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Top Financial Literacy Stories of 2021

Top Financial Literacy Stories of 2021

2021 was another wild ride.

It was no 2020, thank goodness. But there were enough ups, downs, and head scratchers to warrant a retrospective.

These are the top financial literacy stories of 2021.

Memes rocked the financial industry. You read that correctly—memes.

It began with struggling companies like Gamestop and AMC soaring in value. The cause? Rabid speculation fueled primarily by Reddit. There was little rhyme and even less reason to the frenzy, with devastating results—the boom became a bust that wiped out $167 billion of wealth.¹

And notice, that’s not even counting the rollercoaster year that cryptocurrency enthusiasts have “enjoyed.”

Memes also literally became hot commodities in the form of NFTs (Non-Fungible Tokens).

What’s an NFT? In short, it’s an image that’s modified with blockchain. The blockchain makes the image a one-of-a-kind collector’s item since it’s possible to verify the image’s identity. Think of it as a mix of cryptocurrency and trading cards.

That means almost any digital image has the potential to become incredibly valuable. For instance, one NFT sold in 2021 for $69.3 million.²

And it makes sense why people have turned en masse to memes to build wealth. They don’t know how money works. They’ve never been taught how to build a financial legacy. And deep down, they know it. So when something, anything, comes along that looks like an opportunity to stick it to the man, they take it. The results are predictable… and often tragic.

The housing market caught on fire. Speaking of extravagant pricing, the housing market boomed in 2021. The numbers speak for themselves. Rent increased 16.4% from January to October.³ More dramatically, home prices surged almost 20% between August 2020 and August 2021.⁴

The housing market serves as a window into other forces impacting consumers. Inflation raised the cost of almost everything in the last half of 2021. And with the supply chain in chaos, it seems possible that prices will continue to rise in 2022.

That makes financial literacy more critical than ever. Families have less and less margin for error, and common milestones seem harder to reach. Without the right knowledge and strategies, building wealth may be increasingly difficult.

Financial illiteracy cost Americans billions. An annual survey by the National Financial Educators Council revealed that financial illiteracy cost the average American $1,634 in 2021.⁵ That’s a total of $415 billion.

Worst of all, that’s likely an underestimate. Think of what $1,634 could do if it were put to work building wealth in a business or retirement account. That’s the true cost of financial illiteracy—both in the short-term AND building wealth long-term.

What are your top financial literacy stories from 2021? Do you foresee any exciting changes in 2022?


¹ “Meme Stocks Lose $167 Billion as Reddit Crowd Preaches Defiance,” Sarah Ponczek, Katharine Gemmell, and Charlie Wells, Bloomberg Wealth, Feb 2, 2021, https://www.bloomberg.com/news/articles/2021-02-02/moonshot-stocks-lose-167-billion-as-crowd-preaches-defiance

² “Top 5 Non-Fungible Tokens (NFTs) of 2021,” Rakesh Sharma, Investopedia, Dec 15, 2021, https://www.investopedia.com/most-expensive-nfts-2021-5211768

³ “Biden’s next inflation threat: The rent is too damn high,” Katy O’Donnell and Victoria Guida, Politico, Nov 10, 2021, https://www.politico.com/news/2021/11/10/rent-inflation-biden-520642#:~:text=The%20Apartment%20List%20annual%20National,expected%20to%20continue%20for%20years

⁴ “Home price growth is finally decelerating—and it’s just the start,” Lance Lambert, Fortune, Dec 6, 2021, https://fortune.com/2021/12/06/housing-market-slowing-heading-into-2022/


Rent Keeps Increasing. Will It Stop?

Rent Keeps Increasing. Will It Stop?

It’s official—rent keeps increasing.

From January to October 2021, rent skyrocketed 16.4.¹ And the market hasn’t cooled off—housing costs increased for renters 0.3% between September and October alone.²

It briefly looked like the housing market boom was temporary. There were plenty of rumors that the bubble was about to burst. Queue the comparisons to the 2007-2008 housing bubble!

But prices have kept on rising. In fact, Americans have come to expect it—on average, they anticipate a 10% increase in 2022.³ Financial institutions agree—the Federal Reserve Bank of Dallas predicts the surge to continue until December 2023.⁴

Why? Because of a perfect storm of…

• Supply chain woes • Housing shortages • Historically low interest rates • First-time home buyers

In other words, houses are in high demand, but there aren’t enough available and they’re expensive to build.

And those problems aren’t likely to be resolved anytime soon.

But take all that with a grain of salt. If there’s anything that the last two years have proven, it’s that anything is possible.

For now, it’s best practice to prepare your budget for rising rents.


¹ “Biden’s next inflation threat: The rent is too damn high,” Katy O’Donnell and Victoria Guida, Politico, Nov 10, 2021, https://www.politico.com/news/2021/11/10/rent-inflation-biden-520642

² “Biden’s next inflation threat,” O’Donnell and Guida

³ “Biden’s next inflation threat,” O’Donnell and Guida

⁴ “Biden’s next inflation threat,” O’Donnell and Guida


How NOT To Spend Your Next Raise

How NOT To Spend Your Next Raise

You walk out of the office like a brand new person.

That’s because you’ve done it—you’re going to be earning a lot more money with that raise. The first thing that pops in your head? All the fancy new things you can afford.

Dates. Your apartment. Vacation. They’re all going to be better now that you’ve got that extra money coming in.

And to be fair, all of those things CAN get substantially fancier after your income increases.

But one thing may not change—you still might end up living paycheck to paycheck.

Why? Because your lifestyle became more extravagant as your income increased. Instead of using the boost in cash flow to build wealth, it all went to new toys.

This phenomenon is called “lifestyle inflation”. It’s why you might know people who earn plenty of money and have nice houses, but still seem to struggle with their finances. The greater the income, the higher the stress. As Biggie put it, “Mo’ Money, Mo’ Problems.”

The takeaway? The next time you get a raise, do nothing. Act like nothing has changed. Go celebrate at your favorite restaurant. Keep saving for your new treat. But you’ll thank yourself if you devote the lion’s share of your new income to either reducing debt or building wealth.

Rest assured, there will be plenty of time to enjoy the fruits of your labor in the future. But for now, keep your eyes on the most important prize—building wealth for you and your family’s future.


Questions to Ask About Your Retirement Strategy

Questions to Ask About Your Retirement Strategy

So you’ve decided to create a retirement strategy. Good for you!

Will your plans be durable enough to withstand your working years and sustain you through your retirement? The answers to the following questions can help give you clarity on if your retirement strategy has what it takes!

How’s it constructed? Not all savings vehicles are created equal. For instance, stashing all your cash in a mattress until retirement is a great way to torpedo the value of your savings. Why? Because inflation will slowly but surely reduce the value of each dollar you earn today. The same goes for low-interest saving options like CDs, bonds, and checking accounts. Even a 401(k) might not be enough!

Realistically, you want to put your money in a place where it can leverage compound interest. That means the cash you save generates interest, and all the interest you earn also generates interest. Interest earning interest on interest eventually unleashes a huge tidal wave of wealth creation that can help carry you through your final years.

What percent of your income will you live on? Nobody wants to take a pay cut when they retire. But that’s exactly what people relying on Social Security will do; it’s only designed to replace 40% of your annual income!¹ Instead, it’s better to live off of 80% of your salary.²

So what does that number look like now? Assuming you live 30 years after retiring, how much would you need to save before you hit that goal? If you make $60,000, 80% of your income is $48,000. You would need $1,440,000 saved to maintain your lifestyle for three decades.

Once you have that number estimated, determine how much you’ll need to save starting today. You can use a nifty compound interest calculator like this one to get an idea of how much that will be!

Is it tax efficient? There are few surprises nastier than saving for decades only to have the government bite a huge chunk out of your nest egg at the finish line. We won’t dive into the details of taxes now, but you need to decide when you’ll pay Uncle Sam his share. You can either:

Pay now. CDs and Roth IRAs are options where you pay your taxes, then save the money. You end up only paying the tax rate of today.

Pay later. You don’t pay any taxes now, but you cough up a percentage of whatever you earn in the long haul at a future rate. This is how a 401(k) works.

Pay never. No, you don’t have to hire a Swiss lawyer and hide your money on an island to do this. Ask a licensed and qualified professional about legal ways to achieve tax free growth.

Whatever option you choose, make sure you understand its implications for how much you’ll have when you need it.

It’s always best to review your strategy with a licensed and qualified professional. They’ll have insights and knowledge to help you achieve the retirement of your dreams.

¹ “How Much Can I Receive From My Social Security Retirement Benefit?,” Investopedia, Oct 30, 2020, https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retirement-benefit.asp#:~:text=The%20maximum%20monthly%20Social%20Security%20benefit%20that%20an%20individual%20can,the%20maximum%20amount%20is%20%242%2C324

² “How Much Money Do You Need to Retire?,” John Waggoner, AARP, Sep 17, 2020, https://www.aarp.org/retirement/planning-for-retirement/info-2020/how-much-money-do-you-need-to-retire/?cmp=RDRCT-3c5a7391-20200917


A Life Insurance Deep Dive

A Life Insurance Deep Dive

Last week we explored the basics of life insurance, how it works, and what it’s for.

Today we’ll be fleshing out some concepts you might encounter as you look at your options for protecting your family. Let’s start with the different kinds of life insurance.

Different types of life insurance <br> Life insurance will almost always have a few basic parts—the death benefit (the amount paid to your loved ones upon your passing), the policy itself (the actual insurance contract), and the premium (how much you pay for the life insurance policy).

There’s a wide range of life insurance policies, each with their own strengths and weaknesses.

- Term Life Insurance is the most straightforward form. It lasts for a set amount of time (the term), during which you pay a premium. You and your beneficiaries won’t receive any benefits if you don’t pass away during the term. This type of policy typically doesn’t feature other benefits on its own (you may be able to add other benefits with what is called a rider). - Whole Life Insurance is exactly what it sounds like. It never expires and is guaranteed to pay a benefit whenever you pass away. But it often comes with other benefits. For instance, it can include a saving component called a cash value. It usually builds with interest and you can take money from it any time. - Indexed Universal Life Insurance is similar to whole life insurance, but the cash value is tied to the market. The market is up? Your cash value goes up. The market goes down? Your cash value is actually shielded from loss.

Each of these types of life insurance have different strengths and weaknesses. A term policy might be right for you while a whole life policy might be better for your neighbor. Talk with a financial professional to see which one fits your needs and budget!

The right amount of life insurance <br> But can you have too little life insurance? How about too much? The answer to both of those questions is yes. In general, the purpose of life insurance is to replace your income in case of your passing for your loved ones and family. That should be your guidestone when deciding how substantial a policy to purchase. Typically, you’re looking at about 10 times your annual income. That’s enough to replace your yearly earnings, pay-off potential debts, and guard against inflation. That means someone earning $35,000 would want to shop around for about $350,000 worth of coverage.

Employer life insurance <br> This means that most employer-provided life insurance isn’t enough to fully protect you and your family. There’s no doubt that a free policy from your workplace is great. But they typically only cover about a year of wages. That’s not nearly what you need to provide peace of mind to your beneficiaries! Don’t necessarily refuse your employer-provided life insurance, but make sure that it supplements a more substantial policy.

Still have questions? Reach out to a licensed financial professional and ask for guidance! And stay tuned for next week’s article where we’ll debunk some common life insurance myths!

Add disclosure:

This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before enacting a life insurance policy, seek the advice of a licensed financial professional to discuss your options.


How inflation can affect your savings

How inflation can affect your savings

Even before we leave childhood behind, we become aware of a decrease in buying power.

It seems like that candy bar in the check-out lane has doubled in price without doubling in size. Unlike the value of stocks, real estate, or similar assets, candy doesn’t appreciate in value. What has happened is that your money has depreciated in value. Inflation has a sneaky way of eating away our money over time, forcing us to either find a way to earn more – or to get by with less. Even for the youngest of Generation Z, now in their early teens, consumer prices have increased about 30% since they were born.[i]

In 2018, the average new car costs $35,285 – up $703 since the previous year, or about 2%.[ii] While a $703 increase in a single year might seem high, the inflation rate (as a percentage) is lower than for many other items. And some other items may not have gone up as much as you would expect. For example, in 1913, a gallon of milk cost about 36 cents. One hundred years later in 2013, the average cost was about $3.53.[iii] But if milk had followed the average rate of inflation, the price for a gallon would be nearly $10.00 by now. Supply, demand, and more efficient production and distribution all contribute to a lower price than expected with the milk example. The U.S. government uses what is called a Consumer Price Index (CPI) to measure inflation, which unfortunately does not include food and fuel – both essentials and daily expenses for households – making the true rate of inflation more difficult to determine.

Inflation is due to several reasons, all with complex relationships to each other. At the heart of the matter is money supply. If there is more money in circulation, prices go up. Under the current monetary system, which utilizes a Central Bank to govern monetary policy, inflation rates have been as low as about 1.3% annually in 1964 to 13.5% in 1980.[iv] That means something that cost $10 in 1979 cost $11.35 just a year later. That may not seem like a big increase on $10, but if you’re like most people, your pay probably doesn’t go up 13.5% in a year for doing the same work!

How does inflation affect my savings strategy? It’s a good idea to always keep the current rate of inflation in the back of your mind. As of August, 2018, it was about 2.7%.[v] Interest rates paid by banks and CDs are usually lower than the inflation rate, which might mean you’ll lose money if you leave most of it in these types of accounts. Saving, of course, is essential – but try to find accounts for your cash that work a bit harder to outrun inflation.


[i] https://www.bls.gov/data/inflation_calculator.htm\ [ii] https://mediaroom.kbb.com/average-new-car-prices-jump-2-percent-march-2018-suv-sales-strength-according-to-kelley-blue-book\ [iii] https://inflationdata.com/articles/2013/03/21/food-price-inflation-1913/\ [iv] & [v] https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

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Retirement Mathematics 101: How Much Will You Need?

Retirement Mathematics 101: How Much Will You Need?

Have you ever wondered how someone could actually retire?

The main difference between a strictly unemployed person and a retiree: A retiree has replaced their income somehow. This can be done in a variety of ways including (but not limited to):

  • Saving up a lump sum of money and withdrawing from it regularly
  • Receiving a pension from the company you worked for or from the government
  • Or an annuity you purchased that pays out an amount regularly

For the example below, let’s assume you don’t have a pension from your company nor benefits from the government. In this scenario, your retirement would be 100% dependent on your savings.

The amount you require to successfully retire is dependent on two main factors:

  1. The annual income you desire during retirement
  2. The length of retirement

To keep things simple, say you want to retire at 65 years old with the same retirement income per year as your pre-retirement income per year – $50,000. According to the World Bank, the average life expectancy in the US is 79 (as of 2015).¹ Let’s split the difference and call it 80 for our example which means we should plan for income for a minimum of 15 years. (For our purposes here we’re going to disregard the impact of inflation and taxes to keep our math simple.) With that in mind, this would be the minimum amount we would need saved up by age 60:

  • $50,000 x 15 years = $750,000

There it is: to retire with a $50,000 annual income for 15 years, you’d need to save $750,000. The next challenge is to figure out how to get to that number (if you’re not already there) the most efficient way you can. The more time you have, the easier it can be to get to that number since you have more time for contributions and account growth.

If this number seems daunting to you, you’re not alone. The mean savings amount for American families with members between 56-61 is $163,577² - nearly half a million dollars off our theoretical retirement number. Using these actual savings numbers, even if you decided to live a thriftier lifestyle of $20,000 or $30,000 per year, that would mean you could retire for 8-9 years max!

All of this info may be hard to hear the first time, but it’s the first real step to preparing for your retirement. Knowing your number gives you an idea about where you want to go. After that, it’s figuring out a path to that destination. If retirement is one of the goals you’d like to pursue, let’s get together and figure out a course to get you there – no math degree required!


Sources:
¹ “Life expectancy at birth, total (years).” The World Bank, 2018, http://bit.ly/2I8w4gk.
² Elkins, Kathleen. “Here’s how much the average family in their 50s has saved for retirement.” CNBC, 4.21.2017, http://cnb.cx/2FX0Ckx.

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The Black Hole of Checking (Part 1)

The Black Hole of Checking (Part 1)

What’s the difference between a black hole and a checking account?

One is a massive void with a force so strong that anything that enters it is stretched and stretched, then disappears with a finality that not even NASA scientists fully understand.

… And the other is a black hole.

Joking aside, did you know that a black hole and your checking account actually have a lot in common? Spaghettification is the technical term for what would happen to an object in space if it happens to find itself too close to a black hole.* The intense gravity would stretch the object into a thin noodle, past the point of no return.

If you don’t have a solid financial strategy, the money in your checking account may be stretched past the point of no return, too. Why? If your money is sitting in “The Black Hole of Checking” for years on end, you may find that as you get closer to retirement, each dollar is spread thinner and thinner (until it disappears).

Where are you putting your money for retirement? If you’re keeping it in your checking account, instead of growing your money, you might just be stretching it impossibly, uncomfortably thin.

Say you already have $10,000 saved for your retirement. A checking account comes with a 0% interest rate. That means a $0 rate of return. Even if you managed to not touch that money for 10 years, you’d still only have your starting amount of $10,000. With inflation, you’d really have less value at the end of the 10 years than you had to start with.

But if you took that $10,000 and put it into an account with a 3% compounding interest rate, after 10 years, your money will have grown to $13,439. And that’s without adding another penny! Can you imagine what kind of growth is possible if you start saving now and contribute regularly to an account with a compounding interest rate?

This is the power of compounding interest – interest paid on interest plus the initial amount. (This is also a huge reason why getting as high of an interest rate as you can is important!)

So what are you waiting for? If all of your money is disappearing into that Black Hole of Checking, maybe this is the exploding star “sign” you’ve been looking for! Don’t “spaghettify” your money. Do the opposite and give it the chance to grow with the power of compound interest.


Source:
Curiosity Staff. “Black Holes Might Cause Spaghettification.” Curiosity,* 8.31.2015, https://curiosity.com/topics/black-holes-might-cause-spaghettification/.

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