Strategies:

• Examine your variable expenses each month. Do you really need a take-out coffee or sandwich every day? Over the course of a year, you can potentially save hundreds, or even thousands of dollars by packing your lunch or bringing coffee in a thermos.
• Start by building an emergency fund. The general rule is to have at least three to six months of expenses. But setting aside even a few hundred dollars for unexpected costs is great. Consider putting this money in an account that’s considered safe, such as an FDIC-protected bank account.
• Then think about investing money beyond your emergency fund, in an investing account. The average return for  U.S. large cap investments for 2019 is estimated to be about 5.25%, according to some experts. And your money is likely to compound over time.

Jargon Hack.

What is compounding?

Compounding

Compounding is any return earned on your principal, plus your past returns.

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Example:

First, let’s explain compounding. Compounding is essentially a snowball effect involving the interest or earnings your money can make as it continues to earn more interest or some other return over time. For example, if you start with $100 and put $50 a month away for ten years, with an annual return of 5.25%. You’ll have slightly more than $7,800, but you’ll only have put away $6,100. Compounding could add about $1,700 to what you save.

Now let’s show you how time can work on your side. The sooner you start investing, the more money can work for you through the power of compounding. Notice the difference between how much someone can save by the time they’re 65 if they start at 25, versus starting at 35.

For both charts, we assume you start with $100 and put $50 away each month, with an annual return of 5.25%. The person who starts at 25 will save a total of $24,100 over the next 40 years, compared to the person who starts at 35, who will save $18,100. 

But the person who starts at 25 will end up with nearly twice as much money, just for starting ten years earlier. 

By starting early, the person who starts at 25 will save $24,100 by the time they’re 65. Compounding will add an additional $53,732, for a total of $77,832.

By starting later, the person who starts investing at 35 will save $18,100 by the time they’re 65. Compounding will add $23,981.88 for a total of $42,081.88

As you can see, the person who starts ten years earlier winds up with nearly twice as much money, even though they only save $6,000 more dollars. The extra money that the person who invests for longer could wind up with is all thanks to the power of time and compounding. 

What are you waiting for?

The sooner you get started saving and investing your money, the better. On Stash, you can start investing with any dollar amount. 

With Auto-Invest, you can contribute to your investments on a regular schedule that works for you. By automating your investment strategy, you can maximize the power of compounding without having to remind yourself to invest regularly.

The post How Time Can Help You When it Comes to Saving and Investing appeared first on Stash Learn.

Jargon Hack.

What is P/E ratio?

P/E Ratio

The price-earnings ratio is a mathematical formula that measures a company’s stock price compared to its earnings per share.

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Tactics and considerations:

• Look at the P/E ratios of other companies in the same industry or sector as the company whose stock you’re considering.
• If the P/E ratio is higher than the average, that could mean the company is overvalued. If it’s lower, that could mean it’s undervalued.
• Generally speaking,  a high P/E ratio reflects an expectation of higher growth in the future. But a high P/E could also mean that a stock’s price is high relative to its earnings, and possibly overvalued.
• By contrast, a low P/E ratio may suggest an investment opportunity as the stock price is low relative to its earnings. But this could also suggest that the company has a problem, such as a bankruptcy or threat of a lawsuit.
• Similarly, it’s important to pay attention when the P/E ratio of an entire industry or sector climbs above, or falls below, its historic average.
• Remember, the P/E ratio is just one of many metrics to consider when purchasing a stock. Other things to consider could include profit, revenue, and debt.

Example:

Here’s what the price to earnings ratio formula looks like, as a mathematical equation:

If the stock for Acme Company (not a real company) is trading at $20 a share, and its earnings per share is $5, then its PE ratio is 4*.

Let’s say that Acme  is in the aerospace and defense industry, which has a P/E ratio of 43, according to industry research. The P/E ratio is low for the industry, and the P/E ratio suggests the stock might be good value–in other words, it could increase closer to the industry average over time as its price is relatively low compared to its earnings.

Now let’s say that Acme’s stock is $500 a share, and it’s EPS is still 5. That would give Acme a P/E ratio of 100*, more than twice as high as its industry average. That could suggest the stock may be overvalued.

Other things to keep in mind: Some industries, like technology,  can have very high P/E ratios. That’s because there is often a lot of hype and expectation about how certain stocks will grow over time. (Think about the FAANG stocks, for example, which have some of the most talked about products and services in the market.) More subdued industries, such as financial services, can have lower P/E ratios.

Jargon Hack.

What is earnings per share (EPS)?

Earnings per Share (EPS)

It’s a mathematical formula that divides profits among each share of common stock outstanding.

Find out

The post How to Value a Stock Using a P/E Ratio appeared first on Stash Learn.

Strategies:

• Find other ways to bring in extra money, whether that’s through a side hustle, reducing your flexible expenses such as entertainment and dining out, or asking for a raise.
• If you must borrow money, see if you can borrow from family or friends.
• If you have a workplace plan, such as a 401(k), you may be able to take out a loan against your savings. While this isn’t recommended by most financial experts, since you’ll be missing out on valuable time in the market, you’ll be charged an interest rate that’s likely to be lower than the 10% penalty you’ll owe on early IRA withdrawals. Also, you must repay the loan or face federal tax penalties.
• If you’re unemployed, you may be able to avoid the 10% penalty if you take an early IRA withdrawal to cover medical expenses; You could also avoid the penalty if you make an early IRA withdrawal if you become permanently disabled, or if you’re using the money for qualified higher education expenses, or if you’re using up to $10,000 of it to buy your first home. (Find out more here.)

Example¹:

Let’s say you have $7,000 in a traditional IRA.* You decide to cash out early to pay off a credit card balance.**

• You may be subject to a  10% tax penalty, or $700.
• You may also pay income taxes. Let’s assume your federal tax rate is 24%. You could owe as much as $1,680.
• You also may be subject to state and local taxes. Let’s assume your state and local tax rate is 10%. You may then  owe an additional $700.

Penalties and fees can eat up $3,080, or about 44% of your nest egg.

Jargon Hack.

What is a Traditional IRA?

Traditional IRA

It’s a retirement account that lets you put money away on a pre-tax basis. IRA stands for Individual Retirement Account.

Find out

Jargon Hack.

What is a 401(k)?

401(k)

A workplace-sponsored retirement plan that lets you put money away on a pre-tax basis.

Find out

Jargon Hack.

What is a Roth IRA?

Roth IRA

It’s a retirement account that lets you contribute money after you’ve paid taxes on it. IRA stands for Individual Retirement Account.

Find out

*Different rules apply to Roth IRAs. Generally speaking, account holders can take out what they’ve put into a Roth at any time.
**Typically, early withdrawal is before you turn 59 1/2
¹Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy

The post Try to Avoid Using Retirement Savings for Debt appeared first on Stash Learn.

Jargon Hack.

What is lifestyle creep?

Lifestyle Creep

The tendency to spend more as you earn more, particularly on non-essential items.

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Strategies

• Stick to your budget, whether it’s the 50-30-20 rule or another way you prefer to keep track of your money, and allocate it to monthly expenses and savings.
• Consider using the extra monthly cash to build your emergency fund, for short-term and long-term savings goals. Short-term savings goals could include buying a car or a home, even going on a vacation. Long-term goals include saving for retirement.
• Don’t forget “fun” money. Consider setting up an account just for things you want to simply enjoy, whether that’s clothing, dinners out, or entertainment.
• Automate your savings. Each time your paycheck hits your checking account, have a percentage moved automatically to your savings accounts.

Consideration: Lifestyle creep isn’t always a bad thing. If you previously had to make a choice between buying groceries and paying your electric bill, and now you can afford to do both, that’s great! Lifestyle creep gets to be a problem when luxuries—such as always needing the latest and greatest new smartphone or handbag—become essentials.

Lifestyle creep quiz

1/4

Do You Have What it Takes to Avoid Lifestyle Creep?

 

What is lifestyle creep?

The tendency to get creeped out by the passing of time.

The tendency to build a budget that is too restrictive.

The tendency to always second-guess your spending choices.

The tendency to spend more as you earn more, particularly on non-essential items.

The tendency to spend more as you earn more, particularly on non-essential items. As you earn more, it’s important to try to save and invest more regularly.

2/4

Do You Have What it Takes to Avoid Lifestyle Creep?

 

What is the phrase for what’s leftover in your paycheck after state and federal taxes have been taken out, as well as deductions for Medicare and Social Security?

Net pay

Adjusted gross income

Total profit

Savings

Net pay. Your net pay is what’s leftover in your paycheck after state and federal taxes have been taken out, as well as deductions for Medicare and Social Security. Your net pay is what you should use when you’re budgeting.

3/4

Do You Have What it Takes to Avoid Lifestyle Creep?

 

True or False: A great way to avoid lifestyle creep is to stick to your budget.

True

False

True. If you get a raise or a change in income, you may want to adjust your budget to reflect that change. But the best way to stay on top of lifestyle creep is with a budget.

4/4

Do You Have What it Takes to Avoid Lifestyle Creep?

 

True or False: There’s no room for fun money in a budget.

True

False

False. You should include fun money for dining out, entertainment, etc. Your budget should include room for the things you like to do.

 

Do You Have What it Takes to Avoid Lifestyle Creep?

 

You scored 

Share this quiz with others!

Next Question

The post How to Avoid Lifestyle Creep appeared first on Stash Learn.

• The general rule of thumb is to never spend more than 30% of your gross income on housing—whether you rent or own. Before renting to you, landlords often expect to see proof that you make 40 times your monthly rent annually—it’s the same calculation as 30% of your gross income. (We’ll show you.)
• To cut down on costs, consider getting a roommate, or roommates, to split rent with you.
• If you know your housing costs will exceed 30% a month, find other areas in your budget where you can cut back. For example, take public transportation rather than owning a car. Reduce dining out, or stop impulse spending.
• Look for rentals where utilities are included, as that can help you conserve cash.

Consideration: If you have a lot of debt, your monthly rent plus your other loan payments shouldn’t exceed 43% of your monthly income. You may have to seek cheaper alternatives if it does.

Let’s break it down:

If your gross pay is $3,000 a month, you should pay no more than $900 a month.

To put another way, if your rent is $900 a month, your annual income should be at least $36,000.

Jargon Hack.

What is gross pay?

Gross Pay

Gross pay is the amount you get paid prior to taxes being taken out of your paycheck.

Find out

Jargon Hack.

What is a security deposit?

Security Deposit

A security deposit is money you need to put down prior to moving in to a rental, usually in addition to your first month’s rent. It’s protection for your landlord against your not paying rent, and property damage. You typically get your security deposit back with a small amount of interest when you move out.

Find out

While the 30% rule should be your goal, remember there is a well-documented shortage of affordable housing in the U.S., and nearly 40% of renters in the U.S. spend more than 30% of their income on rent, according to research. But doing what you can to get your rent costs down will only help you in the long run.

The post What It Means to Rent What You Can Afford appeared first on Stash Learn.

• Try to pay more than your monthly minimum payment, which can primarily be interest.
• By paying more than your interest, you’ll be paying down your principal.
• Consider making extra payments if you can, as it will help you pay down principal faster.
• Aim to pay off your loans in ten years or less, which is the standard for federal student loans. The longer you take to pay off your loans, the more interest you will pay, and the more expensive your original loan will become.
• If you’re confused by what you owe, call your lender and discuss how your payments are applied to your loan or loans.

Jargon Hack.

What is principal?

Principal

Principal is the original amount that you borrow on a loan. It’s different from interest, which is a percentage charged annually and added to the principal.

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Principal

Principal is the original amount that you borrowed on your loan. It’s different from interest, which is a percentage charged annually and added to the principal. (Special note: Principal can also be a sum of money that you save or invest, on which you earn interest.)

Example: Say you borrow $30,000, with an interest rate of 5%. The principal of the loan is $30,000. The interest rate is 5%, and your loan will accumulate interest charges on a daily basis.

To calculate your daily interest, divide the interest rate by the number of days in a year: 0.05/365=0.000136986.

Then multiply that number by your outstanding balance: 30,000 x 0.000136986=4.1. (So, $4.10 is approximately how much interest you owe per day.)

Next, multiply that amount by the number of days in the month: 4.1 x 30=123, or $123. That’s roughly how much interest you will owe each month.

If you had the option of making minimum payments of $123 per month, you’d only be paying interest and not paying down any of the $30,000 of principal. To pay off your loan with interest  in ten years, you’d have to pay $308 per month, according to the federal student lender Sallie Mae.

Good to know: As you pay off your principal, the dollar amount of interest you owe will also decrease each month. (You can see how that works with this calculator.)

The post How to Manage Student Loan Debt appeared first on Stash Learn.

• Prioritize spending with cash, or a debit card. Cash is a physical thing, and you can actually see it leaving your wallet or purse when you use it for purchases. That may help you spend less.
• When you use a debit card, the money comes directly from your checking account. Generally speaking, you won’t be able to spend using the card unless you have funds in the account. (Consider opting out of overdraft protection.)
• If you must spend using a credit card, always try to pay off your balance in full each month. That way you won’t have to pay interest.

Jargon Hack.

What is an interest rate?

Interest Rate

It’s the amount that’s charged on any unpaid amount, or balance every month. The interest rate is also called the annual percentage rate, or APR, which is the amount your monthly interest translates to annually.

Find out

Interest rate

Every credit card account comes with an interest rate. It’s the amount that’s charged on any unpaid amount, or balance every month.

Here’s something else that’s important to know: When you have credit card debt, or an unpaid balance, the interest is charged daily. It’s called the daily periodic interest rate. Here’s an example:

Good to know: Credit card companies give you a grace period, generally between the statement closing date and the payment due date, to pay for your new charges. During that period, no interest will be charged. If you don’t pay your balance at the end of the grace period, you will owe interest. And any new charges will also accrue interest.

The post How to Manage Credit Card Spending appeared first on Stash Learn.