Thursday, January 6, 2022

4 Financial Wellness Tips from a Harvard- Trained Economist

CNBC published an article this week that shares 21 financial tips from a Harvard-trained economist. Here are our four favorites and why they will help you better your financial health.

1. Invest in debt repayment first! This includes your mortgage.

Say you have $100,000 that you can invest right now. 

a. If you invest it in a bond earning 1.5%, you’d earn 1,500 in interest income over the course of a year.

b. If you instead had a $100,000 morgage at a 3.2% interest rate, you’d save $3,200 by paying it off and avoiding a year’s worth of interest payments. 

In short, you’d make $1,700 with no risk by investing in your debt instead of in a bond.

2. Use retirement-account contributions, conversions, and withdrawals to cut your lifetime taxes. 

By contributing to your retirement accounts, you save the money you need for your future, receive tax benefits, and can often receive contributions from your employer as well. Understanding your company’s retirement benefits is an important step in this. If you need help understanding the different types of retirement accounts and what is best for you, feel free to schedule an appointment with one of our coaches for personalized guidance.

3. If you don’t formally request your social security benefits, you won’t get it.

Many people don’t know this, and it’s important to plan ahead. You actually have to actually file for benefits once you’re eligible. This can be done through the Social Security Administration’s website.

Another key tip is that if you can wait until age 70 to claim these benefits, your monthly benefits increase significantly. Of course, this isn’t an option for everyone, but consider it before applying.

4. If you want to invest in stocks but are worried about the risk, don’t add more money to your trading account until you are able to pull winnings out.

There are lots of things to learn when you begin investing, but the first things are: 

a. How much money am I willing to “spend” as I learn about the stock market?

- by investing before you know what you’re doing, you will likely lose some of it. Just consider that the cost of self-education. It will get better as you learn to do the proper research and understand the market better.

b. What is my exit strategy?

- If the stock you buy is doing well, it is sometimes hard to sell it because it may continue to go up. If you sell to early, you lose out on profit you could have made, but if you sell too late, then you could lose out anyways. Building an exit strategy means understanding what the stock is likely to do and deciding at what price or % increase you’ll sell part of the stock.

A basic example:
You buy 200 shares of a stock that will probably go up 10%. It has the potential, though, for a 15% increase.

Your exit strategy could look like this:

- At 5% increase: Sell 40 shares

In case the stock doesn’t do what is expected, you make a little and could sell the rest if need be.

- At 8% increase: sell 80 shares
Here the stock is trending as expected but it may not reach its full potential so selling a little over half guarantees some winnings in case it begins trending down.

- At 10% increase: Sell 40 shares

Now the stock has done what was expected. While it could go up, the future is uncertain, and selling a bit more will help mitigate any potential loss from a dip.

- Hold the last 40 shares in case the stock does better than expected and sell if it turns down.

This isn’t the perfect plan for every situation, but it allows you to see the thought process behind mitigating risk with an exit strategy. Here you can see if the stock were to fall at any point, you’d have made some money and could sell the rest of your holdings if needed. 

To read all 21 tips, see the full original article here.

If you need help with any of these concepts, feel free to reach out. Financially Fit is here to help individuals like you better your financial health and overall quality of living. We also offer many financial tools, like budgeting and debt reduction worksheets to get you started. See our website for more information.

Here to help,

Your Financially Fit Team

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