Should I stay or should I go? Wrestling with the decision to quit a career

January 8, 2021 Penny Matthews 0

J.D.’s note: In the olden days at Get Rich Slowly, I shared reader stories every Sunday. I haven’t done that since I re-purchased the site because nobody sends them to me anymore. But earlier this year, Mike did. I love it. I hope you will too.

Earlier this year, I sent my wife a text message: “On a scale of 1 to 10, how freaked out would you be if I quit my job this afternoon?”

My wife and I had only been married a short while, but she’d known since our second date that I didn’t plan to work in my traditional job until normal retirement age. She also knew that I hadn’t been very happy at work in recent months.

We’re very compatible financially — both savers raised in working-class families that didn’t always have a lot. We make a point of having what we like to call “Fun Family Finance Day” from time to time. On Fun Family Finance Day, we do everything from competitively checking our credit scores to discussing questions that get at the root of our money mindsets to help us create our goals.

But this question wasn’t part of the plan. Not then.

And it was never on any of the lists of questions that we’d discussed with each other. It was like a pop quiz, a pothole in the smoothest relationship road I’d ever traveled…and I was the one putting it there.

Dreams Remain Dreams Without Doing

My wife and I rarely argue, but when we do it’s usually about food. It’s the kitchen and the grocery store that are our battleground. Our finances are fine. Thankfully, when you’re confident in the life you’ve created and the person you chose to build it with, it’s a lot easier to be honest about what’s on your mind.

That still doesn’t always mean you get the answer you want. Or the answer you were expecting. She responded: “Wait what. Kinda. What would you do?”

A completely reasonable and fair question. Not to mention one that I’d probably have to get comfortable answering from a lot more people.

I think my immediate reaction was: We talk about this stuff all the time, where is my, “No worries baby, YOLO!”? (I must have watched too many romcoms back before we cut cable from our lives.)

Being a grownup, it turns out, is actually really hard sometimes. I was about to learn that talking about something, and actually doing it, are a world apart.

Life is full of dreamers and doers. Sometimes those two personalities cross over. But there are plenty of people who go through life talking about so many things they’ll never have the courage to try — or the discipline and determination to follow through with.

Which person was I? The dreamer? The doer? Or that fortunate combination of both?

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Got Cash? What to Do with Extra Money

January 8, 2021 Penny Matthews 0

I received a great email from Magen L., who says:

I no longer have any retirement savings because I cashed it all out to pay my debt. We also sold our home and moved into an apartment just as the pandemic was hitting. With the sale of our house, the fact that my husband is working overtime, and the stimulus money, we've saved nearly $10,000 and should have more by the end of the year. My primary question is, what should we do with it?

Right now, I have our extra money in a low-interest bank savings [account], and I'm considering moving it to a high-yield savings [account] as our emergency fund. Is that a good idea? For additional money we save, I intend to use it as a down payment on a new house. However, should I be investing in Roth IRAs instead? What is the best option?

Another question comes from Bianca G., who says:

I have zero credit card debt, but I have a car loan and a student loan. I will be receiving a large amount of money sometime next year. If my fiancé and I want to buy a home, is it better to pay off my car first and then my student loan, or should I just pay down a big portion of my student loan?

Thanks Megan and Bianca for your questions. I'll answer them and give you a three-step plan to prioritize your extra money and make your finances more secure. No matter if you're a good saver or you get a cash windfall from a tax refund, an inheritance, or the sale of a home, extra money should never be squandered.

What to do with extra cash

Maybe you're like Magen and have extra cash that could be working harder for you, but you're not sure what to do with it. You may even be paralyzed and do nothing because you have a deep-seated fear of making a big mistake with your cash.

In some cases, having your money sit idle is precisely the right financial move. But it depends on whether or not you've accomplished three fundamental financial goals, which we'll cover.

To know the right way to manage extra cash, you need to step back and take a holistic view of your entire financial life.

To know the right way to manage extra cash, you need to step back and take a holistic view of your entire financial life. Consider what you're doing right and where you're vulnerable.

Try using a three-pronged approach that I call the PIP plan, which stands for:

  1. Prepare for the unexpected
  2. Invest for the future
  3. Pay off high-interest debt

Let's examine each one to understand how to use the PIP (prepare, invest, and pay off) approach for your situation.

How to prepare for the unexpected

The first fundamental goal you should have is to prepare for the unexpected. As you know, life is full of surprises. Some of them bring happiness, but there's an infinite number of devastating events that could hurt you financially.

In an instant, you could get fired from your job, experience a natural disaster, get a severe illness, or lose a spouse. If 2020 has taught us anything, it's that we have to be as mentally, physically, and financially prepared as possible for what may be around the corner. 

While no amount of money can reverse a tragedy, having safety nets can protect your finances. That makes coping with a tragedy easier.

Getting equipped for the unexpected is an ongoing challenge. Your approach should change over time because it depends on your income, debt, number of dependents, and breadwinners in a family.

While no amount of money can reverse a tragedy, having safety nets—such as an emergency fund and various types of insurance—can protect your finances. That makes coping with a tragedy easier.

Everyone should accumulate an emergency fund equal to at least three to six months' worth of their living expenses. For instance, if you spend $3,000 a month on essentials—such as housing, utilities, food, and debt payments—make a goal to keep at least $9,000 in an FDIC-insured bank savings account.

While keeping that much in savings may sound boring, the goal for an emergency fund is safety, not growth. The idea is to have immediate access to your cash when you need it. That's why I don't recommend investing your emergency money unless you have more than a six-month reserve.

The goal for an emergency fund is safety, not growth.

If you don't have enough saved, aim to bridge the gap over a reasonable period. For instance, you could save one half of your target over two years or one third over three years. You can put your goal on autopilot by creating an automatic monthly transfer from your checking into your savings account.

Megan mentioned using high-yield savings, which can be a good option because it pays a bit more interest for large balances. However, the higher rate typically comes with limitations, such as applying only to a threshold balance, so be sure to understand the account terms.

Insurance protects your finances

Another critical aspect of preparing for the unexpected is having enough of the right kinds of insurance. Here are some policies you may need:

  • Auto insurance if you drive your own or someone else's vehicle
  • Homeowners insurance, which is typically required when you have a mortgage
  • Renters insurance if you rent a home or apartment
  • Health insurance, which pays a portion of your medical bills
  • Disability insurance replaces a percentage of income if you get sick or injured and can no longer work
  • Life insurance if you have dependents or debt co-signers who would suffer financial hardship if you died

RELATED: How to Create Foolproof Safety Nets

How to invest for your future

Once you get as prepared as possible for the unexpected by building an emergency fund and getting the right kinds of insurance, the next goal I mentioned is investing for retirement. That’s the “I” in PIP, right behind prepare for the unexpected.

Investments can go down in value—you should never invest money you can’t live without.

While many people use the terms saving and investing interchangeably, they’re not the same. Let’s clarify the difference between investing and saving so you can think strategically about them:

Saving is for the money you expect to spend within the next few years and don’t want to risk losing it. In other words, you save money that you want to keep 100% safe because you know you’ll need it or because you could need it. While it won’t earn much interest, you’ll be able to tap it in an instant.

Investing is for the money you expect to spend in the future, such as in five or more years. Purchasing an investment means you’re exposing money to some amount of risk to make it grow. Investments can go down in value; therefore, you should never invest money you can’t live without.

In general, I recommend that you invest through a qualified retirement account, such as a workplace plan or an IRA, which come with tax benefits to boost your growth. My recommendation is to contribute no less than 10% to 15% of your pre-tax income for retirement.

Magen mentioned Roth IRAs, and it may be a good option for her to rebuild her retirement savings. For 2020, you can contribute up to $6,000, or $7,000 if you’re over age 50, to a traditional or a Roth IRA. You typically must have income to qualify for an IRA. However, if you’re married and file taxes jointly, a non-working spouse can max out an IRA based on household income.

For workplace retirement plans, such as a 401(k), you can contribute up to $19,500, or $26,000 if you’re over 50 for 2020. Some employers match a certain percent of contributions, which turbocharges your account. That’s why it’s wise to invest enough to max out any free retirement matching at work. If your employer kicks in matching funds, you can exceed the annual contribution limits that I mentioned.

RELATED: A 5-Point Checklist for How to Invest Money Wisely

How to pay off high-interest debt

Once you're working on the first two parts of my PIP plan by preparing for the unexpected and investing for the future, you're in a perfect position also to pay off high-interest debt, the final "P."

Always tackle your high-interest debts before any other debts because they cost you the most. They usually include credit cards, car loans, personal loans, and payday loans with double-digit interest rates. Remember that when you pay off a credit card that charges 18%, that's just like earning 18% on an investment after taxes—pretty impressive!

Remember that when you pay off a credit card that charges 18%, that's just like earning 18% on an investment after taxes—pretty impressive!

Typical low-interest loans include student loans, mortgages, and home equity lines of credit. These types of debt also come with tax breaks for some of the interest you pay, making them cost even less. So, don't even think about paying them down before implementing your PIP plan.

Getting back to Bianca's situation, she didn't mention having emergency savings or regularly investing for retirement. I recommend using her upcoming cash windfall to set these up before paying off a low-rate student loan.

Let's say Bianca sets aside enough for her emergency fund, purchases any missing insurance, and still has cash left over. She could use some or all of it to pay down her auto loan. Since the auto loan probably has a higher interest rate than her student loan and doesn't come with any tax advantages, it's wise to pay it down first. 

Once you've put your PIP plan into motion, you can work on other goals, such as saving for a house, vacation, college, or any other dream you have. 

Questions to ask when you have extra money

Here are five questions to ask yourself when you have a cash windfall or accumulate savings and aren’t sure what to do with it.

1. Do I have emergency savings?

Having some emergency money is critical for a healthy financial life because no one can predict the future. You might have a considerable unexpected expense or lose income.  

Without emergency money to fall back on, you're living on the edge, financially speaking. So never turn down the opportunity to build a cash reserve before spending money on anything else.

2. Do I contribute to a retirement account at work?

Getting a windfall could be the ticket to getting started with a retirement plan or increasing contributions. It's wise to invest at least 10% to 15% of your gross income for retirement.

Investing in a workplace retirement plan is an excellent way to set aside small amounts of money regularly. You'll build wealth for the future, cut your taxes, and maybe even get some employer matching.

3. Do I have an IRA?

Don't have a job with a retirement plan? Not a problem. If you (or a spouse when you file taxes jointly) have some amount of earned income, you can contribute to a traditional or a Roth IRA. Even if you contribute to a retirement plan at work, you can still max out an IRA in the same year—which is a great way to use a cash windfall.

4. Do I have high-interest debt?

If you have expensive debt, such as credit cards or payday loans, paying them down is the next best way to spend extra money. Take the opportunity to use a windfall to get rid of high-interest debt and stay out of debt in the future. 

5. Do I have other financial goals?

After you’ve built up your emergency fund, have money flowing into tax-advantaged retirement accounts, and are whittling down high-interest debt, start thinking about other financial goals. Do you want to buy a house? Go to graduate school? Send your kids to college?

How to manage a cash windfall

Review your financial situation at least once a year to make sure you’re still on track.

When it comes to managing extra money, always consider the big picture of your financial life and choose strategies that follow my PIP plan in order: prepare for the unexpected, invest for the future, and pay off high-interest debt.

Review your situation at least once a year to make sure you’re still on track. As your life changes, you may need more or less emergency money or insurance coverage.

When your income increases, take the opportunity to bump up your retirement contribution—even increasing it one percent per year can make a huge difference.

And here's another important quick and dirty tip: when you make more money, don't let your cost of living increase as well. If you earn more but maintain or even decrease your expenses, you'll be able to reach your financial goals faster.

How I Invest

January 8, 2021 Penny Matthews 0

You asked, so here’s the answer. Let’s breakdown my investment accounts, asset class choices, and why I make those choices.

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14 Best Investment Sites

January 8, 2021 Penny Matthews 0

This page may include affiliate links. Please see the disclosure page for more information. The thought of investing–and doing it successfully–can be a daunting task. This is especially true if you’re a beginner investor. However, if you’re willing to take advantage of the information on the best investment sites, you’ll have a wealth of investment knowledge right…

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Personal Capital Review for 2021

January 8, 2021 Penny Matthews 0

Personal Capital is a client-centric robo-advisor offering investment and wealth management services. The company distinguishes itself from the competition by combining automation with personal service. With over 2.7 million users, Personal Capital currently holds $16…

The post Personal Capital Review for 2021 appeared first on Crediful.

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A Beginner's Guide to Investing in Stocks

January 8, 2021 Penny Matthews 0

To new investors, the stock market can seem mysterious and intimidating. Many people hear that buying stocks is risky, but they like the potentially high investment returns. Fortunately, there are some ways to make money investing in stocks that significantly limit your risk.

Just about every investor should own some amount of stocks, even during times of market volatility.

Just about every investor should own some amount of stocks, even during times of market volatility. I'll explain how to invest in stocks when you have little experience or money. You’ll learn the pros and cons of stocks and the best ways to own them to build wealth safely.

What are stocks?

Stocks are intangible assets that give you ownership in a company. That’s why they’re also known as equities or equity investments. Owning stock entitles you to part of a company’s earnings and assets.

Let's say a company needs to fund groundbreaking research, open a division in a foreign country, or hire a crew of talented engineers. Companies issue stock to raise money from investors for these types of ventures—it’s that simple.

Publicly traded stocks are bought and sold on exchanges such as the NASDAQ or the New York Stock Exchange (NYSE). However, you can trade them only through a broker or investment firm.

When a stock increases in value, it’s called "capital appreciation." That’s a fancy way of saying that the price goes up. As I'm writing this episode, Facebook and Apple stock are selling on the NASDAQ exchange for $266.12 and $469.51 per share. Visa and Walt Disney stock are selling on the New York Stock Exchange for $202.41 and $127.92.

If you buy Visa at $202.41 per share and the price goes up to $210, you can sell it for a gain of $7.59 ($210 – $202.41). You can easily find current stock price quotes on sites like Google Finance and Yahoo Finance.

In addition to capital appreciation, some stocks also pay a portion of company profits. If so, it’s called a dividend stock and distributes dividend payments to stockholders. For instance, right now, Discover pays a dividend of $0.44 a share. If you own 1,000 shares of Discover, you'd be paid $440 in dividends over a year.

Dividend stocks pay you even when the share price goes down, so owning them is smart to hedge against potential market losses. You can find a list of dividend stocks on a site like Morningstar.

The pros and cons of investing in stocks

There are many advantages to investing in stocks. One is that you don't need much money to buy them compared to other assets such as real estate. Buying just one stock share makes you an instant business owner without investing your life savings or taking on significant risk.

Buying just one stock share makes you an instant business owner without investing your life savings or taking on significant risk.

Another advantage of making stock investments is that they offer the most significant potential for growth. Although there's no guarantee that every stock will increase in value, since 1926, the average large stock has returned close to 10% a year.

If you're investing for a long-term goal, such as retirement or a child's education, stocks turbocharge your portfolio with enough growth to achieve it. Over the long term, no other type of common investment performs better than stocks.

The main disadvantage of investing in stocks is that prices can be volatile and spike up or plummet quickly as trading volume fluctuates from minute to minute. News, earnings forecasts, and quarterly financial statements are just a few triggers that cause investors to buy or sell shares, and that activity influences a stock's price throughout the day.

Price volatility is why stocks are one of the riskiest investments to own in the short term.

Price volatility is why stocks are one of the riskiest investments to own in the short term. Investing at the wrong time could wipe out your portfolio or cause you to lose money if you need to sell shares on a day when the price is below what you originally paid.

But as I mentioned, you can minimize this risk (but never eliminate it) by adopting a long-term investing strategy.

What is diversification in stock investing?

In addition to taking a long-term approach, another key strategy for making money investing in stocks is diversification. Having a diversified stock portfolio means you own many stocks.  

People are often surprised to learn that it's better to own more investments than less. Diversification allows you to earn higher average returns while reducing risk because it's not likely that all your investments could drop in value at the same time.

Diversification allows you to earn higher average returns while reducing risk because it's not likely that all your investments could drop in value at the same time.

For instance, if you put your life’s savings into one technology stock that tanks, you’re in trouble. But if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that responds to market conditions in different ways is the key to smoothing out risk.

Diversification isn’t a guarantee that you’ll make a killing with your investments, but the idea is that as some investments go up in value, others may decline and vice versa. It prevents you from “putting all your eggs in one basket,” financially speaking. 

RELATED: How to Invest in the Perfect Portfolio

How to create a diversified stock portfolio

If you think creating a diversified stock portfolio sounds difficult or time-consuming, I want to put you at ease. Buying one or more stock funds is a simple and inexpensive way to achieve instant diversification. 

Funds bundle investments of stocks, bonds, assets, and other securities into packages convenient for investors to buy. They’re made up of many underlying investments. Some funds may focus on one asset class only, such as international stocks, others may have a mix of asset types, such as stock and bonds.

Depending on the investment firm you use, you may see the following types of funds:

  • Mutual funds are collections of assets that are managed by a fund professional. They give you a simple way to own a portfolio of many stocks. Shares can be bought or sold only at the end of the trading day when the fund’s net asset value gets calculated.
     
  • Exchange-traded funds (ETFs) are similar to mutual funds because they’re baskets of assets. However, they trade like an individual stock on an exchange and experience price changes throughout the day.
     
  • Index funds are a mutual fund that aims to match or outperform a particular index, such as the S&P 500. They typically come with low fees and may be comprised of thousands of underlying investments.
     
  • Target date funds are a type of mutual fund that automatically resets the mix of stocks, bonds, and cash in its portfolio according to a selected time frame, such as your estimated retirement date.

How much stock should you own?

Stocks or stock funds should be an essential part of every investor's long-term portfolio. If you're young and have a long way to go before retirement, consider owning a large percentage of stocks. Though prices will go up and down in the short term, you're likely to see prices trend up and give you an impressive return over time.

But if you're nearing or already in retirement, take a more conservative approach to preserve your wealth. That doesn't mean eliminating stocks from your portfolio entirely but instead, owning a lower percentage.

There's a rough rule of thumb that says you should subtract your age from 100 or 110 to find the percentage of stocks to own.

There's a rough rule of thumb that says you should subtract your age from 100 or 110 to find the percentage of stocks to own. For instance, a 40-year-old should consider holding 60% to 70% of their investment portfolio in stocks. The remainder would be in other asset types such as bonds, real estate, and cash.

These investment allocation targets are not hard rules because everyone is different. To design your ideal allocation strategy, you can use an online resource, such as Bankrate's Asset Allocation Calculator.

What's important to remember about making money with stocks is that the amount you own should change over time. When you have decades to go before retirement, take advantage of as much growth as possible by investing mostly in stocks. As you get closer to retirement, devote more of your portfolio to bonds and cash, which preserve the wealth you worked hard to accumulate.

Forex Trading Margin: What Is it, and Why Should You Care?

January 8, 2021 Penny Matthews 0

The Forex industry is a very interesting one in that Forex traders have the ability to trade in far more currency than their principal investments would generally allow. This is the result of what’s known as a “trading margin.” So…

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The post Forex Trading Margin: What Is it, and Why Should You Care? appeared first on MintLife Blog.