsibly – This one pretty much speaks for itself. This pertains to people who spend way more than they ought to. A good rule of thumb is to only buy something using a credit card if you have the funds readily available to pay the balance off. Don’t have the money, don’t put it on the card. Doing so will cost you in interest and can really set you back.
  • Not using at all – Better than the first point, but still not great. Using a credit card can help your financial situation if you use it correctly. Most of them have rewards of some sort. It’s another credit account on your report. Charging and paying off right away establishes a good payment history. All good things for your credit score.

No emergency fund

Establishing an emergency fund is Step 1. If you don’t have money set aside for unexpected expenses, you’ll have to charge it. This leads to the point above about irresponsible use.

Save $1,000 for emergencies, turn your attention to high-interest debt (credit cards), and then shift your focus back to your emergency fund once that debt is paid off.

Spending

  • Paying bills late – Not paying your bills on time, especially ones shown on your credit report is a big mistake. The #1 factor in calculating your credit score is payment history. Paying ONE bill late will knock your score down. Just one. Don’t do it.
  • Spending too much – (See irresponsible credit card use) This is especially harmful if you frivolously spend BEFORE taking care of important “budget items”. Things like saving, debt payments, and bills.
  • Being too frugal – Though frugality is helpful in building wealth, it can also hurt you. There comes a point when you are too frugal. A vital life skill is doing things in moderation. If you pinch pennies and forego rewarding yourself, you run the risk of breaking the bank on a “bender”.

Investing

  • Waiting – I cannot stress enough the importance of investing early. What helps you make the most of your retirement savings is compound interest. The more time you have to invest, the more compound interest works in your favor.
  • Panic selling – This is a timely point since the market dropped almost 5 percent in the last week. Selling out of fear is always bad. More often than not, when you “panic sell,” you’ve already experienced the majority of the drawdown. Now, this depends on your particular situation, but it behooves you to stay invested during that period.
  • Using generalities when setting up an investment plan – Your investment plan needs to reflect your goals, risk tolerance, time horizon, and behavior. Using generalities is good for someone who writes about this stuff, but it’s not good for YOU. Your plan has to be tailored to YOU.

Life and Wealth

  • Sticking with a job you hate – Sometimes money and comfort makes us do things we don’t want to do. Being unhappy at your job is not worth it. It’s important, however, to thoroughly think through this decision. Quitting is tough, but if your family counts on you for income, you need to have a plan in place before you jump ship.
  • Comparing yourself to others – I’m going to encourage you to develop a new mindset because society taught us that wealth looks like fancy cars and big houses. I want you to think about stealth wealth. It’s probably my most favorite phrase/term. Someone with stealth wealth lives within their means. They live in a modest home, drive a car for transportation only, but saves more than the average person. They don’t “look” wealthy, but their retirement account says otherwise.

Further reading:

What it takes to be a successful investor

How to pay off credit card debt

Creating a financial plan you can stick to

What It Take To Be A Successful Investor

by

What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

  • Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
  • Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
    • Long time horizon – 10+ years
    • Medium time horizon – 2-5 years
    • Short time horizon – Less than 2 years
  • Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

Further reading:

The Psychology Of Money