On an upcoming podcast, to be released on Friday, July 19th, we will cover a few new terms! In preparation for this podcast, we wanted to link a quick article that explains what a CFP, or Certified Financial Professional is. You’ll hear our guest, John Redmaster, explain why it’s important to work with a CFP in planning out your long-term goals.
Click here to go to Investopedia’s definition of a CFP!
Here is a link for you to check out a CFP that you are considering working with: CFP Verification
Happy reading and don’t forget to tune in on Friday, July 19th for a new podcast!
Have you ever had a terrible day that just seemed to keep getting worse? You didn’t hear your alarm go off, so you woke up 20 minutes late. When you jumped out of bed in a panic, you stubbed your toe on the nightstand (who put that there?!). At least you still had time to make yourself a fresh, steaming-hot cup of coffee! Unfortunately, on your way to work, an idiot cut you off in traffic and that steaming-hot cup of coffee flew out of your hand and on to your favorite white shirt.
Nice. Huffing and puffing, you barely make it into the office when a coworker stops you and says, “Are you ready for your presentation in the meeting this morning?” (Oh, sh*t. I thought that meeting was tomorrow!) Later on, you realized that you packed a can of cat food instead of chicken salad for your lunch (ew), gave your crush a fist bump in return to a high-five (awkward), dropped a stack of important documents everywhere, and ripped your pants when you bent down to pick them up (tragic). It’s 4:58pm. You’ve almost made it through the day (thank goodness), but you decide to send one last email before you head home. You need to send your coworker, Danielle, a spreadsheet she requested, and decide to mention how annoying your boss has been lately. Sent! Then your heart stops. That email didn’t go to Danielle. It went to Daniel…your boss.
We’ve all had one of those days. But, what makes a day like this so bad? It’s not because just one little thing went wrong. Oh no. It’s because one bad experience seemed to lead to another, which led to another and another, compounding into a terrible day overall.
While this example of a bad day demonstrates how compounding can work against you, compounding interest is a financial tool that can actually work for you in a very positive way, even on a crappy day. Holla!
First of all, what is compound interest? Compound interest is a basic financial concept where interest is not only calculated on your initial investment (simple interest), but is calculated on your initial investment PLUS any interest you have earned previously. Your money is earning money on its money.
Let’s break it down:
Say you put $1,000 into an account that is earning 5% simple interest for 10 years. At the end of the 10 years, you would have a total of $1,500. ($1,000 x .05 = $50 x 10 Years = $500). However, let’s also say that you put $1,000 into an account that is earning 5% compound interest for 10 years. In this case, at the end of 10 years, you would have a total of $1,628.89. How did you end up with more money using compounding interest vs. simple interest? Let’s break it down even further:
For the DIY-ers out there, here’s the formula used to calculate compound interest:
P [(1 + i)n – 1]
P= Principal (Original Investment)
i = Annual Interest
n = Number of Compounding Periods
So, to plug in the numbers from above:
$1,000 [(1 + .05)10 – 1] = $628.89
And here’s a comparison between simple and compound interest over time:
If you’re like me, you probably just glazed over that last section like a Krispy Kreme donut. (I donut blame you). So, we see how the numbers work. Why does it matter?
Compound interest could be the single most important factor either making or breaking your bank account over time. You could either be using compounding interest to your advantage by putting funds into a retirement or investment account and allowing it to compound (grow) more quickly over time. Or, compounding interest could be your worst nightmare if you’ve got high interest credit card or student loan debt, which would compound just as quickly, but in the wrong direction. (Yikes!)
As we can see in the chart above, compounding interest produces a greater return (grows faster) than simple interest over the same period of time. And the key word here is TIME. The concept of compounding interest is pretty spectacular on its own. However, without the crucial ingredient of time (no, not thyme, sorry G’ma), your compound interest will produce very bland results. The longer you wait to withdrawal any of your funds, the more powerful – and flavorful – the compounding effect will be. (Can you tell I’m hungry? Did someone say pizza??)
If you put $1,000 in a retirement account that grows through compounding interest, congratulations! You’re #winning at this game of life. But, if you become impatient and decide to take out $10 here or $20 there, you’ll quickly undermine all the positive benefits of compounding, while likely getting slapped with some hefty tax penalties as well (if you’re under 59 ½). Ouch – Game Over.
If you’re someone who struggles with delayed gratification (aka ME), here’s a life hack to make you think twice about taking money out of your compounding accounts. It’s called the Rule of 72, and it’s a fast calculation to show how quickly your money can double inside a compounding account (without taking withdrawals – no touchy).
Simply divide 72 by the annual interest percentage to see how many years it will take for your money to double. For example, if you’re earning an average of 8% annually in an investment account, your money will double in 9 years (72 / 8 = 9). You put in $1,000 today and you’ll have $2,000 in 9 years. Cha-ching! Obviously, the more money you can invest early on, and the longer you can let it grow, the better your outcome will be.
This is exactly why the best time to start saving is today. Like, NOW. (Actually, the best time to start saving was yesterday…but there’s no time like the present!)
If you want to see for yourself how compound interest works, check out this, this, and this. You’re welcome.
Written By: Kaitlyn Duchien
Contact Us: email@example.com
In the article that Heidi wrote, we learned about what a 401(k) plan is and how it works. So, what is a 403(b) plan and who is eligible for one?
A 403(b) plan is a type of retirement plan for tax exempt organizations, specific employees of public schools (teachers, school administrator, professors), certain ministers, nurses, doctors, or librarians. A 403(b)-retirement plan is like a 401(k) in how it is funded through employee contributions. There are three types of accounts for 403(b) plans: annuity contracts with insurance companies, custodial accounts made of mutual funds – called a 403(b)(7), and retirement income accounts for church employees, typically invested in mutual funds and annuities – called a 403(b)(9). An employee usually can choose among several investments to build his or her portfolio, and design the account based on risk tolerance, such as conservative, balanced or aggressive. (As discussed in the podcast with Erin Martin, make sure to check the fees when choosing where to direct your funds.)
Like a 401(k) plan, your employer may choose to do a matching program. For instance, this means that if you put in 3 percent of your salary into a 403(b), your company could put in the same amount if they do 100% matching. Other companies may do a 50% matching rate. This means that if you put in 6%, they will match up to 3%. (Free money!!) Make sure to check with your HR department on if and how your company matching program works when setting up your 403(b) so that you can take full advantage of the program
Like a 401(k), a 403(b) has a contribution threshold. For the year of 2019 the contribution amount is: $19,000. If you are age 50 and older, you can contribute an additional $6,000 a year. Also, if permitted by the employer, a 403(b) plan may allow for an additional catch-up if an employee has worked for fifteen years or more. You may be able to stack these additional contributions, although there are limits and it is a bit confusing, which is why it is important to seek the advice of a financial advisor to navigate these additional contributions.
Another way that a 403(b) plan is like a 401(k) is that you will be penalized if you withdraw funds before the age of 59 ½ at a rate of 10 percent. (Yikes!)
One caveat is that there are certain circumstances that funds can be withdrawn without penalty such as separating from an employer when a person reaches age 55, a qualified medical expense, death of the employee or disability.
So, what happens if you change employers? Well, potentially there are four possibilities: roll the funds into an IRA, keep in the current plan, transfer to a new employer plan or cash out the account. Not all of these options may be available to you, so this is where speaking with your financial advisor and human resources department before leaving your current employer is very important.
As a reminder: I am not a financial professional and urge you to seek the advice of a financial advisor when making your own financial decisions.
Until next time, face your financial fear! 😉
Written By: Nicole Ellsworth (@lacelemonslove)
Contact Us: firstname.lastname@example.org
You may (or may not) have heard that the Dow Jones has been dropping it like it’s hot lately, dipping 1,150 points just last week. World events and uncertain economic conditions can result in market volatility — when the stock market changes moods faster than your teenage sister. But, what exactly is the Dow Jones? And why has it been making major money moves recently?
The Dow Jones Industrial Average (DJIA) is a stock market index that includes 30 large, U.S. publicly-traded companies and acts as a thermometer, testing the overall health of the U.S. marketplace. Sounds a lot like the S&P 500 index, right?
Here are several key differences between the S&P 500 and the DJIA:
S&P 500 Dow Jones (DJIA) Founded in 1957 Founded in 1896 500 of the largest U.S.-based publicly-traded companies across all industries 30 of the largest U.S.-based publicly-traded companies across all industries (originated with just 12 companies solely in the industrial sector) Companies selected by S&P Committee (owned by McGraw Hill Financial) Companies selected by Dow Jones & Co. Averages Committee Companies selected based upon specific qualification criteria No defined criteria for how a company is selected — generally, must be a large leader in their industry Stocks within the index are weighted by market capitalization (market cap = # of outstanding shares x market price) Stocks within the index are price-weighted (the higher the stock’s market price, the more influence it will have on the index’s performance) Often considered the “single best indicator” of stock market performance, because of its broad and diverse collection of companies across all industries Most well-known stock market index. But, because if its exclusivity (only represents 30 of over 3,000 US public companies), it is more an indicator of blue-chip stocks than the market overall
OK, now that we’ve got a grasp on what the Dow Jones Index is, let’s talk about why it’s been dropping faster than your bank account after a trip to Target.
The stock market can be affected by many factors, such as political changes, natural disasters, inflation, interest and exchange rates, and unexpected world events — just to name a few. Most recently, when the Dow Jones stumbled and fell by 4 percent in early October, it was likely due to sipping a cocktail of rising Treasury yields, the increased Federal Funds rate, and the China-U.S. trade war. Just like how you get a little wobbly after drinking one too many cocktails, the stock market also gets shaky (see: volatile) when too many uncertain events are mixed together at the same time. The stock market: it’s just like us.
But, not to fear. Similarly to how you will drink lots of water, take an Advil, and eat greasy food to bounce back after a night out, the stock market bounces back, too. Usually, the severity of the market fall will determine how long it will take to rebound. Small corrections can be overcome in just a few days, whereas a full-blown financial crisis may take years to recover from (think: the 2008 Great Recession).
To recap: the Dow Jones is the most well-known market index, comprised of only 30 companies across various industries, and is used to evaluate general trends in the stock market. Recently, the Dow Jones took a big tumble due to a woozy cocktail of world events and interest rate changes. But, don’t worry. Analysts remind us that the market often panics over everything and can sometimes be a bit overdramatic…#Relatable. So, for now, be prepared to ride the roller coaster of market volatility, because over the long-term, the market always trends upward. Ask Warren Buffett.
Congratulations! You now know what the Dow Jones is and why it’s been in the headlines lately. But, this article was not meant to be an in-depth analysis of the Dow Jones (because ain’t nobody got time for dat). If you’d like to dig in a little deeper to the topics covered above, feel free to click on any of the hyperlinks (including that one) to become a Dow Jones expert. You’re welcome.
Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: email@example.com
Standard and Poor: Is this the title of my autobiography? Or a stock market index? Honestly, both.
The Standard & Poor’s (S&P) 500 is a stock market index consisting of 500 of the largest publicly-traded U.S. companies, measured by market capitalization. In other words, the S&P 500 is a exclusive group of 500 hot-shot companies that–as a whole–provide a glimpse at how the U.S. economy is doing overall.
In order to enter the exclusive S&P 500 club, companies need to meet some pretty intense qualifications. Just to name a few, the company must have:
- Headquarters in the United States
- A market cap of $5.3 billion or more (market cap = $ of shares x # of shares outstanding)
- Positive earnings in the last 4 most recent quarters
- Actively trading at a reasonable price, with the majority of its shares held by investors (instead of sitting on a shelf waiting to be sold)
But, even after meeting all of these requirements (and then some), a company is still not guaranteed to be included in the S&P 500 index. Think of the S&P 500 like Regina George and The Plastics — they’re rich, famous, and everybody wants to be in their group.
OK, so now that you know what the S&P 500 is, why does it matter to you? Well, think of it this way. When you go on Amazon to buy literally anything, the first thing you do is check the reviews on the product to make sure it’s a reasonable investment, right? You want to poll the masses to see what the general public has to say first, preventing you from spending your hard-earned money on a sketchy product that takes six months to be delivered and, when it arrives, might not even be “as pictured.” Overall, the more five-star reviews the product has, the better.
The S&P 500 is similar in the sense that it provides the public a simple gauge to understand how the stock market is performing overall, which will help us guide our investment decisions. This is also why the S&P 500 is a popular index to invest in through mutual funds and other sources, as it pools some of the largest companies across the U.S. into one collective group, rather than investing into each individual company separately. It’s the same reason why you would probably buy a TV on Amazon with 5,000 4.5-star reviews, rather than a TV with only one five-star review. Crowd-sourcing (on Amazon) and diversification (in your investment portfolio) makes all the difference, people.
Congratulations, you now know what the S&P 500 is and why it matters to you! But, this article was not meant to be an in-depth analysis of the S&P 500 (because ain’t nobody got time for dat). If you’d like to dig in a little deeper to the topics covered above, feel free to click on any of the hyperlinks (including that one) to become an S&P expert. You’re welcome.
Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: firstname.lastname@example.org
Stocks and Bonds, James Bonds
When you think of the word “stock,” what comes to mind? You may think of the New York Stock Exchange. Or, maybe (if you’re like me), you think about how much you need to stock up on Peppermint Ice Cream before it goes out of stock again after the holiday season (just me?…okay).
What about bonds? Do you picture a strapping Daniel Craig wearing a pristine black tuxedo, casually armed with a Walther P99 pistol, in hot pursuit of a criminal? Because I sure do.
No matter what comes to mind, we’re going to dive in to the definitions of stocks and bonds (the financial kind, sorry Daniel Craig), discuss what they are, and why they are important to us.
Let’s start with stocks. By definition, a stock is a type of financial security that allows the stockholder the right to ownership in a company. When someone purchases a company’s stock, they are buying a piece of that company, including the right to claim a portion of the company’s earnings (if they have any — aka if the company makes any money, which you sure hope they do if you invested in them).
Think of stock like a piece of pizza. Say you and three other friends are hanging out on a Saturday night and suddenly the midnight munchies strike.
All four of you decide to put in 2 bucks per person to buy a medium pizza for $8. When the pizza arrives, each person owns the right to ¼ of the pizza (or 2 pieces each), since you each contributed $2 for an $8 pizza with 8 slices total. #Math
Now, obviously a pizza can’t magically grow in size. But for this example, let’s say that it can. Imagine the pizza miraculously doubles in size. Now, you own the right to 4 slices of pizza! Well, since you’re on a diet and you really shouldn’t eat more than two slices of pizza, you decide to sell those two extra slices to a new friend who (conveniently) stopped by after you all ordered the pizza.
In theory, this is how buying a stock works. You own a portion of the company. When the company grows and earns profits, you are entitled to a percentage of those profits. You can then sell your portion of ownership in the company to someone else for more than you originally paid for it. By the way, that’s the ONLY way to make money with a stock — the company must grow so that you can sell your portion for more than you bought it for.
What happens if the company loses money and the stock price goes down? Well, that’s the risk of investing — which is especially risky if you invest in just ONE company or sector of the market. If the one company you invested in (Target, for example) or sector of the market (all retail stores), suddenly goes out of business (don’t panic…this is just a hypothetical example), then you would lose all of your money very quickly. Thankfully, investors have alternative options, such as mutual funds, that allows you to invest in many different companies across many different market sectors at one time — thus limiting your overall risk.
Okay, so now that we know what a stock is and how it can earn us money, let’s talk about bonds. Sorry, we’re still not talking about you, Daniel Craig.
Unlike stocks, bonds do not represent ownership in a corporation. Instead, bonds are a type of loan that an investor can make to a company or to the government, which in turn, promises to return a fixed interest rate to the investor over a specific period of time. Ideally, at the end of the bond’s lifetime, the investor will be repaid her entire initial payment, plus a fixed rate of interest. This is why bonds are often called “fixed-income securities” — because they provide a fixed amount of income (in the form of interest payments) to the investor. Shocking, I know.
Because bonds promise to pay back your initial investment plus a fixed interest rate, they are said to be less risky than stocks, which do not have a fixed rate of return and do not promise to return the money invested. However, bonds are not completely risk-free. The amount of risk you take with a bond depends largely on who is borrowing your money. In real world terms, you know that it’s a lot less risky to loan your mom a dollar than that one friend who is a notorious mooch and never pays anyone back. (I’m talking to you, Karen).
Applying that same concept to investing, a bond issued by a young, relatively unstable company is much more risky than a Treasury bond, which is issued by the federal government and is essentially risk-free. Why is a Treasury bond risk-free, you ask? Well, the federal government has this amazing authoritative power called TAXATION, which means it can always raise taxes in order to pay back the interest on its Treasury bonds. As much as a normal company would simply LOVE to force its customers to buy their products (or else!), unfortunately, they can’t do that. This means that corporate bonds may not always be able to keep their promises of paying the investor a fixed interest rate, thus creating risk. Usually, the more risky the bond, the higher the interest rate will be. On the flip side, Treasury bonds usually have the lowest interest rates on the market. Low risk, low returns. High risk, high returns. You get it.
Believe it or not, we’ve just barely scratched the surface of stocks and bonds. Tragic, I know. I don’t want to bore you to tears, so we’ll leave it at that for now.
But, before you go, one last question. Why do stocks and bonds matter? Even if you don’t plan on being the next Warren Buffett, you should feel confident in understanding stocks and bonds, and identifying where they fit into your investment portfolio (Note: If you’ve got a 401(k) or retirement savings plan, chances are you’re already investing in several stocks and bonds, whether you realize it or not. Congratulations!)
(QUICK DISCLAIMER: I am NOT a financial professional, so please consult one of those fantastic, educated, and far-more-qualified individuals BEFORE you dive into investing or making changes to your retirement plan). As a very general rule of thumb (not specific to every individual’s situation), the younger you are, the more your money may be invested in stocks and less in bonds. As you age and grow closer to retirement, the percentage of your money invested may gradually shift from stock-heavy to bond-heavy. The reason for this is, when you’re young, you have the advantage of time on your side to ride the up-and-down roller coaster of the stock market. Even when there is a market correction and you lose a portion of your portfolio, you still have decades before retirement to earn that money back. However, the closer you get to retirement, the less time your portfolio has to bounce back after a market correction. Thus, safer investment options like bonds will help prevent you from losing your entire life savings to a market drop right before you were planning on retiring and moving to Hawaii. AloNAH, you don’t want that to happen.
Alright, now you know what stocks and bonds are and why they matter! Woot woot! Next step, consult with your financial professional to collaborate on an investing plan that is specifically designed to meet your lifestyle goals.
And, don’t forget to check back here for new, exciting content to be released very soon!
Written By: Kaitlyn Duchien (@ktaylor1395)
Contact Us: email@example.com