Category: Finance Study/Strategy

Bootstrapping’s Impossible Promise : Stop Pulling And Start Pushing

What happens when you realize that you’ve built something that requires more expertise than you have? Usually, anxiety happens. And this can lead us into a trap of believing that if we just try harder for longer, we will figure it out. After all, isn’t that how we made it this far—trying harder? Inevitably, we may find ourselves exerting a tremendous amount of energy trying to lift ourselves up by our own bootstraps.

As I wrote about earlier, pulling on our own bootstraps is usually a fight we can’t win.

So, I propose a redirection of all that energy toward understanding what you can do better than anyone else.

I think Gary Keller and Jay Papasan illustrate this concept well in their book, The One Thing. They explore the power of understanding how and where to focus our energies to make the greatest impact, and they point to the example of “the domino effect.” In short, I can push on a domino that’s a fraction of a square inch, and 29 dominos later, if each domino is one and a half times the size of the domino in front of it, I could knock down a domino the size of the Empire State Building.

Let’s dwell on that for just a second.

By investing our time intentionally to understand where we need to push, we can exert less effort and have a greater impact than trying to pull ourselves up by our own bootstraps. After accepting that your greatest benefit to what you have created is to apply your energies where you will get the greatest return on that investment, dig deeper to find and define your strengths and weaknesses. I recommend StrengthsFinder 2.0 from Gallup and Tom Rath to get started. This is also an easy-to-read book that can have profound implications.

Understanding your natural strengths as a business owner and leader can help you identify quickly where you are lacking. For example, my top five strengths are ideation, strategic, input, futuristic and connectedness. I have learned to embrace those core strengths. I also have acknowledged that some of my weakest characteristics further down the list, like harmony, competition and discipline, are necessary for leading a successful business.

I could say that I need to work harder to turn my weaknesses into strengths and be a well-rounded person. And to be clear, there is nothing wrong with striving to be well rounded—but that is a journey of a lifetime that our businesses cannot wait for us to complete. Instead of throwing all my energy toward what I am not good at, I’ve found the best use of my energy is to invest it where I can generate the greatest amount of return on investment.

Using another physics example, take the gears on a bike. The point of having gears on a bike is to create the ability to adjust the return on energy input from our legs, to the petals, to the gears, through the chain, to the wheels. By adjusting up and down through the gears, we can ensure that we are getting as much return on investment for our energy as possible.

At too low a gear, we are pushing harder than we need to and expending energy we will need later. At too high a gear, we are pedaling fast but not getting the maximum amount of return per push. Understanding our strengths is tantamount to being able to dial in the gears on our bike based on the financial terrain to maximize the return on investment for our energy spent moving our business down the road.

Instead of trying to pedal faster or harder to make up for our weakness, we need to know where to push to generate the greatest return on investment and find others to invest their time and energy in the areas where they are strongest. There are people who are amazing where we are lacking. Finding them and adding them to our teams is a much greater use of our time and resources than trying to become mediocre at doing something we weren’t good at to begin with.

Lastly, I suggest taking time to read Jim Collins’s Good to Great or a current take on it in Gino Wickman’s Traction. Collins uses the example of a flywheel. His proposition is that if we are willing to focus our energy on moving forward the thing(s) we are best at, both personally and as a business, we can build momentum and get the greatest return on investment.

Whether it is a domino, bicycle or flywheel, there are numerous examples of how the most important journey we will embark on is the one where we invest in discovering how we can apply our strengths to a focused area that will generate the greatest impact and return on investment for our time and energy.

We can choose to expend our energy pulling on our own bootstraps—usually out of some sense that we have to do it all by ourselves. If we do, it’s likely that our business will never be more than what we have to offer, and our return on investment will be limited to our own strengths and by our own weaknesses. Or we can choose to start pushing from a position of our greatest strengths, setting our domino, bicycle, flywheel, business in motion, potentially changing the course of our careers.

If you are going to exert all that energy, why not send it in a direction that can create change and foster success? Knowing your strengths can help you identify the kind of strengths you need to find to supplement your business strategy—more on that in the next article.

Christopher White

Christopher White

Christopher M. White, Managing Partner, Eques, Inc. Read Christopher White’s full executive profile here.

Source: Bootstrapping’s Impossible Promise Part Two: Stop Pulling And Start Pushing

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Critics:

By: https://valerianfunds.com

How revenue-based financing can support bootstrapping

Let’s say you’ve built your MVP using your existing resources, you have some initial sales and you’re ready to take things to the next level. Venture capital isn’t looking like the best option for you, but you definitely need some working capital.

These circumstances require a smarter method of financing. On top of bootstrapping, companies in the eCommerce, subscription, marketplace and SaaS spaces now have the option to apply for revenue-based financing (RBF) to support their growth.

A type of non-dilutive funding, revenue-based financing is near-instantaneous capital that you repay over time solely as a percentage of your company’s future revenues.

So, what does this mean for you in the early stages of your business? It means you have a source of funding to boost efforts in marketing and sales, without having to give away equity or pay back rigid amounts that you can’t afford.

You get resources to grow further, while ensuring you only make payments that are proportionate to your revenue. For example, founders might choose to use funding to support their inventory or their marketing efforts. 

This is a game changer for founders, and it suddenly means that bootstrapping is a real and accessible option. It means they have another tool in their arsenal for growing a business without turning to less-than-ideal financing methods. 

That being said, taking an advance through revenue-based financing doesn’t rule out venture capital as a source of funding in the future. Plenty of companies bootstrap and utilize RBF before reaching a point in which VC makes sense for them….

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How Financially Literate Are You? 3 Things You Should Know About Your Money

How do most of us learn how to use our money wisely and well? When we’re growing up, we’re given special instruction in important subjects — swimming, driving, sex — to arm us with info and keep us from harm.

Yet when it comes to managing our money — an activity that every one of us needs to do, every day — we receive surprisingly little preparation. We’re not taught much about it in school, because education systems leave it to us to learn from our families and friends. However, those people often don’t fill in the gaps because money can be such a loaded or taboo topic.

Natalie Torres-Haddad, who grew up in southern California, saw many people around her struggling with debt and financial instability. She was determined to be the exception, and she purchased her first rental property in her early 20s and earned an MPA in Finance & International Business. In the process, however, she became buried in debt. Only by teaching herself the basics of money — basics that she’d never learned — was she able to steady herself and her finances.

Today she leads workshops and sessions to prevent others from falling into the money pit. (She’s also the author of the self-published Financially Savvy in 20 Minutes ). She’s found that even among the college-educated people she meets, “the majority feel confused and overwhelmed about balancing their income and expenses,” she says. The stats show they’re not alone. A 2015 Ohio State University study reported nearly 70 percent of college graduates in the US say they don’t feel equipped to manage money and deal with their debt.

Not only must we get up to speed on the basics, we also need to start having honest conversations with each other about money, says Torres-Haddad. In the same way we’d tell family and friends that we’re cutting out refined sugar from our diets or practicing yoga to increase our flexibility, we should be open with them about the steps we’re taking to boost our financial health.

That way, we can get advice and support. This transparency, she adds, can also make us less susceptible to peer pressure-related spending. How many of us have agreed to a pricey meal or weekend trip because we didn’t want to come clean about our money concerns?

Becoming financially literate does not require a huge time investment. Torres-Haddad believes we can start by dedicating 15 – 20 minutes a day to developing our skills and knowledge by learning new terms and resources. Just like attaining literacy in a foreign language, she says, “it’s an ongoing education.” Here are three things you need to know about your money.

1. Know How Much Money You’re Bringing in Every Month vs. How Much You’re Spending

Most of us can rattle off our salaries in our sleep, but could you do the same for your monthly after-tax income and where you’re spending your money every month? If you can’t, that’s normal. But now is the time to learn your actual take-home pay and your actual expenses (and not just ballpark figures or estimates).

For your income, look at your physical or online pay stubs, and start keeping a record of the after-tax amounts. If you’re a salaried employee, that number should be fairly steady; if you’re not, those numbers will vary.

For your monthly expenses, Torres-Haddad suggests writing down — whether it’s in a physical or online notebook — every single daily purchase (coffee, take-out, Uber, online shopping, etc) you make and every single ongoing payment you make through autopay or credit cards (Netflix, gym membership, car insurance, utilities, etc.).

If you’ve never done this before, you may find this uncomfortable — even painful — but it will force you to face up to your spending habits. It will also make these purchases visible. Often, our regular outlays (such as Netflix, Hulu, etc.) can go unnoticed or unquestioned, and our daily spends — especially if we pay by debit card so the funds are instantly drawn from our bank accounts — can go forgotten. Torres-Haddad calls the latter “runaway spending” — “when the little things that you thought cost only a few dollars actually cost much more” in the long run. Take a daily $5 green smoothie. By making them at home, you could save yourself a few hundred dollars in a month.

After you have a fundamental understanding of income and expenses, you can download an app to help you track these categories; see your bank account, credit-card and loan balances; and organize your purchases into buckets so you can identify areas where you might cut back. Two free apps to try are Mint or Charlie, says Torres-Haddad. But, she cautions, apps can be a little “out of sight, out of mind,” meaning if you need extra help to be aware of your spending, stick with the pen-and-pad (or fingers-and-keyboard) method a while longer.

2. Know Your FICO Score and Your Other Credit Scores

While you don’t need to have a good credit score to be financially literate, you must know what it is. ( Note: Most of the information in this section applies to people living in the US.) In the US, FICO was the first company to offer a three-digit credit-risk score for lenders to use when deciding whether or not to approve a loan or line of credit, a credit limit, and an interest rate. There are three other national credit reporting bureaus — Experian, Equifax and Transunion — which also keep track of all your loans (student, auto, personal, etc.) and your balances and histories for all your credit cards (whether issued by banks, stores or businesses).

However, the FICO score is the one most frequently used when you apply for credit cards, mortgages and most types of loans; rent an apartment; or sign up for utilities. FICO scores range from 300 to 850; 670 and up is seen as a good score and 800 and up is excellent. While the FICO score is calculated with a proprietary algorithm, the primary factors that go into it are your repayment history (do you pay your credit-card bills on time? how late are you?), how much debt you’re carrying on cards and loans, how long you’ve successfully held a credit card or loan for; and whether you’ve managed to hold a mix of different kinds of credit.

Most banks and credit cards offer free access to your FICO score on their mobile apps and websites ( here’s a list of the ones that do). If you don’t use one of these companies, you can also find out how to access your score on FICO’s helpful FAQ, including a chart showing where your score falls between “Poor” and “Exceptional.”

Besides checking your FICO score every year, do an annual check of the reports issued by Experian, Equifax and Transunion. This is so you can verify that they’re correct, make sure no one has opened up a line of credit in your name, and see where you might improve. You are entitled to a free copy of a credit report from each bureau once a year. Beware: Many sites will charge you a fee, so use the federally approved and secure Annual Credit Report site.

If it’s your first time checking or you’re about to make a big purchase (such as a car or a home), Torres-Haddad suggests getting all three reports at once. After that, she recommends spacing them out throughout the year. That way, you can quickly catch any errors, fraud, identity theft or any other actions that could hurt your credit history. Mark your calendar so you know when you can request your next free credit report.

3. Know How Much Credit Card Debt You’re Carrying

Knowing how much credit-card debt you’re carrying — and how quickly it’s increasing due to interest — is critical to your financial literacy. Make a list (on paper or on a computer) of each of your credit cards, their current balances, and their current interest rate. Then, put them in order from highest interest rate to lowest.

In general, says Torres-Haddad, this should be how you should prioritize paying them off, paying as much as you can towards the card with the highest interest rate while paying the minimum on the other cards. Called the “ debt-snowball method,” this was popularized by money expert Dave Ramsey.

If you have any cards that offered a 0% APR as a promotion when you signed up, mark down the date on which the promotional rate expires because that’s when you can expect your debt to accumulate at a high interest rate (20% or more). Try to budget your monthly payments so that this card will have little to no balance when that expiration date arrives.

Believe it or not, having a credit card can be a great thing for a person’s FICO and credit scores — if you use it responsibly. Of course, carrying no debt on your cards is best. Otherwise, Torres-Haddad recommends using no more than 30 percent of your available credit limit. So if you have two credit cards with limits of $6K apiece, totalling $12K in available credit, make sure the total balances you’re carrying do not exceed $4K.

If you’ve managed to pay off a credit card, congratulations. But while you may be tempted to close it, Torres-Haddad advises against it. Why? Closing the account will shrink your total amount of available credit and cause your credit score to dip. Instead, delete the card number from any online shopping accounts, cancel any auto-pays billed to it, and freeze the card in ice. It may sound silly but it means that if you want to use it, you’ll be forced to wait for it to defrost — and forced to take a little time to think about your purchase.

When choosing a new credit card, look for ones that offer incentives — such as travel points or cash back — which could help you and your finances. Torres-Haddad recommends going to nerdwallet.com and bankrate.com to compare credit card offers.

Obviously, these three points represent just a small part of financial literacy. That’s why Torres-Haddad urges people to be patient and to learn gradually. Two books she recommends are Napoleon Hill’s Think and Grow Rich!  and Robert T. Kiyosaki’s Rich Dad, Poor Dad. For those who like to get information through listening, she suggests the “Popcorn Finance” and “Her Dinero Matters” podcasts.

When you can, supplement your research with an in-person workshop, adds Torres-Haddad. “Even going to one financial literacy workshop can have a life-changing effect,” she says. A good time to find free workshops is April, which is Financial Literacy Month in the US. One of the best investments you can make in your life is to educate yourself about money, says Torres-Haddad. “It can really give you a lot of peace of mind.”

By: Erin McReynolds

Source: How Financially Literate Are You? 3 Things You Should Know About Your Money

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3 Debt Financing Options To Get Needed Capital For Your Business

The old business adage that the time to fix the roof is when the sun is shining has never been more relevant than right now. Many businesses have seen a boost in activity over the last few months, but with the Delta variant still a threat and flu season officially underway, there may be yet another spike in Covid cases on the horizon. As this may result in new government restrictions, now is the time to access business capital that you may need later on, including considering debt financing options for your business.

During the pandemic, you likely found a way to keep your business afloat through pivoting, innovating, or accessing government relief funds like the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL), the Restaurant Revitalization Fund (RRF), or the Shuttered Venue Operators Grant (SVOG). But, those funds are likely dwindling if not completely, and you may be wondering, “What’s next?”While you might not want to acquire more debt, that is likely the best bet for your business. There are no more federal grant programs on the horizon, and it is difficult to attract equity investors unless your business can scale quickly.

And, even if you could attract equity investors, you would have to dilute your ownership in the business you built. While, of course, you have to repay debt, the advantage is you retain control of your business and typically can have a long time horizon to repay it.The first step in applying for loans is to prepare your business finances. That means getting your books up to date so you can generate profit-and-loss statements and balance sheets, making sure your tax returns are as current as possible, and ensuring you have a future-looking business plan so you can explain how you plan to use funds. Many small businesses and independent contractors who were not prepared accordingly missed out on opportunities in the past.

Here are three debt financing options for your business that you can try to access:

1. Bank loans

Working with a full-service bank is still almost required to run a business and source debt capital. Again, a lesson learned from PPP was that those businesses with strong banking relationships—not just an account but a personal relationship with an account manager—were able to apply and secure PPP loans at a much easier and faster pace. In addition, those businesses with accounts at local banks, rather than national chains, also fared much better.

Banks will take a hard look at your credit score, business cash flow, last two years of tax returns, and planned use of funds before deciding on the size of a loan or line or credit, length of term, and interest rates. In many cases they will also want to collateralize your loan with either your businesses assets or, in some cases, your home. This means if you default on your loan, you’ll need to sell those assets or your home to repay the loan. It is a good idea to shop around for the right bank that can offer the best terms.

Community development financial institutions (CDFIs) are also a good option if you live in an economically disadvantaged or underserved community. CDFIs are banks or credit unions, loan funds, and venture capital funds, whose goal is to broaden economic opportunity for low income and minority communities. These loans are more easily attainable, have lower interest rates, and come with business development help. The downside is the application times and receipt of funds can take much longer than banks or other funding sources.

2. Small Business Administration loans

There are several types of SBA loans:

Economic Injury Disaster Loans (EIDL)

The EIDL program is a traditional SBA program for areas of the country hit by natural disasters like hurricanes, fires, or other unforeseen events that devastate communities. In the case of Covid, the SBA determined the entire country was a disaster area, allowing every business to apply for these loans.

Applying for an EIDL loan is fairly easy and is done directly through the SBA website at www.sba.gov/eidl. The cap on EIDL loans is $500,000, with the typical loan around $150,000 with a 30-year repayment term. The money is meant for working capital to meet normal and customary expenses. Due to Covid, the SBA also instituted a two-year moratorium on the first payment, although interest does accrue. The interest rate on an EIDL loan is 3.5%, which is one of the lowest rates you will find. Non-profits may also qualify for an EIDL loan at a 2.5% interest rate. The Covid EIDL loans came with a grant portion as well that was $1,000 per employee up to 10 employees, or $10,000, although high demand reduced this amount to $1,000 regardless of your employee head count.

Due to the ongoing effects of Covid, EIDL loans are still available through December 31, 2021, and if you already received one, you may be eligible for an increased loan amount. If you are eligible for an increase to your existing EIDL loan, the SBA will contact you directly with more information and instructions, so be on the lookout for that email.

SBA 7(a) loans

The most common SBA loan is the 7(a) program, which can be used for short- and long-term working capital, refinancing of existing debt, and the purchase of furniture, fixtures, and supplies. These loans are most useful if real estate is part of the equation, such as for the purchase or construction of a new building or the renovation of an existing building. It is not required, however.

In order to apply, you’ll need the same paperwork basically required for a bank loan. This includes personal and business financial statements, such as balance sheets and profit-and-loss statements, tax returns, business licenses, and business plans, among other items. You apply for 7(a) loans through your bank and they are 85% guaranteed on loans up to $150,000 and 75% on loans greater than $150,000.

SBA 504 loans

SBA 504 loans provide long-term, fixed-rate financing of up to $5 million for major fixed assets that “promote business growth and job creation.” To be eligible for a 504 loan you must be doing business within the United States, have a net worth of less than $15 million, and have annual revenue after taxes of less than $5 million for the preceding two years. You apply for the loan through Certified Development Centers (CDCs), which are community partners of the SBA that promote economic development in their communities. The CDCs will also evaluate your business plan, management experience, and ability to repay the loan, among other factors.

The 504 loans can be used for the purchase or renovation of existing buildings or land, new facilities, or long-term machinery and equipment. They cannot be used for working capital or inventory, consolidating, repaying or refinancing debt, or speculation or investing in rental real estate. The loans can be repaid over a 10-, 20-, or 25-year term, and interest rates are automatically tied to a percentage above the current market interest rates for 5- and 10-year U.S. Treasury bonds.

3. Small business bonds

The SMBX, a new San Francisco-based fintech financing marketplace, has developed a platform for small and medium-sized businesses to issue bonds to their customers, community, and institutional investors. The company performs an underwriting service at no cost to determine how much credit the small business can qualify for, at what interest rate, and over how long a time horizon.

The capital raised ranges from $25,000 to as much as $5 million. Interest rates typically range between 4% and 10% and the time horizon is 1-10 years. The SMBX platform offers a couple of features that other lending programs do not.

First, if you borrow money from the SBA or a bank, you pay the principal and interest back to those entities. There is likely no other benefit to your business other than the loan. With SMBX your investors are your customers, and so every month they receive a reminder about your business when their principal and interest payment hits their account. Likewise, that capital stays within your community. Plus, even though your customers and community are not equity owners in your business as bonds are debt, they still feel the pride of ownership that can generate more sales and increased check sizes.

Second, the SMBX also provides free marketing around your bond offering. So once your business is listed on the exchange, the SMBX marketing team will provide email and social media marketing to your online followers. They provide messaging and creative development and can also provide flyers, mailers, or advertising copy. In many cases, businesses are seeing the marketing services they receive are of greater value than the cost of the capital borrowed.

Get capital for your business before you need it

It is highly unlikely that there will be a full shutdown of the economy again, or at least not in the majority of the country. That being said, many restrictions are already coming back and many businesses are still recovering from last year. It is critical to avoid being undercapitalized in this business environment. While the thought of taking on debt (or taking on more debt) may not sound appealing, it is still the best bet for small businesses to obtain the capital they need to maintain, grow, and thrive.

About the Author

Neil Hare is an attorney and President of GVC Strategies, where he specializes in small business policy, advocacy, and communications campaigns; follow him on Twitter @nehare and on LinkedIn. See more of Neil’s articles and full bio on AllBusiness.com.

RELATED: Should I Finance My Business With Credit Cards?

This article was originally published on AllBusiness.com.

AllBusiness

AllBusiness

AllBusiness.com is one of the world’s largest online resources for small businesses, providing essential tools and resources to start, grow, and manage your business.

Source: 3 Debt Financing Options To Get Needed Capital For Your Business

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Guidebook of the Emmanuel Association of Churches. Logansport: Emmanuel Association. 2002. p. 13-14.

Do You Get Your Money’s Worth From Buying An Annuity?

Coin Stacks And Chart Graphs On A Chessboard

Once upon a time, in the (somewhat mythical) past of traditional defined benefit pensions, your employer protected you from the risk of outliving your money in retirement, by acting, more or less, as an insurance company providing an annuity. With that benefit receding into the past, many experts have been hoping that Americans with 401(k) plans would avail themselves of annuities on their own, to give themselves the same sort of protection, and, indeed, the SECURE Act of 2019 made it easier for those plans to offer their participants an annuity choice, and, when surveyed, 73% of those participants said they would “consider” an annuity at retirement.

At the same time, though, Americans distrust annuities — in part because traditional deferred annuities had high fees and expenses and only made sense in an era predating IRAs and 401(k)s, when they were attractive solely due to the limited tax-advantaged options for retirement savings. But that’s not the only reason — annuities, quite frankly, aren’t cheap.

How do you quantify the value of an annuity? In one respect, it’s subjective and personal: do you judge yourself to be in good health, or does family history and your list of medications say that you’ll be one of those with the early deaths that longer-lived annuity-purchasers are counting on? Do you want to be sure you can maintain your standard of living throughout your retirement, or do you figure that you won’t really care one way or another if you have to cut down expenses once you’re among the “old-old”?

But measuring the value of annuities, generally speaking, does tell us whether consumers are getting a fair deal from their purchases, and here, a recent working paper by two economists, James Poterba and Adam Solomon, “Discount Rates, Mortality Projections, and Money’s Worth Calculations for US Individual Annuities,” lends some insight.

Here’s some good news: using the costs of actual annuities available for consumers to purchase in June 2020, and comparing them to bond rates which were similar to the investment portfolios those insurance companies hold, the authors calculated “money’s worth ratios” that show that, for annuities purchased immediately at retirement, the value of the annuities was between 92% – 94% (give-or-take, depending on type) of its cost. That means that the value of the insurance protection is a comparatively modest 6 – 8% of the total investment.

But there’s a catch — or, rather, two of them.

In the first place, the authors calculate their ratios based on a standard mortality table for annuity purchasers — which makes sense if the goal is to judge the “fairness” of an annuity for the healthy retirees most likely to purchase one. But this doesn’t tell us whether an annuity is a smart purchase for someone who thinks of themselves as being in comparatively poorer health, or with a spottier family health history, and folks in these categories would benefit considerably from analysis that’s targeted at them, that evaluates, realistically, whether annuities are the right call and whether their prediction of their life expectancy is likely to be right or wrong.

In the second place, the 92% – 94% money’s worth calculation is based on the typical investment portfolio of insurance companies, approximated by the returns of BBB-rated bonds. This measures whether the annuity is “fair” or not, in that “moral” sense of whether the perception that the company is “cheating” is customers is real (it’s not).

But these interest rates are very low. The authors, in addition to their calculations of “money’s worth,” back into the implied discount rate from the annuity costs themselves. For men aged 65, that interest rate is 2.16%; for women aged 65, 2.18%.

Now, imagine that you compare this annuity to an alternative plan of investing your money in the stock market, earning 7% annual returns, and believing you can predict your death date (or not really caring if you fall short or end up with leftover money for heirs).

The cost of the protection offered by the annuity, the guarantee that you will never run out of money, and that you will not suffer from a market crash, is very expensive indeed — when you compare apples to oranges in this manner, the money’s worth ratio is, according to my very rough estimates, more like 60%, meaning that about 40% of your cash is spent to purchase the “insurance protection” of the annuity.

And, again, that’s not because insurance companies are cheating anyone; that’s solely because of the wide gap between corporate bond rates and expected returns when investing in the stock market— a gap which was particularly wide in the summer of 2020 when this study was competed, but remains nearly as wide now.

As it stands, Moody’s Baa rates are in the 3% range; in the 2000s, they were in the 6% range, and in the 1990s, from 7% – 9%. Although this drop in bond rates is good news for American homebuyers because this marches in tandem with mortgage rates, it makes it far harder for retirees to manage their finances in ways that protect them from the risks that they face in their retirement.

Perhaps interest rates in general, and bond rates specifically, will increase as we leave our current economic challenges, but there’s no certainty, and as long as this gap between bond rates and expected stock market returns remains so substantial, retirees will be challenged to find any sort of safe investment that makes sense for them. Which means that what seems like a great benefit for Americans looking to borrow money — for mortgages, car loans, credit cards — can pit the elderly against the young in a generational “us vs. them” contest.

As always, you’re invited to comment at JaneTheActuary.com!

Follow me on Twitter. Check out my website.
Elizabeth Bauer

Elizabeth Bauer

Yes, I’m a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as “Jane the Actuary” since 2013, I enjoy reading and writing about retirement issues, including retirement income adequacy, reform proposals and international comparisons.

Source: Do You Get Your Money’s Worth From Buying An Annuity?

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Critics:

An annuity is a series of payments made at equal intervals.[1] Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities can be classified by the frequency of payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other regular interval of time. Annuities may be calculated by mathematical functions known as “annuity functions”.

An annuity which provides for payments for the remainder of a person’s lifetime is a life annuity.

Variability of payments

  • Fixed annuities – These are annuities with fixed payments. If provided by an insurance company, the company guarantees a fixed return on the initial investment. Fixed annuities are not regulated by the Securities and Exchange Commission.
  • Variable annuities – Registered products that are regulated by the SEC in the United States of America. They allow direct investment into various funds that are specially created for Variable annuities. Typically, the insurance company guarantees a certain death benefit or lifetime withdrawal benefits.
  • Equity-indexed annuities – Annuities with payments linked to an index. Typically, the minimum payment will be 0% and the maximum will be predetermined. The performance of an index determines whether the minimum, the maximum or something in between is credited to the customer.

See also

References

  • Kellison, Stephen G. (1970). The Theory of Interest. Homewood, Illinois: Richard D. Irwin, Inc. p. 45
  • Lasher, William (2008). Practical financial management. Mason, Ohio: Thomson South-Western. p. 230. ISBN 0-324-42262-8..
  1. Jordan, Bradford D.; Ross, Stephen David; Westerfield, Randolph (2000). Fundamentals of corporate finance. Boston: Irwin/McGraw-Hill. p. 175. ISBN 0-07-231289-0.
  • Samuel A. Broverman (2010). Mathematics of Investment and Credit, 5th Edition. ACTEX Academic Series. ACTEX Publications. ISBN 978-1-56698-767-7.
  • Stephen Kellison (2008). Theory of Interest, 3rd Edition. McGraw-Hill/Irwin. ISBN 978-0-07-338244-9.

How to Buy Happiness (Responsibly)

The great reopening offers ample opportunity to lift your spirits if you have some money to spare. Here’s how to do it right. Bring on the nationwide spending binge. Half of all people over 18 in the United States are now fully vaccinated. Tens of millions of them are emerging, blinking in the springtime sunshine, and heading straight for restaurants, movie theaters or a flight to somewhere — or anywhere, really.

It is true that millions of people are still trying to get their hotel jobs or theater gigs back. But collectively, Americans are holding on to a larger share of their income than they have in decades.

That leftover money is a kind of kindling. We may look back on this moment as a once-in-a-lifetime period, when many millions of Americans felt that money was burning actual holes in their pockets.

It is an unfamiliar sensation for many of us. “There is a puritanical streak that runs through all aspects of money in America,” said Ramit Sethi, an author who focuses more attention than most on spending well in addition to saving intelligently. “And most of the conversations start with no.”

But we should consider the strong possibility that saying yes right now could bring a true improvement in happiness. So this column — and another one next week — will be about maximizing it through strategic spending.

The conversation begins with “Yes, and … — with perhaps with a side order of “Yes, but …” To help us all get there, I called on some of my most thoughtful contacts among people who talk, think or write about money. And I made sure to ask them this: What are you doing yourself?

Brian Thompson, a financial planner in Chicago, was prepared for this moment. He generally has two questions at the ready: What do you want to spend your money on? And why are you really spending it?

There are no wrong answers, Mr. Thompson said. “I always come from the approach that there is no judgment, and I try to come with empathy to help people clarify what the money means for them,” he said.

Paradoxically, the first thing to think about here is saving. Paulette Perhach said it better than I could here in her classic 2016 article exhorting everyone to build a freedom fund. (“Freedom” is my word — she uses an F-bomb, if you’re trying to find it via internet search.)

Savings aren’t just for when your car breaks down or you get sick. Having a freedom fund means you are not beholden to someone else — whether that’s a significant other who is treating you like garbage or a boss who is harassing you or otherwise making you miserable.

“This is about power, and power comes in a lot of different forms,” Ms. Perhach, an essayist and a writing coach, told me this week. “It comes from options. From looking at life and making sure one person does not have so much say over the outcome of your finances that you would have to tolerate behavior that goes against your own self-respect.”

Every few years, I reopen my well-worn copy of “Happy Money: The Science of Happier Spending,” a book from 2013 by Elizabeth Dunn and Michael Norton, for a review session. This time, I called Professor Dunn, a member of the psychology department at the University of British Columbia, to help me along.

A first principle of research in this area has generally been that buying an experience brings more satisfaction — and less buyer’s remorse — than buying stuff. In the years since the book was published, Professor Dunn said, this conclusion has largely held up for people with more money, though it can be less true for people farther down the socioeconomic ladder.

So what types of experiences should we be making a priority?

After a year marked by loss, I adopted a narrow approach focused on things that I might not have a chance to do again. I will never attend another John Prine concert or again eat food touched by the hands of Floyd Cardoz, both of whom were among the many we lost to the pandemic.

But there are things I can do instead that aren’t likely to recur, like attending my friend’s swearing-in ceremony as police chief in another state. And I’m prioritizing a trip with my daughters to the Great Barrier Reef (using approximately 9,000 years of frequent-flier mile savings) before it is no more.

Professor Dunn endorsed my plans, and the need to get out into the world again. “The only experiences I’ve been having are Netflix and DoorDash,” she said.

Professor Dunn lost her mother, Winifred Warren, to lung cancer in September and has a plan to celebrate her someplace other than a Zoom chat. Soon, she’ll get over the border to California and dine with her aunt and her mother’s best friend at the famed French Laundry — where Ms. Warren had been hoping to go herself, once she got better.

But just because so much fun seems available again all at once, it doesn’t mean you should pursue it all simultaneously. People who have reasonably high incomes — but the proclivity to go the immediate gratification route — can rack up quite a bit of debt,” Professor Dunn said.

Indeed, credit card issuers are licking their lips in anticipation of whatever orgy of spending ensues this year. Ms. Perhach found herself impulsively buying concert tickets recently and was inspired to pen a warning about the behavioral science of overspending for Vox.

The gratification doesn’t necessarily last long — and can even be wiped out by the dread of any new debt, she said. “I’ve done trips with an undercurrent of ‘I’m about to be in trouble,’” she told me this week. “And that’s not a great recipe for fun.”

If you are among the many lucky millions who are better off financially than you were at the beginning of 2020, consider how good it might feel to give something away.

Minnie Lau has spent much of the past year helping her accounting clients in the San Francisco Bay Area spend and save the windfalls from initial public offerings and other stock winnings in as tax savvy a manner as possible. Both they and she have done quite well. They did nothing wrong and have nothing to apologize for.

But amid so much death, fear and suffering, coming out ahead still leads to conflicted feelings. “My ill-gotten gains are going to the food bank,” Ms. Lau said of the money she has made investing this year. “People should not have to line up for food. Didn’t California just announce that it had a surplus? What kind of crazy world is this?”

Everyone else I talked to this week felt a similar urge. Professor Dunn recalled being overwhelmed with gratitude after receiving her coronavirus jab. Now, she’s a monthly donor to UNICEF’s vaccine equity initiative. Ms. Perhach is supporting VONA, which helps writers of color, while Mr. Sethi busted into his emergency fund to donate to Feeding America and match his readers’ donations.

Mr. Thompson, the financial planner, has given money to help people who are both Black and transgender — a segment of the population that he believes needs more help than most. And he’s redoubling his efforts at work to reduce the racial wealth gap.

“If I can help more people build more wealth to pass down, it is a way of serving my purpose and helping people in the process,” he said. “And I think that takes more than just giving. It means systemic change.”

Ron Lieber

 

By Ron Lieber

 

Source: https://www.nytimes.com/

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Critics:

Money management is the process of expense tracking, investing, budgeting, banking and evaluating taxes of one’s money which is also called investment management. Money management is a strategic technique to make money yield the highest interest-output value for any amount spent. Spending money to satisfy cravings (regardless of whether they can justifiably be included in a budget) is a natural human phenomenon.

The idea of money management techniques has been developed to reduce the amount that individuals, firms, and institutions spend on items that add no significant value to their living standards, long-term portfolios, and assets. Warren Buffett, in one of his documentaries, admonished prospective investors to embrace his highly esteemed “frugality” ideology. This involves making every financial transaction worth the expense:

1. avoid any expense that appeals to vanity or snobbery
2. always go for the most cost-effective alternative (establishing small quality-variance benchmarks, if any)
3. favor expenditures on interest-bearing items over all others
4. establish the expected benefits of every desired expenditure using the canon of plus/minus/nil to the standard of living value system.

References

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