The Time Value of Money

We must use time wisely and forever realize that the time is always ripe to do right.” 

– Nelson Mandela 

Investing and time

Your retirement is on sale. Right now. And at a big discount.

 

If you invest now, you will be in better shape than if you wait.  Much better. Every dollar can grow.  Sounds magical, doesn’t it?  But your money can grow, if you invest it.  Plant your dollar in a patch, tend to it and it will produce a crop of interest, dividends and growth called capital gains. Something else magical happens, the crop of one year is added to the crop that grows in the following year. So, you not only get interest, dividends and capital gains on the initial dollar, but you also gain interest, dividends and capital gains on the interest, dividends, and capital gains.  And this happens every year.  It is called compounding and it’s awesome. The investment growth in any single year usually isn’t a big deal.  Over time, like several decades until you hit retirement, the impact is huge. Some examples:

  1. To have $50,000 in 40 years, you’ll need to invest $7,102 today (assuming 5% growth market average is about 7%).  Yes, just $7,102 in your patch will grow to be $50,000 in 40 years at 5%. 
  2. 2. But if you wait, and want to have the same $50,000 in 30 years, you need to invest $11,569 at 5%. That’s a big difference. 

Waiting a decade means that you need to save over 60% more than if you just start now, and it doesn’t take a lot to get started. Fintech companies like Betterment have a balance minimum of $0, which means you can start saving just a little bit here and there. Your retirement really is on sale now.  So start saving! 

In future posts, we will describe more on investing.  Just as you have to water and weed your garden, you have to monitor and rebalance your investments.  Also, just as picking what will grow well, producing the best harvest in your garden, while getting rid of plants that no longer grow as well, your investments need to have the right mix.

 

 

Every Dollar Has a Job

“Budgets are nothing if not statements of priorities” 

– Jeff Merkley

Think of Yourself Like a Business

Imagine you have been put in charge of your favorite coffee shop. You really like their coffee, so you want to do all you can to keep it going. Could you manage it or would the shop go out of business? 

 

While you may not have the industry knowledge to manage a coffee shop…yet, you should have the skills to manage your own income and expenses like a business. If you don’t manage your income and expenses? Then you could go out of business! Okay, that’s a bit harsh, but who enjoys feeling broke all the time, and not being able to afford the things you really want? 

Every dollar serves some purpose and you need to know what that is. 

Back to the coffee shop. If you did manage it, you would need to keep track of everything that came into the shop and everything that left.

 

 

You would know what cash and credit card payments you received.  That is your Income. Also, you would know how many cups of coffee, pounds of coffee beans, and all the paraphernalia the shop sold.  These are your sales (sort of like the hours you “sell” to your employer). You would keep track of what you paid for supplies, rent, electricity, water, and insurance. You would also know how much you paid each employee and what you paid in payroll taxes and benefits.  These are your expenses. Finally, you would know what you made, which is the coffee shop income less its expenses.  That is called your profit (before taxes). 

What would you do with that profit?  You would pay income taxes, of course. You might create an emergency fund so you would be prepared for some unexpected calamity, like a delayed coffee shipment, or a broken storefront window. If you were really forward thinking, you might even set aside funds to replace broken equipment or maybe even save up to buy a building rather than continue to rent.

What if, instead of a profit, your expenses continually exceeded income? You have a loss – ouch! You don’t want to lose the coffee shop, so you might borrow some money to cover bills. That only postpones your problem; it doesn’t fix it. So you create a budget to learn why your expenses were so much compared to income. You might hire a bookkeeper to make sure you didn’t miss anything.

You could even hire a coffee shop planner who would tell you if you are buying too many supplies compared to what you sold.  The planner would make sure you charge enough for coffee and she would tell you to stop paying that Friday night blues band that wants free coffee and isn’t actually improving business. 

I’m sure you figured out where this is all going: You need to know what you make and where you spend each dollar. 

If you don’t know, look at the last 12 months of income and spending, even start a budget so you see why you keep borrowing on credit cards instead of saving for your future.

In the end, there is no left over money.  Every dollar needs to work for you, as hard as you work to make every dollar.

In future posts, we will look at the ways you spend, your “fixed expenses,” like income taxes, health insurance and rent, your “variable expenses” like food, phone bills and clothing, and your “discretionary expenses” like Netflix and, you guessed it, coffee!

 

Woke Money Is Smart Money

“At base, financial literacy is inextricably connected to control over one’s future” 

– Ann Cotton 

Wake Up to a Happier You

When you go to college you learn about your chosen profession along with many other topics.  Often, you learn the history of your profession so you understand why your profession is where it is today and how you can advance it.

What if your money could go to money college?  Your dollars would learn how to keep credit card balances low, maintain a good credit score, prioritize spending, set aside money for emergencies, take advantage of tax deductions, afford the things you care about, pay off debt efficiently and so much more.

If your money paid attention in class, it would know how much you need to save now to afford a house in 5 years, or how to save and invest well so you can retire comfortably at age 60.  If your money had good instruction on history, it would know how to avoid mistakes that your friends or even your parents may have made trying to manage their finances.

Imagine what your money could do if it got a PhD! Maybe your money would know how to start a new business, raise capital from investors and help you to be even more successful. Or your money would know how to form a partnership to bring opportunities to communities that are suffering.

We created Woke Money so you can improve your financial literacy, so you can fill in the gaps that school, family, and friends didn’t or couldn’t teach you.

We want you to get to know every dollar you have, understand how those dollars can do more work for you. We want you to overcome any fear or anxiety you may have about paying taxes, starting investments or comparing insurance. We want to encourage you to stay informed so you can identify a good opportunity and manage risk. We want you to be able to enjoy today because you know you are on track for a good future! Use the power you gain from this knowledge for good,  adjust your habits to create a better life! 

Try out this first step:

Identify what you care about most, whether it’s buying a home, not living paycheck to paycheck or paying off your growing student loan or perhaps credit card debt.

Then make a pledge to yourself to take action: I am going to conquer my fear of investing and save for the vacation I always wanted!

You can’t afford to wait!

There is no spare time … you get 86,400 seconds each day of your life, to use or waste, so make a good plan for each one!

 

Article Template – Duplicate Me First, Then Edit

“Quote relating to subject matter, search on: http://www.brainyquote.com/, Select the quote text and then hit the quotation button to create.” – Quote’s Author

This is the hook, why all of this is important. It can be a sentence or two but it should answer the question, “Why am I reading this?”. This small paragraph is the main point and takeaway. The actual point of the article.

This is the first subtitle and it’s an H3, it introduces the first example or argument

This is the text for the first argument or case being made. Make it short and simple. Write something that gets people thinking or is maybe shocking?

If the text above was shocking, the picture or GIF above should respond to that.

This is the second subtitle (H3) and should introduce the second argument or case

This is the supporting text for the second argument. Feel free to use another GIF or image to break up the text a little bit and engage the user with a visual.

This is the third subtitle, and should introduce the final argument or case.

This is the supporting text for the third argument or case.

This is the summary subtitle

This is the closing statement. It should serve as a summary for the entire article and include a call to action, what the user should do next…

Putting It All Together

“The financial advice market presents an impossible conundrum: in order to work with a financial planner, you must have enough money to be of interest. In order to amass enough money, it is critical to work with a financial planner. Most financial plans come with a $1,500-$3,000 price tag – numbers that are simply out of reach for most Americans.” 

– Alexa von Tobel

Creating Your Own Money Plan 

You face many financial decisions in life. 

    “Do I buy a house now or continue to rent?”

    “Do I pay off all my student loans right away or begin saving for retirement now too?”

    “Should I lease or buy a car?  Is pre-owned better than brand new?”

    “Can I afford to go to the bachelorette party AND go to the wedding?”

How do you answer these questions? Investopedia states that “there is no specific template for a financial plan” but offers a broad definition here:

         A comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans.

The people that can afford it, work with an investment or tax professional and use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing the plan.  These will be used along with estimates of asset growth to determine if a person’s financial goals can be met in the future, or what steps need to be taken to ensure that they are. 

Hiring a professional is expensive, and often you already need a decent chunk of money to even get started in investing. If you aren’t ready to hire someone to create your plan, you can develop your own plan now.  This way, you get to know what you should be doing now.  A simple plan is a list of goals and ways of getting there:

To create this plan, you by start by understanding your long-term financial goals and your resources.

Time value of money – Cost out your Goals:

As you saw in our section on the time value of money, investments compounding over time have a big impact on future goals, but so does inflation.  Those factor in on these long-term goals: 

Retirement 

Many investor sites offer free calculators that factor in return on investment and inflation.  The results allow you to estimate how much you need to save now to be able to fund a reasonable retirement, but remember it’s not a guarantee.  

Life insurance 

If you have children, you should have insurance. If anything happens to you, your loved ones will be financially secure.

College  

If you have children who hope to go to college, or if you plan to return for a new degree, you can find websites that help you estimate what you need to save now.

You may have other goals as well, such as buying a home.  And you will want to create an emergency fund.  Put these all in order of priority on one side of the plan you are sketching out. 

Every dollar has a job – Use all your Resources

You learned in our section “Every Dollar Has a Job” that you need to account for all of your resources.  These include the income you earn, credit card awards, tax refunds and company benefits. 

List these on the other side of the plan you are sketching out. 

Woke money is smart money – Have a Plan

The art of creating a workable plan is to mesh the goals with the resources in the best way.  If your situation is complex, you may want advice from a professional. Some websites offer free tools, like the budgeting tool on Learnvest, and offer financial advice at a more affordable price than traditional financial advisors.

In the end, your plan will remind you what to do so you improve your finances.  Here is a sample list:

  • ‍Maximize my 401(k) contributions,
  • Set up and contribute to a Roth IRA from my side gig,
  • Add to my emergency fund,
  • Monitor my credit rating,
  • Steer clear of any major credit card debt,
  • Review my beneficiary designations at work,
  • Sign a medical directive and durable power of attorney, and
  • Save enough for a fun (not too expensive) vacation next summer!

It doesn’t matter how many pages or what the plan looks like; what matters is that you learn from reviewing your finances and change how you manage your resources so that you improve your finances.  A simple list on a Post-It is a great plan, if you follow it!